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0000350900-96-000004 | 0000350900-96-000004_0000.txt | TEMPLETON SMALLER COMPANIES GROWTH FUND, INC.
THIS STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 1, 1996, IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF TEMPLETON SMALLER COMPANIES GROWTH FUND, INC. DATED JANUARY 1, 1996, AS AMENDED FROM TIME TO TIME, WHICH CAN BE OBTAINED WITHOUT CHARGE UPON REQUEST TO THE PRINCIPAL UNDERWRITER, 700 CENTRAL AVENUE, P.O. BOX 33030, TOLL FREE TELEPHONE: 800/DIAL BEN
General Information and History................. 1 Investment Objective and Policies............... 1 Management of the Fund.......................... 11 -Custodian and Transfer Agent................... 22 -Ownership and Authority Disputes............... 27 -Special Net Asset Value Purchases.............. 30 -Redemptions in Kind. . . . . . . .............. 31
Templeton Smaller Companies Growth Fund, Inc. (the "Fund") was incorporated under the laws of Maryland on February 4, 1981, and is registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end diversified investment company.
The Fund's investment objective is long-term capital growth, primarily through investment in common stocks and all types of common stock equivalents, including rights, warrants and preferred stock, of companies of various nations throughout the world. The Fund seeks to achieve its objectives by investing primarily in securities of smaller companies generally. For defensive purposes, the Fund also may invest in bonds and other debt obligations of such issuers and fixed-income obligations of various governments.
INVESTMENT POLICIES. The investment objective and policies of the Fund are described in the Prospectus under the heading "General Description--Investment Objective and Policies."
DEBT SECURITIES. The Fund may invest in medium quality or high risk, lower quality debt securities. As an operating policy, the Fund will invest no more than 5% of its assets in debt securities rated lower than Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation ("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.
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 creditworthiness 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 net 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 Funds 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 Funds anticipate 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, a 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.
INVESTMENT RESTRICTIONS. The Fund has imposed upon itself certain investment restrictions which, together with its investment objective and policies, are fundamental policies except as otherwise indicated. No changes in the Fund's investment objective, policies or investment restrictions (except those which are not fundamental policies) can be made without the 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 Fund's 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 does not:
1. Invest more than 5% of its total assets in the securities of any one issuer (exclusive of U.S. Government securities).
2. Invest in real estate or mortgages on real estate (although the Fund may invest in marketable securities secured by real estate or interests therein); invest in other open-end investment companies (except in connection with a merger, consolidation, acquisition or reorganization); invest in interests (other than publicly issued debentures or equity stock interests) in oil, gas or other mineral exploration or development programs; purchase or sell commodity contracts, or, as an operating policy approved by the Board of Directors, invest in closed-end investment companies.
3. Purchase or retain securities of any company in which Directors or Officers of the Fund or of Templeton Investment Counsel, Inc. (the "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.
4. 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.
5. Act as an underwriter; issue senior securities; purchase on margin or sell short; write, buy or sell puts, calls, straddles or spreads.
6. 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 U.S. Government obligations with a simultaneous agreement with the seller to repurchase them within no more than seven days at the original repurchase price plus accrued interest.
7. Borrow money for any purpose other than redeeming its Shares for cancellation, and then only as a temporary measure up to an amount not exceeding 5% of the value of its total assets; or pledge, mortgage, or hypothecate its assets for any purpose other than to secure such 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. The Fund will not pledge, mortgage or hypothecate its assets to the extent that at any time the percentage of pledged assets plus the sales commission will exceed 10% of the Offering Price of its Shares.
8. Invest more than 5% of the value of its total assets in securities of issuers which have been in continuous operation less than three years.
9. Invest more than 5% of its total assets in warrants whether or not listed on the New York or American Stock Exchange, and more than 2% of its total assets 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.
10. Invest more than 10% of its total assets in restricted securities, securities with a limited trading market (which the Fund may not be able to dispose of at the current market price) or those which are not otherwise readily marketable with readily available current market quotations.
11. Invest more than 25% of its total assets in a single industry.
12. Invest in "letter stocks" or securities on which there are any sales restrictions under a purchase agreement.
13. Participate on a joint or a joint and several basis in any trading account in securities. (See "Investment Objective and Policies--Trading Policies" as to transactions in the same securities for the Fund and other Templeton Funds.)
The Fund has undertaken with a state securities commission that it will limit investments in illiquid securities to no more than 5% of its total assets.
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. With the exception of Investment Restrictions Numbers 10 and 11, above, nothing herein shall be deemed to prohibit the Fund from purchasing the securities of any issuer pursuant to the exercise of subscription rights distributed to the Fund by the issuer, except that no such purchase may be made if, as a result, the Fund would no longer be a diversified investment company as defined in the 1940 Act. Foreign corporations frequently issue additional capital stock by means of subscription rights offerings to existing shareholders at a price below the market price of the shares. The failure to exercise such rights would result in dilution of the Fund's interest in the issuing company. Therefore, the exception applies in cases where the limits set forth in any investment policy or restriction would otherwise be exceeded by exercising rights, or have already been exceeded as a result of fluctuations in the market value of the Fund's portfolio securities.
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 New York Stock Exchange ("NYSE") and securities of some foreign companies are less liquid and more volatile than securities of comparable United States companies. Although the Fund may not invest 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, which are 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 liquidity 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 endeavors to buy and sell foreign currencies on as favorable a basis as practicable. Some price spread on currency exchange (to cover service charges) will 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 which 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 have experienced a steady devaluation relative to the U.S. dollar. Any devaluations in the currencies in which a Fund's portfolio securities are denominated may have a detrimental impact on the Fund. Through the Fund's flexible policy, the Investment Manager 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' will always be correct or that such exchange control restrictions or political acts of foreign governments might not occur.
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 in certain countries 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
Metro Center, 1 Station Place
centers); and a director of RBC Holdings (U.S.A.) Inc. (a bank Foods. Age 63.
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.
Executive vice president, secretary and director of Franklin Resources, Inc.; executive vice president and director, Franklin Templeton Distributors, Inc.; executive vice president of Franklin Advisers, Inc.; officer and/or director, as the case may be, of other subsidiaries of Franklin Resources, Inc., and officer and/or director, trustee or general partner, as the case may be, for 41 of the investment companies in the Franklin Templeton Group. Age 50.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS
adviser for National Bank of Canada, Toronto. Age 85.
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and a director of General Host Corporation. Age 63.
of Gulfwest Banks, Inc. (bank and chairman of Templeton Funds Management, Inc. (1974-1991). Age 74.
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.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEARS
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.
Investors, and president of the 67.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH FUND DURING PAST FIVE YEAR
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 a director of various business and nonprofit organizations. Age 66.
& Company (1987 - 1990); vice Research (1990 - 1993). Age 35.
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 with 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.
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.
Vice president of the Templeton 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 with 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 Advisors 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
and Mr. Brady an annual retainer of $6,000 and a fee of $500 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 176,646,946 Shares of the Fund outstanding, of which 940,980 Shares (0.533%) 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, except Merrill Lynch, Pierce, Fenner & Smith, Inc., P.O. Box 45286, Jacksonville, Florida 32232-5286 owned of record 9,026,926 Shares (5% of the outstanding Shares) and no person owned beneficially or of record 5% or more of the outstanding Shares of Class II, except Merrill Lynch, Pierce, Fenner & Smith, Inc., 4800 Deer Lake Dr. E., 3rd Floor, Jacksonville, Florida 32246-6484 owned 29,501 shares (5% of the outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENT. The Investment Manager of the Fund is Templeton Investment Counsel, Inc., a Florida corporation with offices in Ft. Lauderdale, Florida. On October 30, 1992, the Investment Manager assumed the investment management duties of Templeton, Galbraith & Hansberger, Ltd. ("TGH"), a Cayman Islands corporation, with respect to the Fund in connection with the merger of the business of TGH with that of Franklin Resources, Inc. ("Franklin"). The Investment Management Agreement, dated November 1, 1993, and amended and restated December 6, 1994, was approved by the Shareholders of the Fund on October 13, 1993, was last approved by the Board of Directors, including approval by 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 continues from year to year, subject to approval annually by the Board of Directors of the Fund 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. These expenses have been and may continue to be borne by the Fund.
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.
When the Investment Manager determines to buy or sell the same security for the Fund that the Investment Manager or certain of its affiliates have selected 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 Board of Directors, to be impartial and fair, in order to seek good results for all parties. See "Investment Objective and Policies-Trading Policies." Records of securities transactions of persons who know when orders are placed by the Fund are available for inspection at least four times annually 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 Manager on behalf of a Fund. Similarly, with respect to a 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 or sell for its or 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 a Fund or other funds or accounts which it manages or administers. Any transactions for the accounts of the Investment Manager and other access persons will be made in compliance with the Fund's 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 securities 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 in office at the time or by vote of a majority of the outstanding voting securities of the Fund (as defined by the 1940 Act).
MANAGEMENT FEES. For its services, the Fund pays the Investment Manager a fee, calculated and paid monthly, equal on an annual basis to 0.75% of the Fund's average daily net assets, payable in U.S. dollars at the end of each calendar month. 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 fees and commissions and extraordinary expenses, such as litigation, are in excess of specific applicable limitations. The strictest rule 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 (and, prior to October 30, 1992, TGH, the Fund's previous investment manager) received fees from the Fund of $10,004,316, $10,050,360, and $7,657,346, respectively, pursuant to the Investment Management Agreement and Agreements in effect prior to October 30, 1992.
THE INVESTMENT MANAGER. 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:
. providing office space, telephone, office equipment and
. paying all compensation of the Fund's officers for
. authorizing expenditures and approving bills for payment on behalf of the Fund;
. supervising preparation of annual and semiannual reports to Shareholders, notices of dividends, capital gain distributions and tax credits, and attending to correspondence and other communications with individual
. 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 financial data;
. monitoring relationships with organizations serving the Fund, including the Custodian and printers;
. providing trading desk facilities for the Fund;
. supervising compliance by the Fund with recordkeeping requirements under the 1940 Act and regulations thereunder, and 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;
. monitoring the qualifications of the tax-deferred retirement plans offered by the Fund; and
. 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 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 may be higher than those of 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 1,575,214, $1,567,336, and $1,270,208, 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 or gross negligence. 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 do not 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 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 will be provided at least semiannually with reports showing the Fund's portfolio and other information, including an annual report with financial statements audited by 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 Management Agreement provides that 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 research services provide lawful and appropriate assistance to the Investment Manager in the performance of its investment decision-making responsibilities, and that the commissions paid 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 are 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 also include 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 any of them, has any material direct or indirect interest in any broker which may be employed by or on behalf of the Fund. Franklin Templeton Distributors, Inc., the Fund's Principal Underwriter, is a registered broker-dealer, but it has never executed any purchase or sale transactions for the Fund or participated in any commissions on any such transactions, and has no intention of doing so in the future. The total brokerage commissions on the Fund's portfolio transactions during the fiscal years ended August 31, 1995, 1994, and 1993 (not including any spreads or concessions on principal transactions) were $1,298,000, $3,802,000, and $2,064,000, respectively. All portfolio transactions are allocated to broker-dealers only when their prices and execution, in the 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."
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 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 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:
. For individuals whether or not covered by other
. For simplified employee pensions;
. For employees of tax-exempt organizations; and
. 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 millon, 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 status of 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.
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, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security and the date of 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 the 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 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 a 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. U.S. tax rules applicable to foreign investors may differ significantly from those outlined above. Shareholders are advised to consult their own tax advisers for details with respect to the particular tax consequences to them 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) 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) payment 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 in connection with the distribution of Shares costs and expenses of $3,293,741 for Class I Shares of the Fund, $3,952 for Class II Shares of the Fund. During the same period, the Fund made reimbursements pursuant to the Plan in the amount of $3,315,877. FTD has informed the Fund that it had no unreimbursed expenses for Class I Shares of the Fund under the Class I Plan as of August 31, 1995. In the event that the Plan 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 Plan, with respect to Class I Shares of the Fund, the following amounts on: compensation to dealers, $2,410,107; sales promotion, $210,416; printing, $187,733; advertising, $455,801; and wholesale costs and expenses, $29,684; with respect to Class II Shares of the Fund, the following amounts on: compensation dealers, $339; sales promotion, $9; printing, $8; advertising, $20; and wholesale costs and expenses, $3,577.
The Distribution Agreement provides that the Principal Underwriter will use its best efforts to maintain a broad and continuous distribution of the Fund's Shares among bona fide investors and may sign selling agreements with responsible dealers, as well as sell to individual investors. The Shares are sold 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. In 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 $241,160, $752,231, and $625,039, or approximately 10.00%, 16.88%, and 20.10%, of the gross sales commissions for those years, 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 Blue Sky laws of the jurisdictions in which the Principal Underwriter desires to distribute such Shares, and for preparing, printing and distributing prospectuses and reports to Shareholders. The Principal Underwriter pays 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
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 and such other countries or territories as it might hereafter relinquish to another principal underwriter. The Fund has entered into a non-exclusive underwriting agreement with Templeton Global Strategic Services (Deutschland) GmbH ("Templeton Strategic Services"), whose office address is Taunusanlage 11, 60329 Frankfurt am Main, Germany, as principal underwriter for sale of the Shares in all countries in Europe. The terms of the underwriting agreements with Templeton Strategic Services are substantially similar to those of the Distribution Agreement with FTD. Templeton Strategic Services is an indirect wholly owned subsidiary of Franklin.
FTD 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 (up to the life of the Fund) 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 Fund's average annual total return for the one-, five-and ten-year periods ended August 31, 1995 was 2.92%, 13.66%, and 11.63%, respectively.
Performance information for the Fund may be compared, in reports and promotional literature, to: (i) the S&P'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, 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."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of investment."
* 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 "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 contained in the Fund's Annual Report to Shareholders dated August 31, 1995 are incorporated herein by reference. | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T08:34:16 |
0000950109-96-000213 | 0000950109-96-000213_0003.txt | THIS STOCK OPTION AGREEMENT ("Option Agreement"), dated as of January 5, 1996, is by and between The Safety Fund Corporation ("Safety Fund"), a Massachusetts corporation registered as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHC Act"), and CFX Corporation ("CFX"), a New Hampshire corporation registered as a bank holding company under the BHC Act.
WHEREAS, the Boards of Directors of Safety Fund and CFX have approved an Agreement and Plan of Merger ("Merger Agreement"), providing for certain transactions pursuant to which Safety Fund would be merged with and into CFX;
WHEREAS, as a condition to CFX's entry into the Merger Agreement and to induce such entry, Safety Fund has agreed to grant to CFX the option set forth herein to purchase authorized but unissued shares of Safety Fund Common Stock;
NOW, THEREFORE, in consideration of the premises herein contained, the parties agree as follows:
1. DEFINITIONS. Capitalized terms defined in the Merger Agreement and used herein shall have the same meanings as in the Merger Agreement.
2. GRANT OF OPTION. Subject to the terms and conditions set forth herein, Safety Fund hereby grants to CFX an option ("Option") to purchase up to 332,000 shares of Safety Fund Common Stock, at a price of $20.00 per share payable in cash as provided in Section 4 hereof; provided, however, that in the event Safety Fund issues or agrees to issue any shares of Safety Fund Common Stock in breach of its obligations under the Merger Agreement at a price less than $20.00 per share (as adjusted pursuant to Section 6 hereof), the exercise price shall be equal to such lesser price. Notwithstanding anything else in this Agreement to the contrary, the number of shares of Safety Fund Common Stock subject to the Option shall be reduced to such lesser number, if any, as may from time to time be necessary, but only for so long as may be necessary, to cause CFX not to become an "interested stockholder" for purposes of Chapter 11OF of the General Laws of the Commonwealth of Massachusetts.
(a) CFX may exercise the Option, in whole or part, at any time or from time to time if a Purchase Event (as defined below) shall have occurred and be continuing; provided that to the extent the Option shall not have been exercised, it shall terminate and be of no further force and effect upon the earliest to occur of (i) the Effective Time of the Merger or (ii) termination (other than a termination resulting from a willful breach by Safety Fund of any covenant contained therein) of the Merger Agreement in accordance with the provisions thereof prior to the occurrence of a Subsequent Purchase Event (as defined below) or (iii) six months after termination of the Merger Agreement if such termination follows the occurrence of a Subsequent Purchase Event or is due to a willful breach by Safety Fund of any covenant contained therein; and provided further that any such exercise shall be subject to compliance with applicable provisions of law. As used herein "Subsequent Purchase Event" shall mean a Purchase Event that occurs after the date hereof.
(b) As used herein, a "Purchase Event" shall mean any of the following events or transactions:
(1) any person (other than Safety Fund, any Safety Fund subsidiary, CFX, or any CFX affiliate) shall have commenced a bona fide tender or exchange offer to purchase shares of Safety Fund Common Stock such that upon consummation of such offer such person would own or control 10% or more of the outstanding shares of Safety Fund Common Stock;
(2) any person (other than Safety Fund or any Safety Fund subsidiary), other than in connection with a transaction to which CFX has given its prior written consent, shall have filed an application or notice with any federal or state regulatory agency for clearance or approval, to (i) merge or consolidate, or enter into any similar transaction, with Safety Fund or any Safety Fund subsidiary, (ii) purchase, lease or otherwise acquire all or substantially all the assets of Safety Fund or any Safety Fund subsidiary, or (iii) purchase or otherwise acquire (including by way of merger, consolidation, share exchange or any similar transaction) securities representing 10% or more of the voting power of Safety Fund or any Safety Fund subsidiary;
(3) any person (other than Safety Fund, any Safety Fund subsidiary, subsidiaries of Safety Fund in a fiduciary capacity, CFX, affiliates of CFX, or subsidiaries of CFX in a fiduciary capacity) shall have acquired beneficial ownership or the right to acquire beneficial ownership of 10% or more of the outstanding shares of Safety Fund Common Stock (the term "beneficial ownership" for purposes of this Option Agreement having the meaning assigned thereto in Section 13(d) of the Exchange Act and the regulations promulgated
(4) any person (other than Safety Fund or any Safety Fund subsidiary) shall have made a bona fide proposal to Safety Fund by public announcement or written communication that is or becomes the subject of public disclosure to (i) acquire Safety Fund or any Safety Fund subsidiary by merger, consolidation, purchase of all or substantially all its assets or any other similar transaction, or (ii) make an offer described in clause (i) above; or
(5) Safety Fund shall have willfully breached any covenant contained in the Merger Agreement, which breach would entitle CFX to terminate the Merger Agreement (without regard to the cure periods provided for therein) and such breach shall not have been cured prior to the Notice Date (as defined below).
(c) If more than one of the transactions giving rise to a Purchase Event under Section 3(b) is undertaken or effected, then all such transactions shall give rise only to one Purchase Event, which Purchase Event shall be deemed continuing for all purposes hereunder until all such transactions are abandoned. As used in this Option Agreement, "person" shall have the meanings specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act, and shall also include persons (other than Safety Fund, any Safety Fund subsidiary, CFX, or any CFX affiliate), who have entered into an agreement, arrangement or understanding (whether or not in writing), or who are acting in concert or with conscious parallel behavior, for the purpose of acquiring, holding, voting or disposing of any voting securities of Safety Fund (except pursuant solely to a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the Exchange Act and the regulations promulgated thereunder).
(d) In the event CFX wishes to exercise the Option, it shall send to Safety Fund a written notice (the date of which being herein referred to as "Notice Date") specifying (i) the total number of 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 ("Closing Date"); provided that, if prior notification to or approval of any federal or state regulatory agency is required in connection with such purchase, CFX 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 any required notification period has expired or been terminated or such approval has been obtained and any requisite waiting period shall have passed.
4. PAYMENT AND DELIVERY OF CERTIFICATES.
(a) At the closing referred to in Section 3 hereof, CFX shall pay to Safety Fund the aggregate purchase price for the shares of Safety Fund Common Stock purchased pursuant to the exercise of the Option in immediately available funds by a wire transfer to a bank account designated by Safety Fund.
(b) At such closing, simultaneously with the delivery of cash as provided in subsection (a), Safety Fund shall deliver to CFX a certificate or certificates representing the number of shares of Safety Fund Common Stock purchased by CFX, and CFX shall deliver to Safety Fund a letter agreeing that CFX will not offer to sell or otherwise dispose of such shares in violation of applicable law or the provisions of this Option Agreement.
(c) Certificates for Safety Fund Common Stock delivered at a closing hereunder may be endorsed with a restrictive legend which shall read substantially as follows:
"The transfer of the shares represented by this certificate is subject to certain provisions of an agreement between the registered holder hereof and The Safety Fund Corporation and to resale restrictions arising under the Securities Act of 1933, as amended, a copy of which agreement is on file at the principal office of The Safety Fund Corporation. A copy of such agreement will be provided to the holder hereof without charge upon receipt by The Safety Fund Corporation of a written request."
It is understood and agreed that the above legend shall be removed by delivery of substitute certificate(s) without such legend if CFX shall have delivered to Safety Fund a copy of a letter from the staff of the Commission, or an opinion of counsel, in form and substance satisfactory to Safety Fund, to the effect that such legend is not required for purposes of the Securities Act.
5. REPRESENTATIONS. Safety Fund hereby represents, warrants and covenants to CFX as follows:
(a) Safety Fund shall at all times maintain sufficient authorized but unissued shares of Safety Fund Common Stock so that the option may be exercised without authorization of additional shares of Safety Fund Common Stock.
(b) The shares to be issued upon due exercise, in whole or in part, of the Option, when paid for as provided herein, will be duly authorized, validly issued, fully paid and nonassessable.
6. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. In the event of any change in Safety Fund Common Stock by reason of stock dividends, split-ups, recapitalizations, combinations, exchanges of shares or the like, the type and number of shares subject to the Option, and the purchase price per share, as the case may be, shall be adjusted appropriately. In the event that any additional shares of Safety Fund Common Stock are issued or otherwise become outstanding after the date of this Option Agreement (other than pursuant to this Option Agreement), the number of shares of Safety Fund Common Stock subject to the Option shall be adjusted so that, after such issuance, it equals 19.99%. of the number of shares of Safety Fund Common Stock then issued and outstanding without giving effect to any shares subject or issued pursuant to the Option. Nothing contained in this Section 6 shall be deemed to authorize Safety Fund to breach any provision of the Merger Agreement.
7. REGISTRATION RIGHTS. Safety Fund shall, if requested by CFX, as expeditiously as possible following the occurrence of a Purchase Event and prior to the second anniversary thereof, file a registration statement on a form of general use under the Securities Act if necessary in order to permit the sale or other disposition of the shares of Safety Fund Common Stock that have been acquired upon exercise of the Option in accordance with the intended method of sale or other disposition requested by CFX. CFX shall provide all information reasonably requested by Safety Fund for inclusion in any registration statement to be filed hereunder. Safety Fund will use its best efforts to cause such registration statement first to become effective and then to remain effective for such period not in excess of 270 days from the day such registration statement first becomes effective as may be reasonably necessary to effect such sales or other dispositions. The obligations of Safety Fund hereunder to file a registration statement and to maintain its effectiveness may be suspended for one or more periods of time not exceeding 60 days in the aggregate if the Board of Directors of Safety Fund shall have determined that the filing of such registration statement or the maintenance of its effectiveness would require disclosure of non-public information that would materially and adversely affect Safety Fund. The first registration effected under this Section 7 shall be at Safety Fund's expense except for underwriting commissions and the fees and disbursements of CFX's counsel attributable to the registration of such Safety Fund Common Stock. A second registration may be requested hereunder at CFX's expense. In no event shall Safety Fund be required to effect more than two registrations hereunder. The filing of any registration statement hereunder may be delayed for such period of time as may reasonably be required to facilitate any public distribution by Safety Fund of Safety Fund Common Stock. If requested by CFX, in connection with any such registration, Safety Fund will become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in such underwriting agreements. Upon receiving any request from CFX or assignee thereof under this Section 7, Safety Fund agrees to send a copy thereof to CFX and to any assignee thereof known to Safety Fund, in each case by promptly mailing the same, postage prepaid, to the address of record of the persons entitled to receive such copies.
(a) At the request of CFX at any time commencing upon the occurrence of a Repurchase Event (as defined in subsection (c) below) and ending nine months thereafter ("Repurchase Period"), Safety Fund shall repurchase the Option (whether or not previously terminated) from CFX together with any shares of Safety Fund Common Stock purchased by CFX pursuant thereto, at a price equal to the sum of:
(1) the exercise price paid by CFX for any shares of Safety Fund Common Stock acquired pursuant to the Option;
(2) the difference between the "market/tender offer" price for shares of Safety Fund Common Stock (defined as the higher of the highest price per share at which a tender or exchange offer has been made or the highest reported sale price for shares of Safety Fund Common Stock within that portion of the Repurchase Period preceding the date CFX gives notice of the required repurchase under this Section 8) and the exercise price as determined pursuant to Section 2 hereof multiplied by the number of shares of Safety Fund Common Stock with respect to which the Option has not been exercised, but only if the market/tender offer price is greater than such exercise price;
(3) the difference between the market/tender offer price (as defined in Section 8(b) hereof) and the exercise price paid by CFX for any shares of Safety Fund Common Stock purchased pursuant to the exercise of the option, multiplied by the number of shares so purchased, but only if the market/tender offer price is greater than such exercise price; and
(4) CFX's reasonable out-of-pocket expenses incurred in connection with the transactions contemplated by the Merger Agreement, including, without limitation, legal, accounting and investment banking fees.
(b) In the event CFX exercises its rights under this Section 8, Safety Fund shall, within three business days thereafter, pay the required amount to CFX in immediately available funds and CFX shall surrender to Safety Fund the Option and the certificates evidencing the shares of Safety Fund Common Stock purchased thereunder and CFX shall warrant that it owns such shares and that the same are then free and clear of all liens and encumbrances; provided that, if prior notification to the Federal Reserve Board is required in connection with such purchase, Safety Fund 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 any required notification period has expired or been terminated or such approval has been obtained and any requisite waiting period shall have passed.
(c) A "Repurchase Event" shall mean any of the following:
(1) any person (other than Safety Fund, any Safety Fund subsidiary, CFX, or any CFX affiliate) shall have acquired beneficial ownership of 51% or more of the outstanding shares of Safety Fund Common Stock; or
(2) any person (other than CFX or any CFX affiliate) shall have entered into an agreement, arrangement or understanding (whether or not in writing) with Safety Fund or any Safety Fund subsidiary to (i) merge or consolidate, or enter into any similar transaction, with Safety Fund or any Safety Fund subsidiary, (ii) purchase, lease or otherwise acquire all or substantially all the assets of Safety Fund or any Safety Fund subsidiary, or (iii) purchase or otherwise acquire (including by way of merger, consolidation, share exchange or any similar transaction) securities representing 51% or more of the voting power of Safety Fund or any Safety Fund subsidiary.
9. SEVERABILITY. If any term, provision, covenant or restriction contained in this Option 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 and covenants and restrictions contained in this Option 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 the Option will not permit the holder to acquire or Safety Fund to repurchase the full number of shares of Safety Fund Common Stock provided in Section 2 hereof (as adjusted pursuant to Section 6 hereof), it is the express intention of Safety Fund to allow the holder to acquire or to require Safety Fund to repurchase such lesser number of shares as may be permissible, without any amendment or modification hereof.
(a) EXPENSES. Except as otherwise 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.
(b) ENTIRE AGREEMENT. Except as otherwise expressly provided herein, this Option Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereto, written or oral. Notwithstanding anything to the contrary contained in this Agreement or the Merger Agreement, this Agreement shall be deemed to amend the Confidentiality Agreement so as to permit CFX to enter into this Agreement and exercise all its rights hereunder, including its right to acquire Safety Fund Common Stock upon exercise of the Option. The terms and conditions of this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Nothing in this Option Agreement, expressed or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Option Agreement, except as expressly provided herein.
(c) ASSIGNMENT. Neither of the parties hereto may assign any of its rights or obligations under this Option Agreement or the Option created hereunder to any other person, without the express written consent of the other party, except that in the event a Purchase Event shall have occurred and be continuing CFX may assign in whole or in part its rights and obligations hereunder; provided, however, that until the date 30 days following the date on which the Federal Reserve Board approves an application by CFX under the BHC Act to acquire the shares of Safety Fund Common Stock subject to the Option, CFX may not assign its rights under the Option except in (i) a widely dispersed public distribution, (ii) a private placement in which no one party acquires the right to purchase in excess of 2% of the voting shares of Safety Fund, (iii) an assignment to a single party (e.g., a broker or investment banker) for the purpose of conducting a widely dispersed public distribution on CFX's behalf, or (iv) any other manner approved by the Federal Reserve Board. If at any time prior to the expiration of the Option, CFX shall desire to assign all or any part of the Option, other than in a manner described in clause (i), (ii), or (iii) above, it shall give Safety Fund written notice of the proposed transaction ("Offeror's Notice"), identifying the proposed transferee and setting forth the terms of the proposed transaction. An Offeror's Notice shall be deemed an offer by CFX to Safety Fund, which may be accepted within two business days of the receipt of such Offeror's Notice, on the same terms and conditions and at the same price at which CFX is proposing to transfer the Option or portion thereof to a third party. Settlement shall be within five business days of the date of the acceptance of the offer and the purchase price shall be paid in immediately available funds. In the event of the failure or refusal of Safety Fund to purchase all of the portion of the Option covered by the Offeror's Notice, CFX may, within 60 days from the date of the Offeror's Notice, sell all, but not less than all, of such portion of the Option to such third party at no less than the price specified and on terms no more favorable than those set forth in the Offeror's Notice.
(d) NOTICES. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by overnight express or by registered or certified mail, postage prepaid, addressed as provided in the Merger Agreement. A party may change its address for notice purposes by written notice to the other party hereto.
(e) COUNTERPARTS. This Option Agreement may be executed in any number of counterparts, and each such counterpart shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement.
(f) SPECIFIC PERFORMANCE. The parties agree that damages would be an inadequate remedy for a breach of the provisions of this option Agreement by either party hereto and that this Option Agreement may be enforced by either party hereto through injunctive or other equitable relief.
(g) GOVERNING LAW. This option Agreement shall be governed by and construed in accordance with the laws of Massachusetts applicable to agreements made and entirely to be performed within such state and such federal laws as may be applicable.
IN WITNESS WHEREOF, each of the parties hereto has executed this Option Agreement as of the day and year first written above.
[SEAL) By:/s/ Peter J. Baxter
[SEAL] By:/s/ Christopher W. Bramley
[SEAL] By:/s/ Martin F. Connors, Jr. | 8-K | EX-2.C | 1996-01-12T00:00:00 | 1996-01-12T16:40:45 |
0000905729-96-000012 | 0000905729-96-000012_0000.txt | Information Statement pursuant to Rules 13d-1 and 13d-2 Under the Securities Exchange Act of 1934
COMMON STOCK $10 PAR VALUE (Title of Class of Securities)
Check the following box if a fee is being paid with this 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.) (See Rule 13d-7).
*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).
The filing of this schedule shall not be construed as an admission by Chemical Bank and Trust Company that it is, for purposes of Section 13(d) or 13(g) of the Securities Exchange Act of 1934 or for any other purposes, the beneficial owner of any securities covered by this schedule.
(1) Names of Reporting Person S.S. or I.R.S. Identification No. of Above Person
Chemical Bank and Trust Company - Trust Department
(2) Check the Appropriate Box if a Member of a Group
(4) Citizenship or Place of Organization Midland, Michigan
Number of (5) Sole Voting Power 849,301 Each (6) Shared Voting Power 0 (7) Sole Dispositive Power 921,799
(8) Shared Dispositive Power 17,118
(9) Aggregate Amount Beneficially Owned by Each
(10) Check Box if the Aggregate Amount in Row (9) Excludes Certain Shares [ ]
(11) Percent of Class Represented by Amount in Row 9 10.21%
(12) Type of Reporting Person BK
ITEM 1(A). NAME OF ISSUER:
ITEM 1(B). ADDRESS OF ISSUER'S PRINCIPAL EXECUTIVE OFFICES:
ITEM 2(A). NAME OF PERSON FILING:
Trust Department of Chemical Bank and Trust Company
ITEM 2(B). ADDRESS OF PRINCIPAL BUSINESS OFFICE:
ITEM 2(D). TITLE OF CLASS OF SECURITIES:
Common Stock, $10 par value
ITEM 3. IF THIS STATEMENT IS FILED PURSUANT TO RULES 13D-1(B), OR 13D-2(B), CHECK WHETHER THE PERSON IS A:
(a) [ ] Broker or dealer registered under Section 15 of the (b) [X] Bank as defined in Section 3(a)(6) of the Act, (c) [ ] Insurance Company as defined in Section 3(a)(19) of the (d) [ ] Investment Company registered under Section 8 of the (e) [ ] Investment Adviser registered under Section 203 of the Investment Advisers Act of 1940, (f) [ ] Employee Benefit Plan, Pension Fund which is subject to the provisions of the Employee Retirement Income Security Act of 1974 or Endowment Fund, (g) [ ] Parent Holding Company, in accordance with Rule (h) [ ] Group, in accordance with Rule 13d-1(b)(1)(ii)(H).
(a) Amount Beneficially Owned: 938,917 shares beneficially owned (b) Percent of Class: 10.21% (c) Number of Shares as to which such person has: (i) Sole voting power: 849,301 (ii) Shared voting power: 0 (iii) Sole dispositive power: 921,799 (iv) Shared dispositive power: 17,118
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 purpose 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.
Dated: January 4, 1996 By /S/ BRUCE M. GOOM | SC 13G/A | SC 13G/A | 1996-01-12T00:00:00 | 1996-01-12T17:14:24 |
0000899681-96-000004 | 0000899681-96-000004_0001.txt | 2.1 Agreement and Plan of Merger among Recoton Corporation, RC Acquisition Sub, Inc. and International Jensen Incorporated, dated as of January 3, 1996.
10.1 Exclusive World-Wide License and Option to Sell and Option to Purchase Proprietary Rights by and between International Jensen Incorporated and Recoton Corporation, dated as of January 3, 1996
10.2 Shareholders' Agreement between Robert G. Shaw and Recoton Corporation, dated as of January 3, 1996.
99.1 Press Release dated January 3, 1996.
AGREEMENT AND PLAN OF MERGER
dated as of January 3, 1996,
SECTION 1.2 Effective Time of the Merger SECTION 1.3 Effects of the Merger
SECTION 2.1 Certificate of Incorporation; Amendment SECTION 2.3 Directors and Officers
SECTION 3.1 Conversion of Jensen Shares in the Merger SECTION 3.2 Exchange of Certificates SECTION 3.3 Stock Transfer Books SECTION 3.4 Stock Options and Other Rights
REPRESENTATIONS AND WARRANTIES OF Jensen
SECTION 4.1 Organization and Qualification SECTION 4.2 Jensen Common Stock SECTION 4.4 Authority; Non-Contravention; Approvals SECTION 4.5 Reports and Financial Statements; Derivative SECTION 4.6 Absence of Undisclosed Liabilities SECTION 4.7 Absence of Certain Changes or Events SECTION 4.10 No Violation of Law SECTION 4.11 Compliance with Agreements SECTION 4.14 Employee Benefit Plans; ERISA SECTION 4.18 Certain Business Practices SECTION 4.19 No Excess Parachute Payments SECTION 4.20 Trademarks, Etc. SECTION 4.21 Jensen Stockholders' Approval SECTION 4.22 State Takeover Statutes
REPRESENTATIONS AND WARRANTIES OF ACQUISITION SUB AND RECOTON
SECTION 5.1 Organization and Qualification SECTION 5.2 Recoton Common Stock SECTION 5.3 Authority; Non-Contravention; Approvals SECTION 5.4 Reports and Financial Statements SECTION 5.5 Absence of Undisclosed Liabilities SECTION 5.6 Absence of Certain Changes or Events SECTION 5.8 No Violation of Law
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1 Conduct of Business by Jensen Pending the Merger SECTION 6.2 Site Testing and Evaluation
SECTION 7.1 Access to Information SECTION 7.2 Registration Statement and Proxy Statement SECTION 7.4 Compliance with the Securities Act SECTION 7.7 Agreement to Cooperate SECTION 7.10 Indemnification of Certain Officers and Directors
SECTION 8.1 Conditions to Each Party's Obligation to Effect the SECTION 8.2 Conditions to Obligation of Jensen to Effect the SECTION 8.3 Conditions to Obligation of Recoton and Acquisition Sub to Effect the Merger
SECTION 9.2 Effect of Termination
SECTION 10.1 Non-Survival of Representations, Warranties and SECTION 10.8 Parties in Interest SECTION 10.9 Right to Offset
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of January 3, 1996 (the "Agreement"), by and between RECOTON CORPORATION, a New York corporation ("Recoton"), RC ACQUISITION SUB, INC., a Delaware corporation ("Acquisition Sub") and wholly-owned subsidiary of Recoton, and INTERNATIONAL JENSEN INCORPORATED, a Delaware corporation ("Jensen").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of Recoton, Acquisition Sub and Jensen have approved the merger of Jensen with and into Acquisition Sub (the "Merger") pursuant to the terms and conditions set forth in this Agreement and the sole stockholder of Acquisition Sub has
WHEREAS, for federal income tax purposes, it is intended that Acquisition Sub and Jensen and their respective stockholders will recognize no gain or loss for federal income tax purposes under the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder as a result of the consummation of the Merger except with respect to stockholders who exercise dissenters' rights, or to the extent stockholders receive cash in lieu of fractional shares, the Per Share Cash Amount (as defined in Section 3.1) or a
WHEREAS, Jensen and Recoton simultaneously herewith have entered into an agreement (the "AR Agreement") by which Recoton has acquired a license to and an option to purchase, and Jensen has acquired an option to sell, the trademarks and associated copyrights and other intellectual properties of Jensen associated with the name "Acoustic Research" or "AR" (the "AR Rights"); and
WHEREAS, Jensen and IJI Acquisition Corp. ("IJI") simultaneous herewith have entered into an agreement (the "OE Agreement") by which IJI has agreed to acquire the assets associated with the original equipment business of Jensen (the "Original Equipment Business") and assume related liabilities prior to the Effective Time (as defined in Section 1.2), which agreement Recoton has approved.
NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein, Recoton, Acquisition Sub and Jensen, intending to be legally bound hereby, agree as follows:
Section 1.1 The Merger. Upon the terms and subject to the conditions of this Agreement, at the Effective Time in accordance with the Delaware General Corporation Law (the "GCL") Jensen shall be merged with and into Acquisition Sub in accordance with this Agreement and the form of certificate of merger attached hereto as Exhibit 1.1 (the "Certificate of Merger") and the separate existence of Jensen shall thereupon cease. Acquisition Sub shall be the surviving corporation in the Merger (hereinafter sometimes referred to as the "Surviving Corporation").
Section 1.2 Effective Time of the Merger. The Merger shall become effective at such time (the "Effective Time") after the Closing as a copy of the duly completed Certificate of Merger (the "Merger Filing") is delivered to the Secretary of State of the State of Delaware for filing and is filed by the Secretary of State of the State of Delaware or at such later time as the parties may agree to specify in the Certificate of Merger.
Section 1.3 Effects of the Merger. The Merger shall have the effects set forth in Section 259 of the GCL.
Section 1.4 Closing. The closing (the "Closing ") of the transactions contemplated by this Agreement shall take place at the offices of Stroock & Stroock & Lavan, 7 Hanover Square, New York, New York on April 2, 1996 at 9:30 A.M. New York time, or, if later, on the second business day immediately following the date on which the last of the conditions set forth in Article VIII hereof is fulfilled or waived, or at such other time and place as Acquisition Sub and Jensen shall agree (the "Closing Date").
Section 2.1 Certificate of Incorporation; Amendment. The Certificate of Incorporation of Acquisition Sub as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation after the Effective Time until amended in accordance with the provisions of the GCL, except that Article FIRST shall be amended as of and from the Effective Time to read "The name of the Corporation shall be "Recoton Audio Corporation."
Section 2.2 By-Laws. The By-Laws of Acquisition Sub shall be the By-Laws of the Surviving Corporation after the Effective Time, and thereafter may be amended in accordance with their terms and as provided by the Certificate of Incorporation of the Surviving Corporation and the GCL.
Section 2.3 Directors and Officers. (a) At the Effective Time, the Board of Directors of the Surviving Corporation shall consist of the following persons:
(b) At the Effective Time, the officers of the Surviving Corporation shall be as follows:
President & Robert G. Shaw
Vice President & Marc T. Tanenberg
Treasurer & Joseph H. Massot
Section 3.1 Conversion of Jensen Shares in the Merger.
(a) At the Effective Time, by virtue of the Merger and without any action on the part of any holder of any capital stock of Jensen except as set forth in this Section 3.1, subject to the other provisions of this Section 3.1, each share of common stock, par value $.01 per share, of Jensen ("Jensen Common Stock") issued and outstanding immediately prior to the Effective Time (excluding any treasury shares and Dissenting Shares (as defined in Section 3.5)) shall be converted into either
(i) the right to receive cash in the amount of $8.90 (hereinafter the "Per Share Cash Amount");
(ii) the right to receive such number of validly issued, fully paid and nonassessable Common Shares, $0.20 par value, of Recoton ("Recoton Common Stock") as shall be determined by dividing the Per Share Cash Amount by the Average Stock Price for Recoton Common Stock (as defined in Section 3.1(b)) (such number divided by one being referred to hereinafter as the "Exchange Ratio"); or
(iii) the right to receive a combination of shares of Recoton Common Stock valued at the Average Stock Price and cash equal in the aggregate to the Per Share Cash Amount;
provided, however, that if the Average Stock Price is below $16.00, then the Acquisition Sub shall have the right at least three days prior to the meeting of the stockholders of Jensen being held to vote upon the Merger (the "Jensen Stockholders' Meeting") to elect to have each share of the Jensen Common Stock converted into the Per Share Cash Amount (such election, or an election pursuant to Section 3.1(i) or pursuant to Section 8.1(h) being hereinafter referred to as an "All-Cash Election"). At the Effective Time, all shares of Jensen Common Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each certificate previously evidencing any such shares shall thereafter represent the right to receive the Merger Consideration (as defined in Section 3.2(b)). The holders of certificates previously evidencing shares of Jensen Common Stock outstanding immediately prior to the Effective Time shall cease to have any rights with respect to shares of Jensen Common Stock except as otherwise provided herein or by law. Certificates previously evidencing shares of Jensen Common Stock shall be exchanged for (i) certificates evidencing whole shares of Recoton Common Stock issued in consideration therefor, (ii) the Per Share Cash Amount multiplied by the number of shares previously evidenced by the canceled certificate, or (iii) a combination thereof, in each case in accordance with the allocation procedures of this Section 3.1 and upon the surrender of such certificates in accordance with the provisions of Section 3.2, without interest. No fractional shares of Recoton Common Stock shall be issued, and, in lieu thereof, a cash payment shall be made pursuant to Section 3.2(e). The recipients of shares of Recoton Common Stock issued in accordance with this Section 3.1 shall also by receiving shares of Recoton Common Stock thereby receive an associated Common Stock purchase right pursuant to the Rights Agreement dated as of October 27, 1995, between Recoton and Chemical Mellon Shareholder Services, L.L.C.
(b) The "Average Stock Price" shall mean the average of the per share closing prices of the Recoton Common Stock on the Nasdaq Stock Exchange ("Nasdaq") during the 20 consecutive trading days ending the fifth trading day prior to the Jensen Stockholders' Meeting, discarding the three highest and three lowest closing prices.
(c) Notwithstanding the foregoing, if between the date of this Agreement and the Effective Time the outstanding shares of Recoton Common Stock or Jensen Common Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares, the Exchange Ratio and the Per Share Cash Amount shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares.
(d) Unless Recoton has made an All-Cash Election pursuant to Sections 3.1(a), 3(i), or 8.1(h) or otherwise elects pursuant to Section 3.1(g) to increase the Target Stock Election Number (as defined below), the number of shares of Jensen Common Stock to be converted into the right to receive cash in the Merger (including Dissenting Shares and Fractional Shares) shall be 60% of the number of shares of Jensen Common Stock outstanding immediately prior to the Effective Time (the "Target Cash Election Number") and the number of shares of Jensen Common Stock to be converted into the right to receive Recoton Common Stock in the Merger shall be 40% of the number of shares of Jensen Common Stock outstanding immediately prior to the Effective Time (the "Target Stock Election Number").
(e) Subject to the allocation and election procedures set forth in this Section 3.1, each record holder immediately prior to the Effective Time of shares of Jensen Common Stock will be entitled (i) to elect to receive cash for all of such shares (a "Cash Election") or (ii) to elect to receive Recoton Common Stock for all of such shares (a "Stock Election"), or (iii) to indicate that such record holder has no preference as to the receipt of cash or Recoton Common Stock for such shares (a "Non-Election"). All such elections shall be made on a form designed for that purpose (a "Form of Election"). Holders of record of shares of Jensen Common Stock who hold such shares as nominees, trustees or in other representative capacities (a "Representative") may submit multiple Forms of Election, provided that such Representative certifies that each such Form of Election covers all the shares of Jensen Common Stock held by such Representative for a particular beneficial owner.
(f) If the aggregate number of shares covered by Cash Elections (the "Cash Election Shares") exceeds the Target Cash Election Number, all shares of Jensen Common Stock covered by Stock Elections (the "Stock Election Shares") and all shares of Jensen Common Stock covered by Non-Elections (the "Non-Election Shares") shall be converted into the right to receive Recoton Common Stock, and each Cash Election Share shall be converted into the right to receive (i) an amount in cash, without interest, equal to the product of (x) the Per Share Cash Amount and (y) a fraction (the "Cash Fraction"), the numerator of which shall be the Target Cash Election Number and the denominator of which shall be the total number of Cash Election Shares, and (ii) a number of shares of Recoton Common Stock equal to the product of (x) the Exchange Ratio and (y) a fraction equal to one minus the Cash Fraction.
(g) If the aggregate number of Stock Election Shares exceeds the Target Stock Election Number, Recoton shall have the right to elect to increase the Target Stock Election Number up to an amount equal to the aggregate number of Stock Election Shares. If the aggregate number of Stock Election Shares exceeds the Target Stock Election Number and Recoton does not elect to increase the Target Stock Election Number up to the aggregate number of Stock Election Shares, all Cash Election Shares and all Non-Election Shares shall be converted into the right to receive cash, and each Stock Election Share shall be converted into the right to receive (i) a number of shares of Recoton Common Stock equal to the product of (x) the Exchange Ratio and (y) a fraction (the "Stock Fraction"), the numerator of which shall be the Target Stock Election Number (as increased pursuant to Recoton's election, if applicable) and the denominator of which shall be the total number of Stock Election Shares, and (ii) an amount in cash, without interest, equal to the product of (x) the Per Share Cash Amount and (y) a fraction equal to one minus the Stock Fraction.
(h) If neither Section 3.1(f) nor Section 3.1(g) is applicable (including, by reason of an election by Recoton to increase the Target Stock Election Number), all Cash Election Shares shall be converted into the right to receive cash, all Stock Election Shares shall be converted into the right to receive Recoton Common Stock, and each Non-Election Share shall be converted into the right to receive (i) an amount in cash, without interest, equal to the product of (x) the Per Share Cash Amount and (y) a fraction (the "Non-Election Fraction"), the numerator of which shall be the amount by which the Target Cash Election Number exceeds the total number of Cash Election Shares and the denominator of which shall be amount by which (A) the number of shares of Jensen Common Stock outstanding immediately prior to the Effective Time exceeds (B) the sum of the total number of Cash Election Shares and the total number of Stock Election Shares and (ii) a number of shares of Recoton Common Stock equal to the product of (x) the Exchange Ratio and (y) a fraction equal to one minus the Non-Election Fraction.
(i) Notwithstanding the foregoing, if the difference between the Average Share Price for Recoton Common Stock and the actual share price for Recoton Common Stock as of the Effective Time would render the Merger ineligible for treatment as a reorganization under Sections 368(a)(1)(A) and 368(a)(1)(D) of the Code, Recoton shall immediately prior to the Effective Time elect in writing either to (1) issue shares of Recoton Common Stock in lieu of payments of the Per Share Cash Amount as shall be required to achieve such tax treatment (the methodology for such election being substantially as set forth in Section 3.1(f)) or (2) make an All-Cash Election on the terms set forth in Section 3.1(a).
(j) Elections shall be made by holders of Jensen Common Stock by mailing to the Exchange Agent a Form of Election. To be effective, a Form of Election must be properly completed, signed and submitted to the Exchange Agent and accompanied by the certificates representing the shares of Jensen Common Stock as to which the election is being made (or by an appropriate guaranty of delivery by a commercial bank or trust company in the United States or a member of a registered national securities exchange or the National Association of Securities Dealers, Inc. (the "NASD")). Recoton will have the discretion, which it may delegate in whole or in part to the Exchange Agent, to determine whether Forms of Election have been properly completed, signed and submitted or revoked and to disregard immaterial defects in Forms of Election. The decision of Recoton (or the Exchange Agent) in such matters shall be conclusive and binding. Neither Recoton nor the Exchange Agent will be under any obligation to notify any person of any defect in a Form of Election submitted to the Exchange Agent. The Exchange Agent shall also make all computations contemplated by this Section 3.1 and all such computations shall be conclusive and binding on the holders of Jensen Common Stock, absent manifest error.
(k) For the purposes hereof, a holder of Jensen Common Stock who does not submit a Form of Election which is received by the Exchange Agent prior to the Election Deadline (as hereinafter defined) shall be deemed to have made a Non-Election. If Recoton or the Exchange Agent shall determine that any purported Cash Election or Stock Election was not properly made, such purported Cash Election or Stock Election shall be deemed to be of no force and effect and the stockholder making such purported Cash Election or Stock Election shall for purposes hereof, be deemed to have made a Non-Election.
(l) Jensen shall use its best efforts to mail the Form of Election to all persons who become holders of Jensen Common Stock during the period between the record date for the Jensen Stockholders' Meeting and 10:00 a.m. New York time, on the date seven calendar days prior to the anticipated Effective Time and to make the Form of Election available to all persons who become holders of Jensen Common Stock subsequent to such day and no later than the close of business on the business day prior to the Effective Time. A Form of Election must be received by the Exchange Agent by the close of business on the last business day prior to the Effective Time (the "Election Deadline") in order to be effective. All elections may be revoked until the Election Deadline.
(m) Each share of Jensen Common Stock held in the treasury of Jensen and each share of Jensen Common Stock owned by Recoton or any direct or indirect wholly owned subsidiary of Recoton or of Jensen immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof and no payment shall be made with respect thereto.
(a) Exchange Agent. Promptly after completion of the allocation and election procedures set forth in Section 3.1, but prior to the Effective Time, Recoton or Acquisition Sub shall deposit, or shall cause to be deposited, with a bank or trust company designated by Recoton (the "Exchange Agent"), for the benefit of the holders of shares of Jensen Common Stock, for exchange in accordance with this Article III, through the Exchange Agent, (i) certificates evidencing such number of shares of Recoton Common Stock equal to (x) the Exchange Ratio multiplied by (y) the Target Stock Election Number and (ii) cash in the amount equal to the Per Share Cash Amount multiplied by the Target Cash Election Number, including an amount as estimated by the Exchange Agent as necessary to pay for Fractional Shares minus an amount equal to the Dissenting Shares multiplied by the Per Share Cash Amount (such certificates for shares of Recoton Common Stock, together with any dividends or distributions with respect thereto and cash, being hereinafter referred to as the "Exchange Fund"); provided, however, that should Acquisition Sub make an All-Cash Election, Recoton or Acquisition Sub only shall deposit in the Exchange Fund cash in the amount equal to the number of shares of Jensen Common Stock outstanding multiplied by the Per Share Cash Amount and provided, further, that the cash and Recoton Common Stock to be deposited in the Exchange Fund shall be adjusted as necessary to reflect any adjustments pursuant to Section 3.1(i). The Exchange Agent shall, pursuant to irrevocable instructions, deliver the Recoton Common Stock and cash out of the Exchange Fund in accordance with Section 3.1. Except as contemplated by Section 3.2(f) hereof, the Exchange Fund shall not be used for any other purpose.
(b) Exchange Procedures. As soon as reasonably practicable after the Effective Time, the Surviving Corporation shall instruct the Exchange Agent to promptly mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time evidenced outstanding shares of Jensen Common Stock (other than Dissenting Shares) (the "Certificates") (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 proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as the Surviving Corporation may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates evidencing shares of Recoton Common Stock or cash. Upon surrender of a Certificate for cancellation to the Exchange Agent (or, in lieu thereof delivery to the Exchange Agent of an appropriate affidavit of loss and such other documents as may be required under Section 3.2(i)) together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Certificates shall be entitled to receive, and shall instruct the Exchange Agent to promptly deliver, in exchange therefor (A) certificates evidencing that number of whole shares of Recoton Common Stock which such holder has the right to receive in respect of the shares of Jensen Common Stock formerly evidenced by such Certificate in accordance with Section 3.1, (B) cash to which such holder is entitled to receive in accordance with Section 3.1, (C) cash in lieu of fractional shares of Recoton Common Stock to which such holder is entitled pursuant to Section 3.2(e) and (D) any dividends or other distributions to which such holder is entitled pursuant to Section 3.2(c) (the shares of Recoton Common Stock, dividends, distributions and cash described in clauses (A), (B), (C) and (D) being collectively, the "Merger Consideration") and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of shares of Jensen Common Stock which is not registered in the transfer records of Jensen, a certificate evidencing the proper number of shares of Recoton Common Stock and/or cash may be issued and/or paid in accordance with this Article III to a transferee if the Certificates evidencing such shares of Jensen Common Stock are presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 3.2, each Certificate shall be deemed at any time after the Effective Time to evidence only the right to receive upon such surrender the Merger Consideration.
(c) Recoton Distribution with Respect to Unsurrendered Certificates of Jensen. No dividends or other distributions declared or made after the Effective Time with respect to Recoton Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Recoton Common Stock evidenced thereby, and no other part of the Merger Consideration shall be paid to any such holder, until the holder of such Certificate shall surrender such Certificate or complies with Section 3.2(i). Subject to the effect of applicable laws, following surrender of any such Certificate or compliance with Section 3.2(i), there shall be paid to the holder of such Certificates promptly (i) the Merger Consideration and (ii) the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Recoton Common Stock and, at the appropriate payment date, the amount of dividends or other distributions, with a record date after the Effective Time but prior to surrender and a payment date occurring after surrender, payable with respect to such whole shares of Recoton Common Stock. No interest shall be paid on the Merger Consideration or any dividends or other distributions.
(d) No Further Rights in Jensen Common Stock. All shares of Recoton Common Stock issued and cash paid upon conversion of the shares of Jensen Common Stock in accordance with the terms hereof shall be deemed to have been issued or paid in full satisfaction of all rights pertaining to such shares of Jensen Common Stock.
(e) No Fractional Shares. (i) No certificates or scrip evidencing fractional shares of Recoton Common Stock shall be issued upon the surrender for exchange of Certificates, and such fractional share interests will not entitle the owner thereof to vote or to any rights of a stockholder of Recoton. In lieu of any such fractional shares, each holder of Jensen Common Stock upon surrender of a Certificate for exchange pursuant to this Section 3.2 shall be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying (a) the Average Stock Price by (b) the fractional interest to which such holder would otherwise be entitled (after taking into account all shares of Jensen Common Stock then held of record by such holder).
(ii) As soon as practicable after the determination of the amount of cash, if any, to be paid to holders of Jensen Common Stock with respect to any fractional share interests, the Exchange Agent shall promptly pay such amounts to such holders of Jensen Common Stock subject to and in accordance with this Agreement.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the holders of Jensen Common Stock for one year after the Effective Time shall be delivered to the Surviving Corporation, upon demand, and any holders of Jensen Common Stock who have not theretofore complied with this Article III shall thereafter look only to the Surviving Corporation for the Merger Consideration to which they are entitled.
(g) No Liability. Neither Recoton nor the Surviving Corporation shall be liable to any holder of shares of Jensen Common Stock for any such shares of Recoton Common Stock or cash (or dividends or distributions with respect thereto) from the Exchange Fund delivered in good faith to a public official pursuant to any applicable abandoned property, escheat or similar law.
(h) Withholding Rights. Recoton and/or the Surviving Corporation shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Jensen Common Stock such amounts as Recoton and/or the Surviving Corporation is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Recoton and/or the Surviving Corporation, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Jensen Common Stock in respect of which such deduction and withholding was made by Recoton and/or the Surviving Corporation.
(i) Lost Certificates. In the event any certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, stolen or destroyed and, if reasonably required by the Surviving Corporation (which determination may be delegated to the Exchange Agent), the posting by such person of a bond in such amount as the Surviving Corporation or such Exchange Agent may determine is reasonably necessary as indemnity against any claim that may be made against it with respect to such certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed certificate the Merger Consideration deliverable in respect thereof pursuant to this Agreement.
Section 3.3 Stock Transfer Books. At the Effective Time, the stock transfer books of Jensen shall be closed and there shall be no further registration of transfers of shares of Jensen Common Stock thereafter on the records of Jensen. On or after the Effective Time, any certificates presented to the Exchange Agent, Recoton or the Surviving Corporation for any reason shall be converted into the Merger Consideration.
Section 3.4 Stock Options and Other Rights.
(a) At the Effective Time, each outstanding option to purchase shares of Jensen Common Stock (a "Jensen Stock Option") issued pursuant to the Jensen Stock Option Plan (1989), the Jensen 1991 Stock Incentive Plan and the 1994 Jensen Stock Option and Purchase Plan for Non-Employee Directors (together, the "Jensen Stock Option Plans") shall be assumed by Recoton with each such option becoming fully exercisable upon the Merger to the extent so required by the applicable plan. Except for any such acceleration of the exercisability of the Jensen Stock Options as provided in the preceding sentence, each Jensen Stock Option shall be deemed to constitute an option to acquire, on the same terms and conditions as were applicable under such Jensen Stock Option, the same number of shares of Recoton Common Stock as the holder of the Jensen Stock Option would have been entitled to receive pursuant to the Merger had such holder exercised such option in full immediately prior to the Effective Time and received in the Merger such number of shares of Recoton Common Stock equal to the number of shares of Jensen Common Stock represented by such Jensen Stock Option multiplied by the Exchange Ratio, at a price per share equal to (y) the aggregate exercise price for the shares of Jensen Common Stock otherwise purchasable pursuant to such Jensen Stock Option divided by (z) the number of full shares of Recoton Common Stock deemed purchasable pursuant to such Jensen Stock Option.
(b) As soon as practicable after the Effective Time, Recoton shall deliver to the holders of Jensen Stock Options appropriate notices setting forth such holders' rights pursuant to the Jensen Stock Option Plans and the agreements evidencing the grants of such Jensen Stock Options shall continue in effect on the same terms and conditions (subject to the adjustment required by this Section 3.4 after giving effect to the Merger and the assumption by Recoton as set forth above and until otherwise determined). Recoton shall comply with the terms of the Jensen Stock Option Plans with respect to the Jensen Stock Options.
(c) Pursuant to Section 3.2 of the 1994 Stock Option and Purchase Plan For Non-Employee Directors (the "Jensen Directors Plan"), certain directors of Jensen ("Deferred Holders") have elected to defer the receipt of shares of Jensen Common Stock ("Deferred Shares") owed to them in lieu of directors' fees pursuant to the Jensen Directors Plan. Immediately prior to the Effective Time, Jensen shall terminate each such director's right to receive the Deferred Shares, and in consideration thereof, Jensen shall make a cash payment to each Deferred Holder at the time provided in the final two sentences of this Section 3.4(c) (and subject, in the case of each such Deferred Holder, to the receipt from such Deferred Holder of a Cancellation Agreement, as that term is defined in the next sentence), in an amount equal to the number of Deferred Shares held by such Deferred Holder times the Per Share Cash Amount. Jensen shall use its best efforts to obtain from each Deferred Holder a written agreement substantially in the form of Exhibit 3.4 (a "Cancellation Agreement") prior to the Effective Time. A Deferred Holder who has delivered to Jensen a Cancellation Agreement prior to the Effective Time shall be paid pursuant to this Section 3.4(c) at or prior to the Effective Time. In the case of any Deferred Holder who does not deliver a Cancellation Agreement to Jensen prior to the Effective Time, Recoton shall cause the Surviving Corporation to pay such Deferred Holder after the Effective Time the amount to which the Deferred Holder is entitled pursuant to this Section 3.4(c) promptly after the receipt by the Surviving Corporation from the Deferred Holder of a Cancellation Agreement.
Section 3.5 Dissenting Shares. Notwithstanding any other provisions of this Agreement to the contrary, shares of Jensen Common Stock that are outstanding immediately prior to the Effective Time and which are held by stockholders who shall have not voted in favor of the Merger or consented thereto in writing and who shall have demanded properly in writing appraisal for such shares in accordance with Section 262 of the GCL (collectively, the "Dissenting Shares") shall not be converted into or represent the right to receive the Merger Consideration. Such stockholders shall be entitled to receive payment of the appraised value of such shares of Jensen Common Stock held by them in accordance with the provisions of such Section 262, except that all Dissenting Shares held by stockholders who shall have failed to perfect or who effectively shall have withdrawn or lost their rights to appraisal of such shares of Jensen Common Stock under such Section 262 shall thereupon be deemed to have been converted into and to have become exchangeable, as of the Effective Time, for the right to receive, without any interest thereon, the Merger Consideration, as if such shares of Jensen Common Stock were covered by Non-Elections, upon surrender, in the manner provided in Section 3.2, of the certificate or certificates that formerly evidenced such shares of Jensen Common Stock.
REPRESENTATIONS AND WARRANTIES OF Jensen
Jensen represents and warrants to Recoton and Acquisition Sub as follows:
Section 4.1 Organization and Qualification. Jensen is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its businesses as it is now being conducted. Jensen is qualified to do business and is in good standing in each jurisdiction in which the properties owned, leased or operated by it or the nature of the businesses conducted by it makes such qualification necessary, except where the failure to be so qualified and in good standing will not, when taken together with all other such failures, have a Jensen Material Adverse Effect. For purposes of this Agreement, a Jensen Material Adverse Effect shall be a material adverse effect on the business, operations, properties, assets, condition (financial or otherwise), results of operations or prospects of Jensen and its subsidiaries taken as a whole, excluding the Original Equipment Business (except that for purposes of determining whether a Jensen Material Adverse Effect arising out of the matters described in Section 4.17 has occurred, "Jensen Material Adverse Effect" shall mean potential liabilities and costs that reasonably may exceed $5,000,000). True and complete copies of Jensen's Certificate of Incorporation and By-Laws, as in effect on the date hereof, including all amendments thereto, have heretofore been delivered to Recoton.
Section 4.2 Jensen Common Stock. Jensen has 10,000,000 authorized shares of Common Stock, of which 5,714,799 shares are outstanding as of November 30, 1995, all of which are or shall be validly issued and are fully paid, nonassessable and free of preemptive rights. Except as set forth in Section 4.2 of the separate disclosure schedule executed and delivered by Jensen simultaneous with the execution and delivery of the Agreement ("Jensen's Disclosure Schedule"), as of the date hereof, there are no outstanding subscriptions, options, warrants, rights, calls, contracts, voting trusts, proxies or other commitments, understandings, restrictions, or arrangements, including any right of conversion or exchange under any outstanding security, instrument or other agreement obligating Jensen to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of the capital stock of Jensen or obligating Jensen or any subsidiary of Jensen to grant, extend or enter into any such agreement or commitment except pursuant to this Agreement.
Section 4.3 Subsidiaries. Each direct and indirect subsidiary of Jensen is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the requisite power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. Each of such subsidiaries is qualified to do business, and is in good standing, in each jurisdiction in which the properties owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified and in good standing will not, when taken together with all such other failures, have a Jensen Material Adverse Effect. Except as set forth in Section 4.3 of Jensen's Disclosure Schedule, all of the outstanding shares of capital stock of each subsidiary are validly issued, fully paid, nonassessable and free of preemptive rights, and those owned directly or indirectly by Jensen are owned free and clear of any liens, claims, encumbrances, security interests, equities, charges and options of any nature whatsoever. Except as set forth in Section 4.3 of Jensen's Disclosure Schedule or in Jensen's Annual Report on Form 10-K for the year ended February 28, 1995 or the exhibits and schedules thereto (the "Jensen 10-K" and, together with any reports filed by Jensen with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") after the Jensen 10-K and prior to the date of this Agreement, the "Jensen 1995 Reports"), Jensen owns directly or indirectly all of the issued and outstanding shares of the capital stock of each of its subsidiaries. Except as set forth in Section 4.3 of Jensen's Disclosure Schedule or in the Jensen 1995 Reports, there are no outstanding subscriptions, options, warrants, rights, calls, contracts, voting trusts, proxies or other commitments, understandings, restrictions or arrangements relating to the issuance, sale, voting, transfer, ownership or other rights affecting any shares of capital stock of any subsidiary of Jensen, including any right of conversion or exchange under any outstanding security, instrument or agreement. Section 4.3 of Jensen's Disclosure Schedule sets forth a list of all material corporations, partnerships, joint ventures and other business entities in which Jensen or any of its subsidiaries directly or indirectly owns an interest and such subsidiaries' direct and indirect share, partnership or other ownership interest of each such entity.
Section 4.4 Authority; Non-Contravention; Approvals. (a) Jensen has full corporate power and authority to enter into this Agreement and, subject to Jensen Stockholders' Approval (as defined in Section 4.18) and the Jensen Required Approvals (as defined in Section 4.4(c)), to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation by Jensen of the transactions contemplated hereby have been duly authorized by Jensen's Board of Directors, and no other corporate proceedings on the part of Jensen are necessary to authorize the execution and delivery of this Agreement and the consummation by Jensen of the transactions contemplated hereby, except for the Jensen Stockholders' Approval and the obtaining of the Jensen Required Approvals. This Agreement has been duly and validly executed and delivered by Jensen and constitutes a valid and legally binding agreement of Jensen enforceable against it in accordance with its terms.
(b) Except as set forth in Section 4.4(b) of Jensen's Disclosure Schedule, the execution and delivery of this Agreement by Jensen does not, and the consummation by Jensen of the transactions contemplated hereby will not, violate, conflict with or result in a breach of any provision of, 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 termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Jensen or any of its subsidiaries under any of the terms, conditions or provisions of (i) the respective charters or By-Laws of Jensen or any of its subsidiaries, (ii) subject to obtaining the Jensen Required Approvals and the receipt of the Jensen Stockholders' Approval, any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to Jensen or any of its subsidiaries or any of their respective properties or assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Jensen or any of its subsidiaries is now a party or by which Jensen or any of its subsidiaries or any of their respective properties or assets may be bound or affected, excluding from the foregoing clauses (ii) and (iii) such violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens, security interests, charges or encumbrances that would not, in the aggregate, have a Jensen Material Adverse Effect.
(c) Except for (i) the filings by Jensen required by Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (ii) any filings required by comparable European or European Community regulation ("EC Filings"), (iii) the filing of the Proxy Statement (as hereinafter defined) with the SEC pursuant to the Exchange Act, and the Securities Act of 1933, as amended (the "Securities Act"), and the declaration of the effectiveness thereof by the SEC and filings with various blue sky authorities and (iv) the making of the Merger Filing with the Secretary of State of the State of Delaware in connection with the Merger (the filings and approvals referred to in clauses (i) through (iv) are collectively referred to as the "Jensen Required Approvals"), no declaration, filing or registration with, or notice to, or authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by Jensen or the consummation by Jensen of the transactions contemplated hereby.
Section 4.5 Reports and Financial Statements; Derivative Transactions. Since February 28, 1995, Jensen and each of its subsidiaries required to make filings under the Securities Act, the Exchange Act and applicable state laws and regulations, as the case may be, have filed all forms, statements, reports and documents (including all exhibits, amendments and supplements thereto) required to be filed by them under each of the Securities Act, the Exchange Act, applicable laws and regulations of Jensen's and its subsidiaries' jurisdictions of incorporation and the respective rules and regulations thereunder, all of which complied in all material respects with all applicable requirements of the appropriate act and the rules and regulations thereunder. Jensen has previously delivered to Recoton true and complete copies of its (a) Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K filed by Jensen or any of its subsidiaries with the SEC from February 28, 1992, until the date hereof, (b) proxy and information statements relating to all meetings of its stockholders (whether annual or special) and actions by written consent in lieu of a stockholders' meeting from February 28, 1992 until the date hereof and (c) all other reports or registration statements filed by Jensen with the SEC from February 28, 1992 until the date hereof (collectively, the "Jensen SEC Reports"), and (d) audited consolidated financial statements for the fiscal year ended February 28, 1995 and its unaudited consolidated financial statements for the nine months ended November 30, 1995 (the "Nine Month Jensen Financial Statements") (collectively the "1995 Jensen Financial Statements"). As of their respective dates, the Jensen SEC Reports did 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 therein, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited interim financial statements of Jensen included in the Jensen SEC Reports and the 1995 Jensen Financial Statements (collectively, the "Jensen Financial Statements") fairly present the financial position of Jensen and its subsidiaries as of the dates thereof and the results of their operations and cash flows for the periods then ended in conformity with generally accepted accounting principles applied on a consistent basis (except as may be indicated therein or in the notes thereto), subject, in the case of the unaudited interim financial statements, to normal year-end and audit adjustments and any other adjustments described therein. Jensen and its subsidiaries do not, and will not, use any derivative financial instruments other than as disclosed in Section 4.5 of Jensen's Disclosure Schedule.
Section 4.6 Absence of Undisclosed Liabilities. Except as set forth in Section 4.6 of Jensen's Disclosure Schedule or in the Jensen 1995 Reports, neither Jensen nor any of its subsidiaries had at February 28, 1995, or has incurred since that date, any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature, except liabilities, obligations or contingencies (a) which are accrued or reserved against in the 1995 Jensen Financial Statements or reflected in the notes thereto or (b) which were incurred after February 28, 1995, and were incurred in the ordinary course of business and consistent with past practices and, in either case, except for any such liabilities, obligations or contingencies which (i) would not, in the aggregate, have a Jensen Material Adverse Effect or (ii) have been discharged or paid in full prior to the date hereof.
Section 4.7 Absence of Certain Changes or Events. Except as set forth in Section 4.7 of Jensen's Disclosure Schedule or in the Jensen 1995 Reports, since February 28, 1995 there has not been any material adverse change in the business (including, without limitation, any actual or threatened loss of significant customers (excluding customers of the Original Equipment Business) or any cancellation or threatened cancellation of any orders with an aggregate value of $1,000,000 or more (excluding orders of the Original Equipment Business)), operations, properties, assets, liabilities, condition (financial or other), results of operations or prospects of Jensen and its subsidiaries, taken as a whole (excluding the original equipment business), and Jensen and its subsidiaries have in all material respects conducted their respective businesses in the ordinary course consistent with past practice.
Section 4.8 Litigation. Except as disclosed in the Jensen 1995 Reports, the 1995 Jensen Financial Statements, or Section 4.8 of Jensen's Disclosure Schedule, (a) there are no claims, suits, actions or proceedings pending or, to the knowledge of Jensen, threatened, nor to the knowledge of Jensen are there any investigations or reviews pending or threatened, against, relating to or affecting Jensen or any of its subsidiaries, which, if adversely determined, would have a Jensen Material Adverse Effect; (b) there have not been any developments since the date of the Jensen 10-K with respect to such claims, suits, actions, proceedings, investigations or reviews which, individually or in the aggregate, may have a Jensen Material Adverse Effect; and (c) except as contemplated by the Jensen Required Approvals, neither Jensen nor any of its subsidiaries is subject to any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or authority or any arbitrator which prohibits or restricts the consummation of the transactions contemplated hereby or may have a Jensen Material Adverse Effect.
Section 4.9 Proxy Statement. The proxy statement to be distributed in connection with the Jensen Stockholders' Meeting (the "Proxy Statement") and which shall be included in the Registration Statement (as hereinafter defined) will not at the time of the mailing of the Proxy Statement and any amendment or supplement thereto, and at the time of the Jensen 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 are made, not misleading or necessary to correct any statement in any earlier filing with the SEC of such Proxy Statement or any amendment or supplement thereto or any earlier communication to stockholders of Jensen with respect to the transactions contemplated by this Agreement. The Proxy Statement will comply as to form in all material respects with all applicable laws, including the provisions of the Exchange Act and the rules and regulations promulgated thereunder. Notwithstanding the foregoing, no representation is made by Jensen with respect to information supplied by Recoton or Acquisition Sub or their representatives specifically for inclusion in the Proxy Statement.
Section 4.10 No Violation of Law. Except as set forth in Section 4.10 of Jensen's Disclosure Schedule, neither Jensen nor any of its subsidiaries is in violation of, or, to the knowledge of Jensen, is under investigation with respect to or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance, or judgment of any governmental or regulatory body or authority, except for violations which in the aggregate do not have a Jensen Material Adverse Effect. Jensen and its subsidiaries have all material permits, licenses, franchises and other governmental authorizations, consents and approvals (the "Jensen Government Approvals") necessary to conduct their businesses as presently conducted and, except as set forth in Section 4.10 of Jensen's Disclosure Schedule, all such Jensen Government Approvals shall be transferred to the Surviving Corporation.
Section 4.11 Compliance with Agreements. Except as disclosed in the Jensen 1995 Reports, the Jensen 1995 Financial Statements or Section 4.11 of Jensen's Disclosure Schedule, Jensen and each of its subsidiaries are not in breach or violation of or in default in the performance or observance of any term or provision of, and no event has occurred which, with lapse of time or action by a third party, could result in a default under, (i) the respective charters or by- laws of Jensen or any of its subsidiaries or (ii) any contract, commitment, agreement, indenture, mortgage, loan agreement, note, lease, bond, license, approval or other instrument to which Jensen or any of its subsidiaries is a party or by which any of them is bound or to which any of their property is subject, which breaches, violations and defaults, in the case of clause (ii) of this Section 4.11 would have, in the aggregate, a Jensen Material Adverse Effect.
Section 4.12 Taxes. (a) Jensen and its subsidiaries have duly filed with the appropriate federal, state, local, and foreign taxing authorities all tax returns required to be filed by them on or prior to the Effective Time and such tax returns are true and complete in all material respects, and duly paid in full or made adequate provision for the payment of all taxes for all periods ending at or prior to the Effective Time. The liabilities and reserves for taxes reflected in the Jensen balance sheets (x) as of February 28, 1995, contained in the Jensen 10-K, are adequate to cover all taxes for any period ending on or prior to February 28, 1995; and (y) as of August 31, 1995, contained in the Form 10-Q filed with the SEC on or about October 15, 1995 (the "Six Month 1995 Financial Statements"), are adequate to cover all taxes for any period ending on or prior to August 31, 1995; and (z) as of November 30, 1995, contained in the Nine Month Financial Statements are adequate to cover all taxes for any period ending on or prior to November 30, 1995. Except as set forth in Section 4.12 of Jensen's Disclosure Schedule, (i) there are no material liens for taxes upon any property or asset of Jensen or any subsidiary thereof, except for (x) liens for taxes not yet due and (y) any such liens for taxes shown on such Section 4.12 of Jensen's Disclosure Statement, which are being contested in good faith through appropriate proceedings; (ii) Jensen has not made any change in accounting method, received a ruling from any taxing authority or signed an agreement with any taxing authority which will materially and adversely affect Jensen in future periods; (iii) during the past three years neither Jensen nor any of its subsidiaries has received any notice of deficiency, proposed deficiency or assessment from any governmental taxing authority with respect to taxes of Jensen or any of its subsidiaries, except any such notice of deficiency, proposed deficiency or assessment which will not in the aggregate cause a Jensen Material Adverse Effect, and, any such deficiency or assessment shown on such Section 4.12 of Jensen's Disclosure Schedule has been paid or is being contested in good faith through appropriate proceedings; (iv) the income tax returns for Jensen and its subsidiaries are not currently the subject of any audit by the Internal Revenue Service (the "IRS") or any other national taxing authority, and such federal income tax returns have been examined by the IRS (or the applicable statutes of limitation for the assessment of federal taxes for such periods have expired) for all periods through and including February 28, 1990, and no material deficiencies were asserted as a result of such examinations which have not been resolved and fully paid; (v) there are no outstanding requests, agreements, consents or waivers to extend the statutory period of limitations applicable to the assessment of any taxes or deficiencies against Jensen or any of its subsidiaries, and no power of attorney granted by either Jensen or any of its subsidiaries with respect to any taxes is currently in force; and (vi) neither Jensen nor any of its subsidiaries is a party to any agreement providing for the allocation or sharing of taxes. Neither Jensen nor any of its subsidiaries has, with regard to any assets or property held, acquired or to be acquired by any of them, filed a consent to the application of Section 341(f) of the Code. Except as set forth on Section 4.12(b) of Jensen's Disclosure Schedule, Jensen will not have any carryovers subject to limitation under Section 382 or Section 383 of the Code immediately after the Merger. Jensen and its subsidiaries, in accordance with Section 482 of the Code, properly conducted intercompany pricing studies for the tax year ended February 1995, and is conducting such study in a timely manner with respect to the tax year ending February 1996.
(b) The term "tax" shall include any tax, assessment, levy, impost, duty, or withholding of any nature now or hereafter imposed by a government authority and any interest, additional tax, deficiency, penalty, charge or other addition thereon, including without limitation any income, gross receipts, profits, franchise, sales, use, property (real and personal), transfer, payroll, unemployment, social security, occupancy and excise tax and customs duty. The term "return" shall include any return, declaration, report, estimate, information return and statement required to be filed with or supplied to any taxing authority in connection with any taxes.
Section 4.13 Customs. Except as set forth in the Jensen 1995 Reports or in Section 4.13 of Jensen's Disclosure Schedule, Jensen and its subsidiaries have at all times been in compliance with all requirements administered and enforced by the U.S. Customs Service, including, but not limited to the classification, valuation, and marking of articles imported into the United States in a way so as not to give rise to a Jensen Material Adverse Effect.
Section 4.14 Employee Benefit Plans; ERISA. (a) Section 4.14 of Jensen's Disclosure Schedule lists all material employee benefit plans, employment contracts or other arrangements for the provision of benefits for employees or former employees of Jensen and its subsidiaries (other than its foreign subsidiaries as to which such disclosure shall be provided within ten business days after the date hereof and as to which the agreements, plans, contracts, or other arrangements thereof shall not be unduly burdensome or out of the ordinary), and, except as set forth in Section 4.14(a) of Jensen's Disclosure Schedule, neither Jensen nor its subsidiaries have any commitment to create any additional plan, contract or arrangement or to amend any such plan, contract or arrangement so as to increase benefits thereunder, except as required under existing collective bargaining agreements. Section 4.14(a) of Jensen's Disclosure Schedule identifies all "employee benefit plans" within the meaning of 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, covering current or former employees of Jensen and its subsidiaries (the "Jensen Plans"), other than Jensen Plans which are described in Jensen 1995 Reports or the Proxy Statement for the 1995 Annual Meeting of Stockholders of Jensen. A true and correct copy of each of the employee benefit plans, employment contracts and other arrangements for the provision of benefits for employees and former employees of Jensen and its subsidiaries described in the Jensen SEC Reports, the Jensen Plans listed on Section 4.14(a) of Jensen's Disclosure Schedule, except for any multiemployer plans, and all contracts relating thereto, or to the funding thereof (including, without limitation, all trust agreements, insurance contracts, investment management agreements, subscription and participation agreements and recordkeeping agreements), each as will be in effect at the Effective Time, has been provided to Recoton. In the case of any employee benefit plan, employment contract or other benefit arrangement which is not in written form, an accurate description of such plan, contract or arrangement as will be in effect at the Effective Time has been provided to Recoton. A true and correct copy of the most recent annual report, actuarial report, summary plan description, and Internal Revenue Service determination letter with respect to each such Jensen plan, to the extent applicable, and a current schedule of assets (and the fair market value thereof assuming liquidation of any asset which is not readily tradeable) held with respect to any funded plan, Jensen Plan, or benefit arrangement has been provided to Recoton by Jensen, and there have been no material changes in the financial condition in the respective plans, Jensen Plans or benefit arrangements from that stated in such annual report and actuarial reports.
(b) Except as disclosed in the Jensen 1995 Reports or as set forth in Section 4.14(b) of Jensen's Disclosure Schedule, (i) there have been no prohibited transactions within the meaning of Section 406 of ERISA or Section 4975 of the Code with respect to any of the Jensen Plans which, assuming that the taxable period of such transaction expired as of the date hereof, could subject Jensen or its subsidiaries to a material tax or penalty under Section 502(i) of ERISA or Section 4975 of the Code; (ii) no liability (except for premiums due) has been or is expected to be incurred by Jensen or any of its subsidiaries under Title IV of ERISA with respect to any of the Jensen Plans or 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 by any entity which is considered a single employer with Jensen under Section 4001 of ERISA or Section 414 of the Code (a "Jensen ERISA Affiliate"); (iii) all amounts which Jensen or its subsidiaries are required to pay as contributions to the Jensen Plans have been timely made or have been reflected in the Jensen Financial Statements; (iv) none of the Jensen Plans has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived; (v) the current value of all "benefit liabilities" within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions used in the Plan's most recent actuarial valuation) under each of the Jensen Plans which is subject to Title IV of ERISA did not exceed the then current value of the assets of such plan allocable to such benefit liabilities by more than the amount disclosed in the Jensen 10-K as of February 28, 1995; (vi) each of the Jensen Plans has been operated and administered in all material respects in accordance with applicable laws, including, but not limited to, the reporting and disclosure requirements of Part 1 of Subtitle I of ERISA and the group health plan continuation requirements of Section 4980B of the Code and Part 6 of Subtitle B of Title I of ERISA; (vii) each of the Jensen Plans which is intended to be "qualified" within the meaning of Section 401(a) of the Code has been determined by the IRS to be so qualified and Jensen is not aware of any circumstances likely to result in revocation of any such determination; (viii) there are no material pending, threatened or anticipated claims involving any of the Jensen Plans other than claims for benefits in the ordinary course; (ix) 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 of the Jensen Plans; (x) neither Jensen nor any of its subsidiaries is a party to, nor participates or has any liability or contingent liability with respect to, any multiemployer plan (regardless of whether based on contributions of a Jensen ERISA affiliate); and (xi) neither Jensen nor its subsidiaries has any liability or contingent liability for retiree life and health benefits under any of the Jensen Plans other than statutory liability for providing group health plan continuation coverage under Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the Code, except as set forth on Section 4.14(b) of Jensen's Disclosure Schedule.
(c) Except as set forth in Section 4.14(c) of Jensen's Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will accelerate benefits or any payments under any Jensen employee agreement, plan or arrangement.
Section 4.15 Material Defaults. Except as set forth on Section 4.15 of Jensen's Disclosure Schedule, neither Jensen nor its subsidiaries is, or 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, or other instrument to which Jensen or any of its subsidiaries is a party or by which Jensen or any of its subsidiaries or the assets, business, or operations receives benefits, except for those defaults which would not have, individually or in the aggregate, a Jensen 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.
Section 4.16 Labor Matters. Except as set forth on Section 4.16 of Jensen's Disclosure Schedule, there are no material controversies pending or, to the knowledge of Jensen, threatened between Jensen or its subsidiaries and any representatives of its employees, and, to the knowledge of Jensen, there are no material organizational efforts presently being made involving any of the presently unorganized employees of Jensen or its subsidiaries. Jensen and its subsidiaries have complied in all material respects with all laws relating to the employment of labor, including, without limitation, any provisions thereof relating to wages, hours, collective bargaining, and the payment of social security and similar taxes, and no person has, to the knowledge of Jensen, asserted that Jensen or its subsidiaries are is liable in any material amount for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing.
(a) Except as set forth in the Jensen 1995 Reports or in Section 4.17 to Jensen's Disclosure Schedule, Jensen and its subsidiaries have complied in all respects with all Environmental Laws (as defined below in this Section). Jensen and its subsidiaries have obtained and will maintain through the Closing Date all permits, licenses, certificates and other authorizations which are required with respect to its operation under any Environmental Laws and all such permits, licenses, certificates and other authorizations are listed on Section 4.17 to Jensen's Disclosure Schedule.
(b) Except as set forth in the Jensen 1995 Reports or in Section 4.17 to Jensen's Disclosure Schedule, Jensen and its subsidiaries are in compliance in all respects with all permits, licenses and authori- zations required by any Environmental Laws, and is also in full compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any Environmental Laws or contained in any regulation or code promulgated or approved under the Environmental Laws, or any plan, order, decree, judgment, injunction, notice or demand letter issued to or entered, against Jensen thereunder. All products manufactured and services provided by Jensen or its subsidiaries prior to the date hereof are in compliance with all Environmental Laws applicable thereto and all such products and services so manufactured or provided prior to the Closing Date will as of such date be in compliance with all Environmental Laws applicable thereto. Jensen has hereto delivered to Buyer true and complete copies of all environmental studies made in the last ten years relating to the business or assets of Jensen and its subsidiaries.
(c) Except as set forth in the Jensen 1995 Reports or Section 4.17 to Jensen's Disclosure Schedule, there is no pending or, to Jensen's knowledge, threatened civil, criminal or administrative Action, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter that affects or applies to Jensen or its subsidiaries, their business or assets, the products they have manufactured or the services they have provided relating in any way to any Environmental Laws or any regulation or code promulgated or approved under the Environmental Laws, or any plan, order, decree, judgment, injunction, notice or demand letter issued to or entered against Jensen or its subsidiaries thereunder.
(d) Except as set forth in the Jensen 1995 Reports or in Section 4.17 to Jensen's Disclosure Schedule, there are no past or present (or, to the knowledge of Jensen, anticipated) events, conditions, circumstances, activities, practices, incidents, Actions or plans which may interfere with or prevent compliance or continued compliance by Jensen or its subsidiaries with any Environmental Laws or with any regulation or code promulgated or approved under the Environmental Laws, or any plan, order, decree, judgment, injunction, notice or demand letter issued to or entered against Jensen or its subsidiaries thereunder, or which may give rise to any common law or legal liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, notice of violation, study or investigation, based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge, release or threatened release into the environment, by Jensen or its subsidiaries of any pollutant, contaminant, chemical, or industrial, toxic or hazardous substance or waste.
(e) Except as set forth in Section 4.17 to the Jensen Disclosure Schedule and except in accordance with a valid governmental permit, license, certificate or approval listed in Section 4.17 to Jensen's Disclosure Schedule there has been no emission, spill, release or discharge by Jensen or its subsidiaries, from any of their assets, from any site at which any of such assets are or were located, into or upon (i) the air, (ii) soils or improvements, (iii) surface water or ground water, or (iv) the sewer, septic system or waste treatment, storage or disposal system servicing such assets of any toxic or hazardous substances or wastes used, stored, generated, treated or disposed at or from any of such assets (any of which events is here- inafter referred to as "Hazardous Discharge").
(f) Prior to the Closing Date, there shall not occur any Hazardous Discharge (except in accordance with a valid governmental permit, license, certificate or approval listed in Section 4.17 to Jensen's Disclosure Schedule).
(g) The term "Environmental Laws" means all federal, state, local and foreign environmental, health and safety laws, codes and ordinances and all rules and regulations promulgated under the Environmental Laws, including, without limitation 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, air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals, or industrial, solid, toxic or hazardous substances or wastes. As used in this Agreement, the term "hazardous substances or wastes" includes, without limitation, (i) all substances which are designated pursuant to Section 311(b)(2)(A) of the Federal Water Pollution Control Act ("FWPCA"), 33 U.S.C Section 1251 et seq.; (ii) any element, compound, mixture, solution, or substance which is designated pursuant to Section 102 of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. Section 9601 et seq.; (iii) any hazardous waste having the characteristics which are identified under or listed pursuant to Sec- tion 3001 of the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901 et seq.; (iv) any toxic pollutant listed under Sec- tion 307(a) of the FWPCA; (v) any hazardous air pollutant which is listed under Section 112 of the Clean Air Act, 42 U.S.C. Section 7401 et seq.; (vi) any imminently hazardous chemical substance or mixture with respect to which action has been taken pursuant to Section 7 of the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; and (vii) waste oil.
(h) Notwithstanding anything in the foregoing to the contrary, the representations and warranties contained in this Section 4.17 shall be deemed to be true and correct unless the aggregate exposure to Recoton, Acquisition Sub and/or the Surviving Corporation of undisclosed and disclosed liabilities which have either arisen or which may arise under the Environmental Laws exceeds $5 million.
Section 4.18 Certain Business Practices. As of the date of this Agreement, except for such action which would not have a Jensen Material Adverse Effect, neither Jensen nor any of its subsidiaries not any directors, officer, agents, or employees of Jensen or any of its subsidiaries has (i) used any funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful payment.
Section 4.19 No Excess Parachute Payments. Sections 4.14(a), 4.14(b), and 4.14(c) of Jensen's Disclosure Schedule set forth all written contracts, arrangements, or undertakings (excluding Jensen Stock Options (as defined in Section 3.4)) pursuant to which any person may receive any amount or entitlement from Jensen or the Surviving Corporation or any of their respective subsidiaries (including cash or property or the vesting of property) that may be characterized as an "excess parachute payment" (as such term is defined in Section 280G(B)(1) of the Code) (any such amount being an "Excess Parachute Payment") as a result of any of the transactions being contemplated by this Agreement. Except as set forth in Section 4.14(c) of Jensen's Disclosure Schedule, no person is entitled to receive any additional payment from Jensen, the Surviving Corporation, their respective subsidiaries, or any other person (a "Parachute Gross-Up Payment") in the event that the 20 percent parachute excise tax of Section 4999(a) of the Code is imposed on such person. The Board of Directors of Jensen has not during the six months prior to the date of this Agreement granted to any officer, director, or employee of Jensen any right to receive any Parachute Gross-Up Payment.
Section 4.20 Trademarks, etc. Section 4.20 of Jensen's Disclosure Schedule sets forth a true and complete list of all patents, trademarks (registered or unregistered), trade names, service marks, and registered copyrights and applications therefor owned, used, or filed by or licensed to Jensen and its subsidiaries ("Intellectual Property Rights") and, with respect to registered trademarks, contains a list of all jurisdictions in which such trademarks are registered or applied for and all registration and application numbers. Except as disclosed on Section 4.20 of Jensen's Disclosure Schedule, the Intellectual Property Rights which are trademark or copyright registrations and issued patents are valid and in good standing, and are owned by Jensen, free and clear of all liens, encumbrances, equities, or claims and, along with applications therefor, are not involved in any interferences, litigations, oppositions, or cancellation proceedings. Jensen or its subsidiaries owns or has the right to use, without payment to any other party, the patents, trademarks, trade names, service marks, copyrights, and applications therefor referred to in such Schedule or otherwise used by Jensen or its subsidiaries, and the consummation of the transactions contemplated hereby will not alter or impair such rights in any material respect. Except as set forth in Section 4.20 to Jensen's Disclosure Schedule, Jensen is not a licensor or licensee in respect of any Intellectual Property Rights, nor has it granted any rights thereto or interest therein to any person or entity. Except as set forth in Section 4.20 of Jensen's Disclosure Schedule, no claims are pending or threatened by any person with respect to the ownership, validity, enforceability, or use of any such Intellectual Property Rights challenging or questioning the validity or effectiveness of any of the foregoing which claims reasonably could be expected to have a Jensen Material Adverse Effect. Jensen shall make all required filings to ensure the continued validity and enforceability of its Intellectual Property Rights up to the Effective Time.
Section 4.21 Jensen Stockholders' Approval. Jensen will take all necessary action so that stockholder approval of this Agreement and the transactions contemplated hereby, including the Merger, will require the affirmative vote of (i) a majority of the outstanding shares of Jensen Common Stock, and (ii) a majority of the outstanding shares of Jensen Common Stock which are voted at the Jensen Stockholders' Meeting other than shares held directly or indirectly by Robert G. Shaw.
Section 4.22 State Takeover Statutes. The Board of Directors of Jensen has approved the Merger. The Certificate of Incorporation of Jensen expressly elects not to be governed by Section 203 of the GCL.
OF ACQUISITION SUB AND RECOTON
Acquisition Sub and Recoton hereby jointly and severally represent and warrant to Jensen as follows:
Section 5.1 Organization and Qualification. Acquisition Sub and Recoton are each corporations duly organized, validly existing and in good standing under the laws of their states of incorporation and have the requisite corporate power and authority to own, lease and operate their assets and properties and to carry on their businesses as they are now being conducted. Acquisition Sub and Recoton are each qualified to do business and is in good standing in each jurisdiction in which the properties owned, leased or operated by each or the nature of the businesses conducted by each makes such qualification necessary, except where the failure to be so qualified and in good standing will not, when taken together with all other such failures, have a Recoton Material Adverse Effect. For purposes of this Agreement, a Recoton Material Adverse Effect shall be a material adverse effect on the business, operations, properties, assets, condition (financial or otherwise), results of operations or prospects of Recoton and its subsidiaries taken as a whole. True and complete copies of Acquisition Sub's and Recoton's Certificate of Incorporation and By-Laws, as in effect on the date hereof, including all amendments thereto, have heretofore been delivered to Jensen. Recoton directly owns and has the power to vote all of the outstanding capital stock of Acquisition Sub, and, as the sole stockholder of Acquisition Sub, has approved this Merger Agreement and the transactions contemplated hereunder.
Section 5.2 Recoton Common Stock. Recoton has 25,000,000 authorized shares of Common Stock, of which 11,163,390 shares are outstanding as of December 31, 1995. Acquisition Sub holds, or by the Effective Time shall hold, a number of shares of Recoton Common Stock sufficient to convert Jensen Common Stock to Recoton Common Stock pursuant to Article III, all of which are or shall be validly issued and are fully paid, nonassessable and free of preemptive rights. Except as set forth in Section 5.2 of the separate disclosure schedule executed and delivered by Recoton and Acquisition Sub simultaneous with the execution and delivery of this Agreement ("Recoton's Disclosure Schedule") or in Recoton's Annual Report on Form 10-K for the year ended December 31, 1994 and the exhibits and schedules thereto (the "Recoton 10-K" and, together with any reports filed by Recoton with the SEC under the Exchange Act after the Recoton 10-K and prior to the date of this Agreement, the "Recoton 1994-5 Reports") or any of the Recoton 1994-5 Reports, as of the date hereof, there are no outstanding subscriptions, options, warrants, rights, calls, contracts, voting trusts, proxies and other commitments, understandings, restrictions and arrangements, including any right of conversion or exchange under any outstanding security, instrument or other agreement obligating Recoton to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of the capital stock of Recoton or obligating Recoton or any subsidiary of Recoton to grant, extend or enter into any such agreement or commitment except pursuant to this Agreement. The shares of Recoton Common Stock to be issued to stockholders of Jensen in the Merger will be at the Effective Time duly authorized, validly issued, fully paid, nonassessable and free of preemptive rights and each certificate evidencing such shares shall contain a notation incorporating by reference that certain Rights Agreement dated as of October 27, 1995 between Recoton and Chemical Mellon Shareholder Services L.L.C.
Section 5.3 Authority; Non-Contravention; Approvals. (a) Recoton and Acquisition Sub have full corporate power and authority to enter into this Agreement and the Recoton Required Approvals (as hereinafter defined), to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation by Recoton and Acquisition Sub of the transactions contemplated hereby have been duly authorized by Recoton's and Acquisition Sub's Boards of Directors, and no other corporate proceedings on the part of Recoton and Acquisition Sub are necessary to authorize the execution and delivery of this Agreement and the consummation by Recoton and Acquisition Sub of the transactions contemplated hereby except for the obtaining of the Recoton Required Approvals. This Agreement has been duly and validly executed and delivered by Recoton and Acquisition Sub, and, assuming the due authorization, execution and delivery hereof by Jensen, constitutes a valid and legally binding agreement of Recoton and Acquisition Sub enforceable against them in accordance with its terms.
(b) Except as set forth in Section 5.3(b) of Recoton's Disclosure Schedule, the execution and delivery of this Agreement by Recoton and Acquisition Sub does not, and the consummation by Recoton and Acquisition Sub of the transactions contemplated hereby will not, violate, conflict with or result in a breach of any provision of, 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 termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Recoton or Acquisition Sub or any of its subsidiaries under any of the terms, conditions or provisions of (i) the respective charters or By-Laws of Recoton or any of its subsidiaries, (ii) subject to obtaining the Recoton Required Approvals, any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to Recoton or any of its subsidiaries or any of their respective properties or assets, and (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Jensen or any of its subsidiaries is now a party or by which Jensen or any of its subsidiaries or any of their respective properties or assets may be bound or affected, excluding from the foregoing clauses (ii) and (iii) such violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens, security interests, charges or encumbrances that would not, in the aggregate, have a Recoton Material Adverse Effect.
(c) Except for (i) the filings by Recoton, Acquisition Sub and Jensen required by Title II of the HSR Act, (ii) any EC Filings, (iii) the filing of the Registration Statement (as hereinafter defined) with the SEC pursuant to the Securities Act, and the declaration of the effectiveness thereof by the SEC and filings with various blue sky authorities, (iv) the making of the Merger Filing with the Secretary of State of the State of Delaware in connection with the Merger and (v) the listing with Nasdaq of the additional shares of Recoton Common Stock to be issued in the Merger (the filings and approvals referred to in clauses (i) through (v) are collectively referred to as the "Recoton Required Approvals"), no declaration, filing or registration with, or notice to, or authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by Recoton or Acquisition Sub or the consummation by Recoton or Acquisition Sub of the transactions contemplated hereby, other than such filings, registrations, authorizations, consents or approvals the failure of which to make or obtain, as the case may be, will not, in the aggregate, have a Recoton Material Adverse Effect.
Section 5.4 Reports and Financial Statements. Since December 31, 1994, Recoton and each of its subsidiaries required to make filings under the Securities Act, the Exchange Act and applicable state laws and regulations, as the case may be, have filed all forms, statements, reports and documents (including all exhibits, amendments and supplements thereto) required to be filed by them under each of the Securities Act, the Exchange Act, applicable laws and regulations of Recoton's and its subsidiaries' jurisdictions of incorporation and the respective rules and regulations thereunder, all of which complied in all material respects with all applicable requirements of the appropriate act and the rules and regulations thereunder. Recoton has previously delivered to Jensen true and complete copies of its (a) Annual Reports on Form 10-K, Quarterly Reports on Form 10- Q, and Current Reports on Form 8-K filed by Recoton or any of its subsidiaries with the SEC from December 31, 1991 until the date hereof, (b) proxy and information statements relating to all meetings of its shareholders (whether annual or special) and actions by written consent in lieu of a shareholders' meeting from December 31, 1991 until the date hereof and (c) all other reports or registration statements filed by Recoton or its subsidiaries with the SEC from December 31, 1991, until the date hereof (collectively, the "Recoton SEC Reports") and (d) audited consolidated financial statements of Recoton for the fiscal year ended December 31, 1994 and its unaudited consolidated financial statements for the nine months ended September 30, 1995 (the "1994-95 Recoton Financial Statements"). As of their respective dates, the financial statements of Recoton included in the Recoton SEC Reports and the 1994-95 Recoton Financial Statements (collectively, the "Recoton Financial Statements") fairly present the financial position of Recoton and its subsidiaries as of the dates thereof and the results of their operations and cash flows for the periods then ended in conformity with generally accepted accounting principles applied on a consistent basis (except as may be indicated therein or in the notes thereto) subject, in the case of the unaudited interim financial statements, to normal year-end and audit adjustments and any other adjustments described therein.
Section 5.5 Absence of Undisclosed Liabilities. Except as set forth in Section 5.5 of Recoton's Disclosure Schedule or in the Recoton 1994-5 Reports, neither Recoton nor any of its subsidiaries had at December 31, 1994, or has incurred since that date, any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature, except liabilities, obligations or contingencies (a) which are accrued or reserved against in the 1994- 1995 Recoton Financial Statements or reflected in the notes thereto or (b) which were incurred after December 31, 1994, and were incurred in the ordinary course of business and consistent with past practices and, in either case, except for any such liabilities, obligations or contingencies which (i) would not, in the aggregate, have a Recoton Material Adverse Effect or (ii) have been discharged or paid in full prior to the date hereof.
Section 5.6 Absence of Certain Changes or Events. Except as set forth in Section 5.6 of Recoton's Disclosure Schedule or in the Recoton 1994-95 Reports, since December 31, 1994, there has not been any material adverse change in the business, operations, properties, assets, liabilities, condition (financial or other), results of operations or prospects of Recoton and its subsidiaries, taken as a whole, and Recoton and its subsidiaries have in all material respects conducted their respective businesses in the ordinary course consistent with past practice.
Section 5.7 Registration Statement. The Prospectus forming part of the Registration Statement on Form S-4 to be filed under the Securities Act with the SEC by Recoton for the purpose of registering the shares of Recoton Common Stock to be issued in the Merger, including Recoton Common Stock that may be issued upon the exercise of Jensen Stock Options after the Effective Time (the "Registration Statement") will not at the time it becomes effective and at the Effective Time, 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 are made, not misleading or necessary to correct any statement in any earlier filing with the SEC of such Registration Statement or any amendment or supplement thereto. The Registration Statement will comply as to form in all material respects with all applicable laws, including the provisions of the Securities Act and the rules and regulations promulgated thereunder. Notwithstanding the foregoing, no representation is made by Recoton with respect to information supplied by Jensen or its representatives specifically for inclusion therein.
Section 5.8 No Violation of Law. Except as disclosed in the Recoton 1994-5 Reports or set forth in Section 5.8 of Recoton's Disclosure Schedule, neither Recoton nor any of its subsidiaries is in violation of, or, to the knowledge of Recoton, is under investigation with respect to or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance, or judgment of any governmental or regulatory body or authority, except for violations which in the aggregate do not have a Recoton Material Adverse Effect. Recoton and its subsidiaries have all material permits, licenses, franchises and other governmental authorizations, consent and approvals necessary to conduct their businesses as presently conducted.
CONDUCT OF BUSINESS PENDING THE MERGER
Section 6.1 Conduct of Business by Jensen Pending the Merger. Except as set forth in Section 6.1 of Jensen's Disclosure Schedule or as otherwise contemplated by this Agreement, after the date hereof and prior to the Effective Time or earlier termination of this Agreement, unless Recoton shall otherwise agree in writing (it being agreed, however, that Jensen shall be solely responsible for its operations and those of its subsidiaries in accordance with the provisions of this Agreement), Jensen shall and shall cause each of its subsidiaries, to:
(a) conduct their respective businesses in the ordinary and usual course of business and consistent with past practice;
(b) not (i) amend or propose to amend their respective charters or by-laws; (ii) split, combine or reclassify their outstanding capital stock or declare, set aside or pay any dividend or distribution payable in cash, stock, property or otherwise; or (iii) knowingly take any action which would result in a failure to maintain the trading of Jensen Common Stock on Nasdaq;
(c) not (i) except for the issuance of shares of Common Stock upon the exercise of currently outstanding Jensen Stock Options, authorize the issuance of, or issue, sell, pledge or dispose of, or agree to issue, sell, pledge or dispose of, any additional shares of, or any options, warrants or rights of any kind to acquire any shares of, their capital stock of any class or any debt or equity securities convertible into or exchangeable for such capital stock, (ii) except for the sale of the assets associated with the Original Equipment Business as described in Section 8.3(f) and the sale of the AR Rights pursuant to the AR Agreement, sell (including, without limitation, by sale/leaseback), pledge, dispose of, license or encumber any material assets (including without limitation intellectual property), or any interests therein, other than in the ordinary course of business and consistent with past practice; (iii) redeem, purchase, acquire or offer to purchase or acquire any (x) shares of its capital stock, other than in accordance with the governing terms of such securities or (y) long-term debt, other than as required by the governing instruments relating thereto; (iv) take or fail to take any action which action or failure to take action would cause Acquisition Sub, Jensen or their respective stockholders (except to the extent that any stockholders perfect dissenters' rights under Delaware law, or receive cash in lieu of fractional shares or receive the Per Share Cash Amounts) to recognize gain or loss for federal income tax purposes as a result of the consummation of the Merger or (v) enter into any contract, agreement, commitment or arrangement with respect to any of the foregoing; provided, however, that Jensen or any of its subsidiaries, after consulting with Recoton, may take any of the actions otherwise prohibited by this Section 6.1(c) if counsel to Jensen advises the Board of Directors of Jensen or any of its subsidiaries that the failure to take such action or actions might reasonably subject Jensen's or any of its subsidiaries' directors to liability for breach of their
(d) use their best efforts to preserve intact their respective business organizations and goodwill, keep available the services of their respective present officers and key employees, and preserve the goodwill and business relationships with suppliers, distributors, customers, and others having business
(e) confer on a regular and frequent basis with one or more representatives of Recoton to discuss operational matters of materiality and the general status of ongoing operations;
(f) promptly notify Recoton of any significant changes in the business, properties, assets, financial condition, or results of operations or prospects of Jensen or its subsidiaries taken as a whole (excluding the Original Equipment Business);
(g) not acquire, or publicly propose to acquire, all or any substantial part of the business and properties or capital stock of any person not a party to this Agreement, whether by merger, purchase of assets, tender offer or otherwise;
(h) not, directly or indirectly, through any officer, director, employee, representative, agent, or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any person (including, without limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act) or entity relating to any acquisition or purchase of all or (other than in the ordinary course of business) any portion of the assets of, or any equity interest in, or any merger or other business combination with, Jensen or any of its subsidiaries, other than with respect to the Original Equipment Business or the transactions contemplated hereby (collectively, a "Jensen Acquisition Transaction"); provided, however, that Jensen or any of its subsidiaries may take any of the actions otherwise prohibited by this Section 6.1(h) if counsel to Jensen advises the Board of Directors of Jensen or any of its subsidiaries that the failure to take such action or actions might reasonably subject Jensen's or any of its subsidiary's directors to liability for breach of their fiduciary duties; and provided, further however, that notwithstanding the foregoing sentence, (a) following receipt of a bona fide unsolicited written offer to consummate a Jensen Acquisition Transaction, Jensen may take and disclose to Jensen's stockholders the position of the Board of Directors of Jensen contemplated by Rule 14e-2 under the Exchange Act or otherwise make appropriate disclosures to its stockholders, (b) Jensen may furnish or cause to be furnished information concerning its business, properties or assets to a third party, and (c) Jensen may engage in discussions or negotiations with a third party concerning a Jensen Acquisition Transaction provided that Jensen shall notify Recoton promptly (orally and in writing) of any
(i) not enter into or amend any employment, severance, special pay arrangement with respect to termination of employment or other similar arrangements or agreements with any directors, officers or key employees, except with the prior written approval
(j) not adopt, enter into or amend any bonus, profit sharing, compensation (except ordinary course salary adjustments consistent with historic practice), stock option, pension, retirement, deferred compensation, health care, employment or other employee benefit plan, agreement, trust, fund or arrangement for the benefit or welfare of any employee or retiree, except as required to comply with changes in applicable law occurring after the date hereof, except with the prior written approval of Recoton;
(k) maintain with financially responsible insurance companies, insurance on its tangible assets and its businesses in such amounts and against such risks and losses as are consistent with past practice and customary for companies engaged in the business engaged in by Jensen and its subsidiaries;
(l) not introduce any new product or plan which would substantially increase the risk exposure of Jensen and its subsidiaries taken as a whole;
(m) not enter into any material arrangement, agreement, or contract with any third party (other than customers in the ordinary course of business) which provides for an exclusive arrangement with that third party or is substantially more restrictive on Jensen or substantially less advantageous to Jensen than arrangements, agreements, or contracts existing on the date hereof;
(n) not establish any new lines of credit or other credit facilities or incur any indebtedness other than pursuant to existing credit facilities except for trade liabilities incurred in the ordinary course of business; and
(o) not agree in writing, or otherwise, to take any of the foregoing actions or any other action which would make any representation or warranty contained in Article IV untrue or incorrect in any material respect as of the time of the Closing.
Section 6.2 Site Testing and Evaluation. Prior to the later of March 1, 1996 or the date of the Proxy Statement (which Recoton may cause to be delayed if it is still conducting its study and testing), Recoton may at its own expense perform or have performed such environmental site inspections and reasonable testing relating to the real property owned or operated by Jensen or its subsidiaries as it may deem appropriate. If based upon the written reports of independent environmental consultants, Recoton determines in its sole and reasonable discretion that the results of the inspections or tests performed indicate that any of such property or a number of such properties is, or that there is a material risk that such property(ies) may be, contaminated in a way as to give rise to possible liability, contingent or otherwise, under the Environmental Laws in an aggregate amount of $5,000,000 or greater, Recoton may terminate this Agreement by notice to Jensen prior to the date of the Proxy Statement.
Section 7.1 Access to Information. (a) Jensen and its subsidiaries shall afford to Recoton and Acquisition Sub and its accountants, counsel, and other representatives full access during normal business hours throughout the period prior to the Effective Time to all of their respective properties, books, contracts, commitments and records (including, but not limited to, tax returns) and to their customers, vendors, employees, consultants and professional advisors and, during such period, shall furnish promptly to Recoton and Acquisition Sub (i) a copy of each report, schedule and other document filed or received by any of them pursuant to the requirements of federal or state securities laws or the HSR Act or filed or received by any of them with or from the SEC, Federal Trade Commission ("FTC") or Department of Justice ("DOJ") and (ii) all other information concerning their respective businesses, properties and personnel as Acquisition Sub may reasonably request; provided, however, that no investigation pursuant to this Section 7.1(a) shall affect any representations or warranties made herein or the conditions to the obligations of the respective parties to consummate the Merger. Jensen and its subsidiaries shall promptly advise Recoton and Acquisition Sub in writing of any change or occurrence of any event after the date of this Agreement having, or which, insofar as can reasonably be foreseen, in the future may have, a Jensen Material Adverse Effect.
(b) Recoton and its subsidiaries shall afford to Jensen and its accountants, counsel and other representatives full access during normal business hours throughout the period prior to the Effective Time to all of their respective properties, books, contracts, commitments and records (including, but not limited to, tax returns) and, during such period, shall furnish promptly to Jensen (i) a copy of each report, schedule and other document filed or received by any of them pursuant to the requirements of federal or state securities laws or the HSR Act or filed or received by any of them with or from the SEC, FTC or DOJ and (ii) all other information concerning their respective businesses, properties and personnel as Jensen may reasonably request; provided, however, that no investigation pursuant to this Section 7.1(b) shall affect any representations or warranties made herein or the conditions to the obligations of the respective parties to consummate the Merger. Recoton and its subsidiaries shall promptly advise Jensen in writing of any change or occurrence of any event after the date of this Agreement having, or which, insofar as can reasonably be foreseen, in the future may have, a Recoton Material Adverse Effect.
(c) Any information received pursuant to Sections 7.1(a) and 7.1(b) above shall be considered Evaluation Material (as defined in the letter agreements dated August 21, 1995 and October 16, 1995, as applicable (the "Confidentiality Agreements"), between Recoton and Jensen, and such information shall be held in confidence by Recoton, Acquisition Sub and Jensen in accordance with the terms of the Confidentiality Agreements.
Section 7.2 Registration Statement and Proxy Statement. Recoton shall prepare and file with the SEC as soon as reasonably practicable after the date hereof the Registration Statement (in which the Proxy Statement shall be included) and shall use all reasonable efforts to have the Registration Statement declared effective by the SEC as promptly as practicable. Jensen shall prepare and file with the SEC as soon as reasonably practicable after the date hereof the Proxy Statement. Recoton shall also take any action required to be taken under applicable state blue sky or securities laws in connection with the issuance of Recoton Common Stock in the Merger; provided, however, that with respect to such blue sky qualifications neither Recoton nor Jensen shall be required to register or qualify as a foreign corporation or to take any action which would subject it to service of process in any jurisdiction (other than Delaware) where any such entity is not now so subject, except as to matters and transactions relating to or arising solely from the offer and sale of Recoton Common Stock. Recoton and Jensen shall promptly furnish to each other all information, and take such other actions, as may reasonably be requested in connection with any action by any of them in connection with the preceding sentence. The information provided and to be provided by Recoton and Jensen, respectively, (and by their auditors, attorneys, financial advisors or other consultants or advisors) to the other for use in the Registration Statement and Proxy Statement shall be true and complete in all material respects without omission of any material fact which is required to make such information not false or misleading.
Section 7.3 Stockholders' Approval. Subject to the provisions of Section 6.1(h) and 9.1(e) Jensen shall promptly submit this Agreement and the transactions contemplated hereby for the approval of its stockholders at the Jensen Stockholders' Meeting to be held as soon as practicable after the Registration Statement is declared effective by the SEC and, subject to the fiduciary duties of the Board of Directors of Jensen under applicable law, shall use its best efforts to obtain stockholder approval (the "Jensen Stockholders' Approval") of this Agreement and the transactions contemplated hereby in accordance with Section 4.21. Subject to the fiduciary duties of the Board of Directors of Jensen under applicable law and the provisions of Section 6.1(h) and 9.1(e), Jensen shall, through its Board of Directors, recommend to its stockholders approval of this Agreement and the transactions contemplated by this Agreement.
Section 7.4 Compliance with the Securities Act. Jensen shall use its best efforts to cause each principal executive officer, each director and each other person who is an "affiliate," as that term is used in paragraphs (c) and (d) of Rule 145 under the Securities Act (an "Affiliate"), of Jensen to deliver to Recoton and Jensen on or prior to the Effective Time a written agreement (an "Affiliate Agreement") to the effect that such person will not offer to sell, sell or otherwise dispose of any shares of Recoton Common Stock issued in the Merger, except, in each case, pursuant to an effective registration statement or in compliance with Rule 145, as amended from time to time, or in a transaction which, in the opinion of legal counsel reasonably satisfactory to Recoton, is exempt from the registration requirements of the Securities Act and, in any case, until after the results covering 30 days of post-merger combined operations of Recoton and Jensen have been filed with the SEC, sent to shareholders of Recoton or otherwise publicly issued.
Section 7.5 Nasdaq Listing. Recoton shall use its best efforts to obtain the listing on Nasdaq, at or before the Effective Time of the additional shares of Recoton Common Stock to be issued pursuant to the Merger.
Section 7.6 Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses.
Section 7.7 Agreement to Cooperate. Subject to the terms and conditions provided in this Agreement, each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all action to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using its reasonable efforts to obtain all necessary or appropriate waivers, consents and approvals and SEC "no-action" letters (including, but not limited to, required approvals under applicable Delaware state laws and regulations), to effect all necessary registrations and filings (including, but not limited to, filings under the HSR Act) and to lift any injunction or other legal bar to the Merger (and, in such case, to proceed with the Merger as expeditiously as possible), subject, however, to the provisions of Sections 6.1(h) and 9.1(e) and to the requisite votes of the stockholders of Jensen. Each party hereto agrees to allow the other to review each regulatory filing made by such party prior to the filing thereof during the term of this Agreement.
Section 7.8 Public Statements. The parties shall release a press release immediately upon the signing of this Agreement in the form set forth as Exhibit 7.8 to this Agreement. None of the parties hereto shall issue any press release or make any other public statements, in each case relating to or connected with or arising out of this Agreement or the matters contained therein, without obtaining the prior written approval of the other parties to the contents and the manner of presentation and publication thereof, provided, however, that nothing herein shall prevent any party from making any disclosures required by applicable law or regulation (including regulation of the SEC and the NASD).
Section 7.9 Accountants' Letters. Each of Recoton and Jensen shall use its best efforts to cause to be delivered to the other letters of Cornick Garber & Sandler, L.L.P., independent auditors for Recoton, and Coopers and Lybrand, independent auditors for Jensen, respectively, dated the date of the Proxy Statement, the effective date of the Registration Statement and the Effective Time (or such other dates reasonably acceptable to the parties) with respect to certain financial statements and other financial information included in the Registration Statement, which letters shall be in customary form and substance reasonably satisfactory to the addressee.
Section 7.10 Indemnification of Certain Officers and Directors. (a) To the extent permitted by applicable law, Recoton and Acquisition Sub agree that all rights to indemnification from Jensen or any subsidiary of Jensen now existing in favor of the directors, officers, employees or agents of Jensen and any subsidiary of Jensen as provided in their respective certificates of incorporation or charters, as the case may be, or by-laws, as in effect on the date of this Agreement, shall survive the Merger and shall continue in full force and effect and be honored by Recoton, Acquisition Sub and the Surviving Corporation for a period of not less than five years from the Effective Time; provided, however, that in the event any claim or claims are asserted or made within such five-year period, all such rights shall continue until final disposition of any such claim or claims.
(b) Recoton and Acquisition Sub will use their best efforts, and will cause the Surviving Corporation to use its best efforts, to cause to be maintained in effect a tail, for not less than three years from the Effective Time, on the current policies of directors' and officers' liability insurance maintained by Jensen and the subsidiaries of Jensen (provided that the Surviving Corporation or Acquisition Sub may substitute therefor policies of at least the same level of coverage containing terms and conditions which are in the aggregate no less advantageous so long as no lapse in coverage occurs as a result of such substitution) with respect to all matters, including the transactions contemplated hereby, occurring prior to and including the Effective Time. Notwithstanding the foregoing, neither Recoton, Acquisition Sub nor the Surviving Corporation shall be required to expend in excess of $150,000 in the aggregate pursuant to this Section 7.10(b).
Section 7.11 Employee Benefits. For a period of one year after the Effective Time, the Surviving Corporation shall make available to the current employees of Jensen, so long as such persons continue after the Effective Time to hold positions as employees with the Surviving Corporation, the same employee benefits that are currently in effect at Jensen, or similar employee benefits on substantially the same terms and conditions that Recoton may make available to its own employees, including, but not limited to, health care and life insurance, pension and retirement benefits and vacation and sick pay. Thereafter, the Surviving Corporation shall provide a benefits package at least comparable to the benefit package provided by Recoton to its own employees. Recoton and the Surviving Corporation shall use their best efforts to insure that employees of the Surviving Corporation shall not be subject to any waiting periods or pre-existing condition restrictions under employee benefit plans offered by Recoton or the Surviving Corporation to the extent that such periods are longer or such periods impose a greater limitation than the period or limitations imposed under employee benefit plans currently offered by Jensen. Employees of the Surviving Corporation shall be given credit for prior service with Jensen for purposes of crediting periods of service for eligibility and vesting of all such substitute employee benefits offered by Recoton or the Surviving Corporation.
Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall have been approved and adopted by the requisite vote of the stockholders of Jensen pursuant to Section 4.21;
(b) The additional shares of Recoton Common Stock issuable in the Merger shall have been authorized for listing on Nasdaq;
(c) The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated and any EC Filings shall have been made and no additional requirements relating thereto shall be applicable;
(d) The Registration Statement shall have become effective in accordance with the provisions of the Securities Act, and no stop order suspending such effectiveness shall have been issued and
(e) No preliminary or permanent injunction or other order or decree by any federal or state court which prevents the consummation of the Merger shall have been issued and remain in effect (each party agreeing to use all reasonable efforts to have any such injunction, order or decree lifted);
(f) No action shall have been taken, and no statute, rule or regulation shall have been enacted, by any state, federal or foreign government or governmental agency which would prevent the consummation of the Merger or that would have a material adverse effect on the prospects of the Surviving Corporation;
(g) All governmental consents and approvals legally required for the consummation of the Merger and the transactions contemplated hereby, including, without limitation, approval (if required) by the DOJ, FTC and the SEC, shall have been obtained and be in effect at the Effective Time on terms and conditions that would not have a material adverse effect on the prospects of the
(h) Jensen shall have received an opinion, and such opinion shall not have been withdrawn at or prior to the Effective Time, of a firm of professionals which is qualified to render tax opinions in reorganizations under Section 368(a) (and has rendered such opinions in other comparable reorganizations of public companies) which firm of professionals is reasonably satisfactory to both Jensen and Recoton, which opinion Recoton shall be allowed to rely upon, subject to customary assumptions and based on representations of Jensen, Jensen Stockholders and Recoton and Acquisition Sub dated the date of the Proxy Statement, to the effect that Acquisition Sub and Jensen and their respective shareholders (except to the extent any stockholders have perfected dissenters' rights under Delaware law or Jensen stockholders have received (i) cash in lieu of fractional shares or (ii) the Per Share Cash Amount or portion thereof) will recognize no gain or loss for federal income tax purposes as a result of consummation of the Merger and that the transaction qualifies as a reorganization under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code; provided, however, that if such opinion in form reasonably satisfactory to Jensen and Recoton has not been received by the date of the Proxy Statement or is withdrawn prior to the Effective Time, Recoton shall have the right to make an All-Cash Election, in which case the condition set forth in this Section 8.1(h) shall be deemed satisfied; and
(i) Jensen shall have received letters from Lehman Brothers dated the date of this Agreement and the date of the Proxy Statement (or such other dates reasonably acceptable to Jensen and Recoton), which letters shall be of the opinion that (1) the Merger Consideration is "fair from a financial point of view" to Jensen's stockholders; and (2) that the proceeds received by Jensen from the sale of the assets of the Original Equipment Business are "fair from a financial point of view" to Jensen.
Section 8.2 Conditions to Obligation of Jensen to Effect the Merger. The obligation of Jensen to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following additional conditions:
(a) Acquisition Sub and Recoton shall have performed in all material respects their agreements contained in this Agreement required to be performed on or prior to the Effective Time and the representations and warranties of Acquisition Sub and Recoton contained in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Effective Time as if made on and as of such date, except as contemplated or permitted by this Agreement, and Jensen shall have received a certificate of the President and the Chief Operating Officer of each of Acquisition Sub and Recoton to that
(b) Jensen shall have received an opinion addressed to Jensen from Stroock & Stroock & Lavan, counsel to Recoton and Acquisition Sub, or other counsel reasonably acceptable to Jensen, dated the Closing Date, substantially in the form set forth in
(c) Jensen shall have received the letters of Cornick Garber & Sandler, L.L.P. contemplated by Section 7.9;
(d) Since the date hereof, no Recoton Material Adverse Effect shall have occurred; and
(e) Recoton shall have deposited the Recoton Common Stock and cash into the Exchange Fund in accordance with Section 3.2(a) and the Exchange Agent shall have delivered to Jensen a certificate acknowledging receipt of such stock and cash.
Section 8.3 Conditions to Obligation of Recoton and Acquisition Sub to Effect the Merger. The obligation of Recoton and Acquisition Sub to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the additional following conditions:
(a) Jensen shall have performed in all material respects its agreements contained in this Agreement required to be performed on or prior to the Effective Time and the representations and warranties of Jensen contained in this Agreement shall be true and correct in all material respects on and as of the date of this Agreement and on and as of the Effective Time as if made on and as of such date, except as contemplated or permitted by this Agreement, and Recoton and Acquisition Sub shall have received a Certificate of the President and the Chief Financial Officer of
(b) Recoton and Acquisition Sub shall have received an opinion from Vedder, Price, Kaufman & Kammholz, counsel to Jensen, or other counsel reasonably acceptable to Recoton and Acquisition Sub, dated the Closing Date, substantially in the form set forth in
(c) The Affiliate Agreements required to be delivered to Acquisition Sub pursuant to Section 7.4 shall have been furnished as required by Section 7.4;
(d) Recoton and Acquisition Sub shall have received the letters of Coopers & Lybrand contemplated by Section 7.9;
(e) Since the date hereof, no Jensen Material Adverse
(f) The closing of the sale of the assets of the Original Equipment Business pursuant to the OE Agreement shall have occurred prior to the Effective Time;
(g) Recoton shall not have elected to terminate due to the results of the inspections or tests performed in accordance with
(h) The number of shares of Recoton Common Stock to be issued in the Merger shall not equal or exceed 20% of the Recoton Common Stock outstanding prior to the Effective Time;
(i) The number of Dissenting Shares shall not exceed 10% of the Jensen Common Stock outstanding; and
(j) Recoton and Acquisition Sub shall have received letters from Furman Selz Incorporated, dated the date of this Agreement and the Effective Date of the Registration Statement (or such other dates reasonably acceptable to Recoton), which letters shall be of the opinion that the Merger Consideration is "fair from a financial point of view" to Recoton.
Section 9.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval by the shareholders of Jensen or Acquisition Sub:
(a) by mutual written consent of Acquisition Sub and
(b) by either Acquisition Sub or Jensen if (i) the Merger shall not have been consummated on or before June 30, 1996 (the "Termination Date"), (ii) the requisite vote of the stockholders of Jensen to approve this Agreement pursuant to Section 8.1(a) and the transactions contemplated hereby shall not be obtained at the Jensen Stockholders' Meeting, or any adjournments thereof, (iii) any governmental or regulatory body, the consent of which is a condition to the obligations of Acquisition Sub and Jensen to consummate the transactions contemplated hereby, shall have determined not to grant its consent and any appeals of such determination shall have been taken and have been unsuccessful or such body shall have imposed conditions or limitations on its consent that would have a material adverse effect on the prospects of the Surviving Corporation and any appeals from such imposition shall have been taken and have been unsuccessful, or (iv) any court of competent jurisdiction in the United States, or any state or any country in which there is a subsidiary of Jensen, shall have issued an order, judgment or decree (other than a temporary restraining order) restraining, enjoining or otherwise prohibiting the Merger and such order, judgment or decree shall have become final and
(c) by Acquisition Sub (i) if the Board of Directors of Jensen shall have withdrawn or modified in a manner adverse to Acquisition Sub its approval or recommendation of the Merger, this Agreement or the transactions contemplated hereby or shall have failed to reaffirm such approval or recommendation upon Acquisition Sub's request, or shall have resolved to do any of the foregoing, (ii) if Jensen or any of the other persons or entities described in Section 6.1(c) or 6.1(h) shall take any of the actions that would be proscribed by Section 6.1(c) or 6.1(h) but for the proviso therein allowing certain actions to be taken if required by fiduciary duty upon advice of counsel, (iii) if there has been (x) a material breach of any covenant or agreement herein on the part of Jensen which has not been cured or adequate assurance of cure given, in either case within 15 business days following receipt of notice of such breach, or (y) a representation or warranty of Jensen herein is or becomes untrue or incorrect in a material respect which representation or warranty by its nature cannot be made true and correct in all material respects prior to the Termination Date or is not made true and correct prior to the Termination Date or (iv) if (x) Jensen enters into an agreement with any corporation, partnership, person, other entity or group (as defined in Section 13(d)(3) of the Exchange Act) other than Recoton or Acquisition Sub whereby such entity or group would directly or indirectly acquire all or any substantial part of the assets or capital stock of Jensen, whether by merger, share exchange, purchase of assets, consolidation, tender offer or otherwise (other than with regard to the Original Equipment Business) or (y) any third party commences a tender or exchange offer for 25% or more of Jensen's Common Stock and Jensen's Board of Directors does not recommend, or ceases to recommend, to Jensen's stockholders that they reject such offer; or
(d) by Jensen if there has been (x) a material breach of any covenant or agreement herein on the part of Acquisition Sub or Recoton which has not been cured or adequate assurance of cure given, in either case within 15 business days following receipt of notice of such breach or (y) a representation or warranty of Recoton or Acquisition Sub herein is or becomes untrue or incorrect in a material respect which representation or warranty by its nature cannot be made true and correct in all material respects prior to the Termination Date or is not made true and correct prior to the Termination Date; or
(e) automatically, if the Jensen Board of Directors shall recommend a Jensen Acquisition Transaction or authorize or approve the entering into by Jensen of a Jensen Acquisition Transaction.
Notwithstanding the foregoing, if prior to the Closing Date, (i) any preliminary or permanent injunction or other order or decree by any federal or state court which prevents the consummation of the Merger shall have been issued, and remains in effect (each party agreeing to use all reasonable efforts to have any such injunction, order or decree lifted); (ii) any action shall have been taken, or any statute, rule or regulation shall have been enacted, by any state, federal or foreign government or governmental agency which would prevent the consummation of the Merger or that would have a material adverse effect on the prospects of the Surviving Corporation; or (iii) any governmental consents and approvals legally required for the consummation of the Merger and the transactions contemplated hereby, including, without limitation, approval (if required) by the DOJ, FTC and the SEC, shall not have been obtained or not be in effect at the Effective Time on terms and conditions that would not have a material adverse on the prospects of the Surviving Corporation, the Termination Date shall be extended at the option of any party hereto for a period of up to 120 days. If, at the end of such 120-day period, the matters referred to in (i), (ii) or (iii) shall not have been satisfied to each party's reasonable satisfaction, either party may terminate this Agreement pursuant to the applicable provisions of this Section 9.1.
Section 9.2 Effect of Termination.
(a) In the event of termination of this Agreement by either Recoton, Acquisition Sub or Jensen as provided in Section 9.1 or any breach of any party or any failure of condition giving rise to a right to terminate this Agreement, there shall be no liability on the part of either Jensen or Recoton or Acquisition Sub or their respective officers or directors except as set forth in this Section 9.2 or in Section 7.1(c).
(b) If this Agreement is terminated pursuant to (i) Section 9.1(b)(i) due to failure to satisfy the conditions set forth in Section 8.1(a), 8.1(h) (if caused by Jensen's willful act), 8.1(i) (if caused by Jensen's willful act), 8.3(a) due to failure to obtain officer's certificate under circumstances in which Jensen has otherwise performed in all material respects its agreements contained in this Agreement required to be performed on or prior to the Effective Time and in which the representations and warranties of Jensen contained in this Agreement are true and correct in all material respects on and as of the date of this Agreement and on and as of the Effective Time as if made on and as of such date, except as contemplated or permitted by this Agreement, 8.3(b) (if caused by Jensen's willful act), 8.3(c) (if caused by Jensen's willful act) or 8.3(d) (if caused by Jensen's willful act), (ii) Section 9.1(b)(ii), (iii) Section 9.1(c)(i), (iv) Section 9.1(c)(ii), (v) Section 9.1.(c)(iii)(x) (if caused by Jensen's willful act), (vi) Section 9.1(c)(iv) or (vii) Section 9.1(e), then Jensen shall pay Recoton $6,000,000.
(c) If this Agreement is terminated pursuant to (i) Section 9.1(b)(i) due to failure to satisfy the conditions set forth in Section 8.1(c) or 8.3(f) or (ii) Section 9.1(b)(iii) (but only if the condition set forth in Section 8.1(c) is the basis for the termination under Section 9.1(b)(iii)), then Jensen shall pay Recoton $1,500,000.
(d) If this Agreement is terminated pursuant to (i) Section 6.2 or (ii) Section 9.1(b)(i) due to failure to satisfy a condition set forth in Section 8.1(b), 8.1(d), 8.1(e), 8.1(f), 8.1(g), 8.1(h) (unless caused by Jensen's willful act), 8.1(i) (unless caused by Jensen's willful act), 8.2(a), 8.2(b), 8.2(c), 8.2(d), 8.2(e), 8.3(a) due to failure to obtain officer's certificate except under the circumstances set forth in Section 9.2(b), 8.3(b) (unless caused by Jensen's willful act), 8.3(c) (unless caused by Jensen's willful act), 8.3(d) (unless caused by Jensen's willful act), 8.3(e), 8.3(g), 8.3(h), 8.3(i) or 8.3(j), (iii) Section 9.1(b)(iii) (other than under the circumstances set forth in Section 9.2(c)(ii)), (iv) Section 9.1(b)(iv), (v) Section 9.1(c)(iii)(x) (unless caused by Jensen's wilful act), (vi) Section 9.1(c)(iii)(y), or (vii) Section 9.1(d), no payment shall be due from Jensen, Recoton or Acquisition Sub.
(e) The agreements contained in this Section 9.2 are an integral part of the transactions contemplated by this Agreement and constitute liquidated damages or other appropriate payments and not a penalty. If a party fails promptly pay to perform in accordance with Article IX, such party shall pay the costs and expenses (including legal fees and expenses) of the other party in connection with any action, including the filing of any lawsuit or other legal action, taken to enforce the terms of this Agreement. Payments by Jensen under this Section shall be made within five business days after termination of this Agreement.
Section 9.3 Amendment. This Agreement may be amended by the parties hereto, at any time before or after approval hereof by the stockholders of Jensen, but, after any such approval, no amendment shall be made which (a) changes the Exchange Ratio or Per Share Cash Amount or (b) changes any of the other principal terms of this Agreement, in each case, without the further approval of such stockholders. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.
Section 9.4 Waiver. At any time prior to the Effective Time, the parties hereto may (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) waive compliance with any of the agreements or conditions contained herein; provided, however, that waiver of compliance with any agreements or conditions herein shall not limit the parties' obligations to comply with all other agreements or conditions herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed on behalf of the parties.
Section 10.1 Non-Survival of Representations, Warranties and Agreements. None of the representations, warranties and agreements in this Agreement shall survive the Merger, except for the agreements contained in this Section 10.1, Article III, and in Sections 2.3, 7.1(c), 7.6, 7.8, 7.10, 7.11, and Article IX. This Section 10.1 shall not limit any covenant or agreement of the parties which by its terms contemplates performance after the Effective Time of the Merger.
Section 10.2 Brokers. Jensen represents and warrants that, except for its investment banking firm, Lehman Brothers, whose fee arrangement has been disclosed to Recoton prior to the date hereof, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Jensen. Acquisition Sub and Recoton represent and warrant that, except for its investment banking firm, Furman Selz Incorporated, whose fee arrangement has been disclosed to Jensen prior to the date hereof, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Acquisition Sub.
Section 10.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally 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 Acquisition Sub or Recoton, to:
Attn: Stuart Mont, Chief Operating Officer
Stroock & Stroock & Lavan Attn: Theodore S. Lynn, Esq.
(b) If to Jensen, to:
25 Tri-State International Office Center Attn: Marc T. Tanenberg, Chief Financial Officer
Vedder, Price, Kaufman & Kammholz 222 North La Salle Street Attn: John R. Obiala, Esq.
Section 10.4 General Terms. The following definitions shall apply to the extent not otherwise defined, or used in capitalized form, in this Agreement:
(a) The terms "agreements" and "contracts" shall include any contract, purchase or sales order, franchise, insurance policy, license, undertaking, arrangement, understanding, commitment, document, lease, sublease, deed, mortgage plan, plan, indenture, bill of sale, assignment, proxy, voting trust or other agreement or instrument.
(b) The term "approval" shall include any consent, waiver, license, permit, certificate or authorization.
(c) The term "breach" shall include any default, event of default or event, occurrence, condition or act which, with notice or lapse of time or both, would constitute a breach, default, or event of default or give the other party or parties a right to accelerate any obligation under the applicable agreement.
(d) The term "governmental authority" means any agency, instrumentality, department, commission, court, tribunal or board of any government, whether foreign or domestic and whether national, federal, state, provincial or local.
(e) The term "law" shall mean, unless specifically stated otherwise herein, means laws, rules, regulations, codes, orders, ordinances, judgments, injunctions, decrees and government policies.
(f) The terms "liability" and "liabilities" shall include any direct or indirect indebtedness, claim, loss, damage, penalty, deficiency (including deferred income tax and other net tax deficiencies), cost, expense, obligation, duties or guarantee, whether accrued, absolute, or contingent, known or unknown, fixed or unfixed, liquidated or unliquidated, matured or unmatured or secured or unsecured.
(g) The term "person" shall include an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an unincorporated organization and a government or other legal body thereof.
(h) The term "subsidiary" shall include each entity controlled by Jensen.
(i) The term "transfer" shall include any sale, pledge, gift, assignment, conveyance, lease or disposition and the term "transferred" shall include sold, pledged, gave, assigned, conveyed, leased or disposed of.
Section 10.5 Interpretation. The 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."
Section 10.6 Miscellaneous. This Agreement (including the documents and instruments referred to herein) (a) together with the Confidentiality Agreements, constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof; (b) is not intended to confer upon any other person any rights or remedies hereunder; (c) shall not be assigned by operation of law or otherwise; and (d) shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of Delaware (without giving effect to the provisions thereof relating to conflicts of law) and service of process may be made upon any party by using the notification procedure set forth in Section 10.3; (e) references to Exhibits and Schedules shall be references to the exhibits of, and schedules, to this Agreement. Such Exhibits and Schedules form an integral part of this Agreement and are hereby incorporated in this Agreement. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.
Section 10.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement.
Section 10.8 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under this Agreement.
Section 10.9 Right to Offset. Payments due under this Agreement or any other agreements or obligation between Recoton (or any affiliate thereof) and Jensen (or any affiliate thereof) may, at the election of either party, be set off against each other including by way of (but not limited to) cancellation of outstanding notes.
IN WITNESS WHEREOF, Recoton, Acquisition Sub and Jensen have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above.
Operations & Chief Operating Officer
OPTION TO SELL AND OPTION TO PURCHASE PROPRIETARY RIGHTS
THIS AGREEMENT made by and entered into as of the 3rd day of January, 1996, by and between International Jensen Incorporated, a Delaware corporation, with its principal place of business at 25 Tri- State International Office Center, Suite 400, Lincolnshire, IL 60069 ("Jensen") and Recoton Corporation, a New York corporation, with its principal place of business at 2950 Lake Emma Road, Lake Mary, FL 32746 ("Recoton").
W I T N E S S E T H:
WHEREAS, Jensen is the owner of the trademarks "Acoustic Research" and "AR" and certain other trademarks (registered or unregistered), trademark applications, service marks, trade names, copyrights, trade secrets, and similar intangible rights associated with such trademarks, including the marks and other rights described on Exhibit "A", and the good will associated therewith, whether or not reflected on the books and records of Jensen (collectively, the "Intellectual
WHEREAS, Recoton desires to obtain a license to, and acquire an option to purchase, the Intellectual Property Rights and acquire possession thereof in accordance with the terms and conditions
WHEREAS, Jensen desires to grant a license to, and acquire an option to sell, the Intellectual Property Rights and convey possession thereof in accordance with the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter set forth, the parties mutually agree as follows:
(a) License of Proprietary Rights.
(a) Jensen herewith grants to Recoton an exclusive worldwide license of the Intellectual Property Rights (the "License") in consideration of a payment of $10,000 per month (the "License Fee") by Recoton to Jensen during the term of the License. The License shall commence upon the date hereof and expire upon the earlier of (i) the Effective Time as defined in the Plan and Agreement of Merger between, inter alia, Recoton and Jensen dated the date hereof (the "Merger Agreement") or (ii) the date of the exercise of either the Purchase Option (as defined below) or the Sale Option (as defined below) (the Purchase Option and the Sale Option sometimes being referred to collectively as the "Options") or (iii) the first anniversary of this Agreement (the "Termination Date").
(b) Option to Purchase and Option to Sell the Proprietary Rights.
(a) Jensen herewith grants to Recoton an option to purchase all of the Intellectual Property Rights on a world-wide basis from Jensen (the "Purchase Option"), exercisable by Recoton on at least five days prior written notice given at any time after the date hereof such that the purchase shall occur at a time stated (the "Purchase Date") prior to the Termination Date. In consideration of the grant of the Purchase Option, Recoton shall pay Jensen a fee of $4,000 per month from the date hereof until exercise of either of the Options or until the Termination Date.
(b) Recoton herewith grants to Jensen an option to sell all of the Intellectual Property Rights on a world-wide basis to Recoton (the "Sale Option"), exercisable by Jensen at any time after the termination of the Merger Agreement and before the Termination Date. The sale shall occur on the later of the fifth business day following the day upon which the Merger Agreement is terminated or the second business day following the exercise of the Sale Option (the "Purchase Date"). In consideration of the grant of the Purchase Option, Jensen shall pay Recoton a fee of $4,000 per month from the date hereof until exercise of either of the Options or until the Termination Date.
(c) On the Purchase Date, Recoton shall pay to Jensen $6 million (the "Purchase Price") by wire transfer or by certified check and Jensen shall execute and deliver to Recoton the Assignment of Trademarks and Assignment of Copyrights and, if applicable, the Assignment of Patents attached hereto as Exhibits "B", "C" and "D" respectively. All assets of Jensen other than the Intellectual Property Rights are specifically excluded from the assets subject to the Options.
(c) Extension of Term of License and Options. If any dispute should arise between Jensen and Recoton during the term of the License or the Option regarding or otherwise affecting the ability of Recoton or Jensen to exercise one or both of the Options, or regarding the validity of the License, the License shall remain in full force and effect notwithstanding any such dispute, and the License and the Options shall otherwise continue on the terms and conditions set forth herein, until the earlier of resolution of such dispute by the parties or the expiration of 30 days following the time within which to appeal any final judgement in any litigation arising from such dispute has lapsed (the "Extended Termination Date") and all references herein to the Termination Date shall be deemed references to the Extended Termination Date.
(d) Effect of Termination of License and Options. If the License should terminate other than pursuant to exercise of the Options or effectiveness of the merger pursuant to the Merger Agreement, Recoton shall cease manufacturing products bearing the licensed trademarks and refrain from further use of the Intellectual Property Rights; provided, however, that Recoton shall, for a period of 12 months following the date of said termination have the right to continue to sell products manufactured prior to such termination bearing the licensed trademarks and use related advertising, promotion and packaging materials on a non-exclusive basis.
(e) Terms of License or Sale
(a) The Intellectual Property Rights are being licensed or, if either of the Options is exercised, sold by Jensen to Recoton free and clear of all debts, mortgages, pledges, liens (including without limitation federal, state, and local tax liens), taxes, claims, defaults, assessments, fines, penalties, charges, security interests, encumbrances, options or other restrictions (whether matured or unmatured) (together, the "Restrictions").
(b) Jensen shall pay any applicable sales, gains, documentary, use, filing, transfer and similar taxes payable as a result of the licensing or, if either of the Options is exercised, sale of the Intellectual Property Rights and file all appropriate returns related thereto. Recoton shall reasonably cooperate in the preparation of such returns, if necessary and, if required, sign such returns if true and complete. All taxes on, or measured by, the net income or revenues of Recoton or Jensen (including, without limitation, income, gross receipts, and net-worth taxes) imposed or levied by, or payable to, any federal, state, or local taxing authority shall be paid or payable by the party upon which such taxes are imposed or levied.
(c) Jensen shall promptly execute and deliver from time to time at the request and expense of Recoton all such further instruments and further assurances as may be required in order to effect the license to, or, if either of the Options is exercised, the sale to, Recoton of, and the right to use and enjoy, the Intellectual Property Rights.
(d) During the term of the License, the nature and quality of all products manufactured by Recoton bearing the licensed trademark shall conform to the quality of those speakers and consumer electronic products, as appropriate, currently held in the inventory of Jensen which use the Acoustic Research brand.
(f) Representations and Warranties of Jensen. Jensen represents and warrants to Recoton as follows:
(a) Jensen has the corporate power to execute and deliver this Agreement and has taken all action required by law, its Certificate of Incorporation, its By-Laws or otherwise to authorize such execution and delivery; this Agreement has been, and the other agreements to be executed pursuant to this Agreement by Jensen will be, duly executed and delivered by Jensen; and this Agreement is a valid and binding agreement, and all such agreements will be valid and binding agreements, of Jensen enforceable in accordance with the terms thereof.
(b) Neither the execution and delivery of this Agreement nor the performance of its terms will conflict with, be a breach of, or constitute a default under, any agreement or instrument to which Jensen is a party.
(c) To the best of Jensen's knowledge, the Intellectual Property Rights which are trademark or copyright registrations are valid, in good standing, and are not involved in any interferences, litigation, oppositions, or cancellation proceedings, and are owned by Jensen, free and clear of all liens, encumbrances, equities, or claims. Jensen owns or has the right to use, without payment to any other party, trademarks, trade names, service marks, copyrights and applications therefor referred to in such Exhibit A (all of which are being licensed herewith), and the consummation of the transactions contemplated hereby will not alter or impair such rights in any material respect. Jensen has no patents or patent rights which are currently used in connection with the Intellectual Property Rights. Jensen is not a licensor or licensee in respect of any Intellectual Property Rights, nor has it granted any rights thereto or interest therein to any person or entity. No claims are pending or threatened by any person with respect to the ownership, validity, enforceability, or use of any such Intellectual Property Rights challenging or questioning the validity or effectiveness of any of the foregoing.
(g) Representations and Warranties of Recoton. Recoton represents and warrants to Jensen as follows:
(a) Recoton has the corporate power to execute and deliver this Agreement and has taken all action required by law, its Certificate of Incorporation, its By-Laws or otherwise to authorize such execution and delivery; this Agreement has been, and the other agreements to be executed pursuant to this Agreement by Recoton will be, duly executed and delivered by Recoton; and this Agreement is a valid and binding agreement, and all such agreements will be valid and binding agreements, of Recoton enforceable in accordance with the terms thereof.
(b) Neither the execution and delivery of this Agreement, nor the performance of its terms, will conflict with, be a breach of or constitute a default under any agreement or instrument to which Recoton is a party.
(h) Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter contained herein and no modification or addition hereto shall be binding unless in writing and signed by both parties.
(i) Parties in Interest. This Agreement shall inure to the benefit of, and be binding upon, the parties hereto, and their respective heirs, representatives and permitted assigns.
(j) Expenses. Except as otherwise provided in this Agreement, Jensen and Recoton shall pay their own expenses incidental to the carrying out of this Agreement, including all fees and expenses of counsel and accountants.
(k) General Laws; Service of Process. This Agreement shall be governed by the laws of the State of New York without reference to its choice-of-law rules. Service of process may be made upon each of the parties hereto by using the notification procedure set forth in Section 15.
(l) Survival. All warranties, representations, and covenants made by each party in or pursuant to this Agreement shall survive for the benefit of the other parties notwithstanding the significance thereof or any examination, examination opportunity or knowledge (whether implied or actual).
(m) Headings. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
(n) Execution in Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument.
(o) Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally 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 Recoton, to:
Attn: Stuart Mont, Chief Operating Officer
Stroock & Stroock & Lavan Attn: Theodore S. Lynn, Esq.
(b) If to Jensen, to:
25 Tri-State International Office Center
Vedder, Price, Kaufman & Kammholz Attn: John R. Obiala, Esq.
Notice of any change in any such address shall be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived by the Party entitled to receive such notice. Notice shall be effective upon receipt.
(p) Further Assurances. Recoton and Jensen shall execute all documentation necessary or appropriate to effect the agreements set forth in this Agreement, including without limitation any assignment of patents or patent rights if the representation regarding the lack of patents made in Section 6(c) is incorrect.
(q) Assignment. No party may assign its rights or obligations hereunder without the written consent of the other parties.
(r) Exhibits. References to Exhibits and Schedules shall be references to the exhibits of, and schedules, to this Agreement. Such Exhibits and Schedules, whether attached to or provided subsequent to the execution of, this Agreement form an integral part of this Agreement and are hereby incorporated in this Agreement.
(s) Enforceability. If any provision of this Agreement is held illegal, invalid or unenforceable, such illegality, invalidity or unenforceability will not affect any other provision hereof. This Agreement shall, in such circumstances, be deemed modified to the extent necessary to render enforceable the provisions hereof.
(t) Costs of Collection. Each party shall pay all costs of litigation, including reasonable attorney's fees, incurred by the other party in successfully enforcing any provision of this Agreement.
(u) Waiver. The failure of any party to insist upon strict performance of any of the terms or conditions of this Agreement will not constitute a waiver of any of its rights hereunder.
(v) Right to Offset. Payments due under this Agreement or any other agreements between Recoton (or any affiliate thereof) and Jensen (or any affiliate thereof) may, at the election of either party, be set off against each other including by way of (but not limited to) cancellation of outstanding notes. If the provisions of Section 3 hereof are applicable and the terms of the License and Options are extended thereunder, payments otherwise due from Jensen (or any affiliate thereof) to Recoton (or any affiliate thereof) at any time up to the amount of the Purchase Price shall not be due and payable until the earlier of payment of the Purchase Price by Recoton to Jensen or the Termination Date.
IN WITNESS WHEREOF, the parties have hereto executed this Agreement as of the 3rd day of January, 1996.
James E. Sula By: /s/Marc T. Tanenberg
Robert L. Borchardt By: /s/Stuart Mont
Acoustic Research United States 1,778,708
Additional trademarks are on attachment.
SHAREHOLDERS' AGREEMENT, dated as of January 3, 1996 (the "Agreement") among Recoton Corporation, a New York corporation (the "Company"), and Robert G. Shaw ("Shaw") and Robert L. Borchardt, a shareholder of the Company, as the initial holder of the proxy granted pursuant to Section 3 hereof.
WHEREAS, simultaneously with the execution of this Agreement, International Jensen Incorporated ("Jensen"), RC Acquisition Sub, Inc. ("Acquisition Sub") and the Company have entered into a Merger Agreement dated as of January 2, 1996 (the "Merger Agreement") pursuant to which Jensen shall be merged into Acquisition Sub as of the Effective Time (as defined in the Merger Agreement) if the conditions set forth in the Merger Agreement are satisfied;
WHEREAS, Shaw currently holds approximately 2,096,854 shares of the Common Stock, $0.01 par value, of Jensen ("Jensen Stock");
WHEREAS, Shaw may acquire Common Shares, par value $.20 per share, of the Company (the "Common Stock") in the conversion of his shares
WHEREAS, the Company and Shaw desire to establish in this Agreement certain terms and conditions of Shaw's relationship with the Company.
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and in the Stock Purchase Agreement, the parties hereto agree as follows:
(a) The Company represents and warrants to Shaw as follows:
(i) The Company has full power and authority to execute, deliver and perform this Agreement;
(ii) This Agreement has been duly and validly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that (x) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance or other similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto, (y) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which any proceedings therefor may be brought, and (z) the rights to indemnity and contribution hereunder may be limited by federal or state securities laws or the public policy underlying
(iii) The execution, delivery and performance of this Agreement by the Company do not violate or conflict with or constitute a default under the Company's Certificate of Incorporation, By-Laws or any material agreement to which it is a party or by which it or its property is bound.
(b) Shaw represents and warrants to the Company as follows:
(i) He has full power and authority to execute, deliver
(ii) This Agreement has been duly and validly authorized, executed and delivered by him and constitutes a valid and binding obligation of his, enforceable against him in accordance with its terms, except that (x) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance or other similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto, (y) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which any proceedings therefor may be brought, and (z) any rights to indemnity and contribution hereunder may be limited by federal or state securities laws or the public policy underlying
(iii) The execution, delivery and performance of this Agreement by him does not violate or conflict with or constitute a default under any material agreement to which he is a party or by which he or his property is bound; and
(iv) As of the date hereof, neither he nor any of his "controlled affiliates" (as defined below) beneficially owns any shares of Common Stock (or any options, warrants, rights or other securities exercisable for, exchangeable for or convertible into shares of Common Stock, whether immediately or after the passage of time (collectively, "Conversion Securities")) other than shares to be issued pursuant to the Merger Agreement.
(c) As used in this Agreement, the term "controlled affiliate" means any corporation, partnership or other entity or person that or who is "controlled by," "controlling" or "under common control with" (as such terms are defined under Rule 405 under the United States Securities Act of 1933, as amended (the "Securities Act")) the applicable party.
2. Term of Agreement; Voting Securities.
(a) Subject to the provisions of Section 6 hereof, the term of this Agreement (the "Term") shall commence at the Effective Time and run for a period equal to the time which Shaw is an employee of Recoton or any subsidiary thereof plus two years (but in no event in excess of ten years). If the Merger Agreement shall be terminated prior to the Effective Time this Agreement shall be of no force and effect.
(b) For the purposes of this Agreement, the term "Voting Securities" shall mean all securities of the Company entitled to vote generally in the election of directors of the Company or on issues submitted to the shareholders of the Company.
3. Voting and Other Rights. Shaw shall during the Term (a) use reasonable efforts to be present and cause his controlled affiliates to be present, in person or represented by proxy, at all shareholder meetings of the Company, so that all Voting Securities beneficially owned by him and his controlled affiliates shall be counted for the purpose of determining the presence of a quorum for such meetings; and (b) vote, and cause to be voted by his controlled affiliates, all Voting Securities beneficially owned by him or his controlled affiliates (i) in favor of all matters proposed by the Board of Directors of the Company (the "Board") and presented to the Company's shareholders, (ii) consistent with the recommendation of the Board on all other matters as to which the Board shall take a position and (iii) for all nominees for Directors of the Company recommended by the Board. To effect the foregoing agreement, Shaw hereby grants to Robert L. Borchardt so long as he is an officer of Recoton, and, if he no longer an officer of Recoton, to Stuart Mont so long as he is an officer of Recoton, and, if he is no longer an officer of Recoton to Peter Wish so long as he is an officer of Recoton, and, if he is no longer an officer of Recoton, to George Calvi so long as he is an officer of Recoton, and, if he is no longer an officer of Recoton, to such officer or officers as may be designed by the Board of Directors of Recoton from time to time, an irrevocable proxy, coupled with an interest, to vote all Voting Securities beneficially owned by him consistent with this Section 3.
4. Acquisition of Voting Securities. During the Term, Shaw shall not, and shall cause each of his controlled affiliates not to, acquire, offer or propose to acquire, or agree to acquire, directly or indirectly, any Voting Securities or Conversion Securities unless Shaw causes such Voting Securities or Conversion Securities to become subject to the terms of this Agreement; provided, however, that Shaw may acquire Voting Securities and/or Conversion Securities pursuant to stock options or stock bonus plans of the Company.
5. Certain Prohibited Actions. During the Term, without the prior written consent of the Company duly authorized by the Board or except as otherwise required or authorized by this Agreement, Shaw will not, and will cause each of his controlled affiliates not to, singly or as part of a "group," directly or indirectly, through one or more intermediaries (i) make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies" (as such terms are defined or used in Regulation 14A under the United States Securities Exchange Act of 1934, as amended (the "Exchange Act")) with respect to the Voting Securities (including by the execution of actions by written consent), or become a "participant" in any "election contest" (as such terms are defined or used in Rule 14a-11 under the Exchange Act) with respect to the Company or seek to advise or influence any person or entity with respect to the voting of any Voting Securities other than consistent with any proxy solicitation on behalf of the Board of Directors of the Company; (ii) initiate, propose or participate in the solicitation of shareholders for the approval of, one or more shareholder proposals with respect to the Company (as described in Rule 14a-8 under the Exchange Act) or induce any other individual or entity to initiate any shareholder proposal relating to the Company; (iii) form, join, influence or participate in a "group," act in concert with any other person or entity or otherwise become a "person," for the purpose of taking any other actions prohibited under this Section 5 or any other provision of this Agreement; (iv) make any proposal or, except as may be required by law, any public announcement relating to a tender or exchange offer for any Voting Securities, or a merger, business combination, sale of assets, liquidation, restructuring, recapitalization or other extraordinary corporate transaction relating to the Company or its material assets; (v) act alone or in concert with others (including by providing financing for another party), to seek or offer to control the Company; (vi) deposit any Voting Securities in a voting trust or subject any Voting Securities to any arrangement or agreement with respect to the voting thereof other than in connection with this Agreement; or (vii) disclose any intention, plan or arrangement inconsistent with the foregoing prohibitions or advise or consent any other person in connection with the foregoing prohibitions; provided, however, that nothing contained herein shall prohibit the Company from publicly announcing its position with respect to any matter concerning the Company or prohibit Shaw from making any disclosures required to be made under applicable securities laws.
6. Disposition of Voting Securities.
(a) During the Term, so long as Shaw is an officer or director of the Company or the Acquisition Sub (an "Affiliate of Recoton"), Shaw shall not, and shall cause his respective controlled affiliates not to, transfer any Voting Securities, whether by sale, assignment, pledge, encumbrance, gift, bequest, appointment or otherwise, without the prior written consent of the Company in each instance except as specifically provided in, and subject to the provisions of, Section 6(b), (c), (d) or (e) of this Agreement. Any such transfers must be in compliance with federal and state and other applicable securities law.
(b) Shaw and his controlled affiliates may transfer Voting Securities in a bona fide private transaction to an unaffiliated person if such transferee agrees to hold such shares subject to the terms of this Agreement.
(c) Shaw and his controlled affiliates may, from time to time, sell in open market transactions pursuant to Rule 144 or Rule 145 under the Securities Act (or any successor provision) the number of Voting Securities then permitted under Rule 144 or Rule 145 (or any successor provision) or pursuant to an offering registered under the Securities Act of 1933 (the "Securities Act").
(d) Shaw and his controlled affiliates shall be free without any restrictions at all times during the Term to sell or transfer any Voting Securities, (i) if a third party makes a bona fide offer to purchase Voting Securities which represent with such third parties' then-current holdings more than 50% of the voting power of the outstanding Voting Securities, which offer is approved and recommended by the Board (if such recommendation shall not have been withdrawn or adversely modified prior thereto) or (ii) to the Company pursuant to any offer made by the Company generally to all shareholders.
(e) Shaw and his controlled affiliates may from time to time sell, transfer, pledge, gift over or otherwise dispose of any Voting Securities to one or more of his spouse, children, grandchildren, siblings or parents (each, a "Family Member") or to a company which is (and during the term of this Agreement will be) wholly owned by, or a trust the only beneficiaries of which are, Shaw or any of his Family Members, on condition in any case that such transferees agree to be bound by all of the provisions of this Agreement.
(f) During the Term so long as Shaw is an Affiliate of Recoton, he shall not, at any time during the Term, sell or transfer Voting Securities to (x) any person (including that person's controlled affiliates and any group in which that person or its controlled affiliates shall be a member if Shaw knows of the existence of such group or affiliates), other than an underwriter in connection with a public offering of Voting Securities or pursuant to sales under Rule 144, which Shaw or his affiliate knows, or through the exercise of reasonable diligence should have known, would, after giving affect to such sale or transfer, beneficially own in the aggregate more than 10% of the Voting Securities.
(a) During the Term, each of the certificates representing Voting Securities received or acquired by Shaw or any of his respective controlled affiliates in accordance with this Agreement shall be subject to stop transfer instructions and shall include the following legend, to the extent applicable:
The shares represented by this certificate may not be transferred whether by sale, assignment, pledge, encumbrance, gift, bequest, appointment or otherwise, and Recoton Corporation ("Recoton") will not register the transfer of such shares, except pursuant to and subject to that certain Shareholders' Agreement among Recoton and Robert G. Shaw dated January 3, 1996. A copy of such agreement is on file with the Secretary of Recoton.
The Company shall have such legend removed upon the expiration of the Term.
8. Specific Performance. Each of the parties hereto recognizes and acknowledges that a breach by it of any covenants or agreements contained in this Agreement will cause the other party to sustain damages for which it would not have an adequate remedy at law for money damages, and therefore in the event of any such breach the aggrieved party shall be entitled to the remedy of specific performance of such covenants and agreements and injunctive and other equitable relief in addition to any other remedy to which it may be entitled, at law or in equity.
9. Amendment and Modification. Subject to applicable law, this Agreement may be amended, modified and supplemented only by written agreement of the Company and Shaw.
10. Notices. Any and all notices or other communications required or permitted to be given under any of the provisions of this Agreement shall be in writing and shall be deemed to have been given when given to the following addresses or telefax numbers:
(a) If to Shaw, c/o
25 Tri-State International Office Center
with a copy (which shall not constitute notice) to:
Wildman, Harrold, Allen & Dixon
(b) If to the Company:
with a copy (which shall not constitute notice) to:
Stroock & Stroock & Lavan Attn: Theodore S. Lynn, Esq.
(or at such other address or telefax numbers as any party may specify by notice to all other parties given as aforesaid). Unless otherwise specifically provided in this Agreement, such communications shall be deemed to have been given (a) five days after mailing, when mailed by registered or certified postage-paid mail, (b) on the second business day after sending, when delivered to a recognized international courier service such as Federal Express or DHL or, where applicable, the U.S. Post Office Express Mail or (c) upon the date of receipt by the addressee when delivered personally or dispatched by telecopier; provided, however, that any notice of change of address shall be effective only upon receipt. Notice may be given on behalf of a party by his or its counsel.
11. Severability. In the event that any provision(s) of this Agreement shall be held illegal, invalid or unenforceable under applicable law, then such illegality, invalidity or unenforceability shall not affect any other provision(s) hereof and this Agreement shall remain in force and be effectuated as if such illegal, invalid or unenforceable provision is not part of this Agreement.
12. Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors (including any successor by merger, reorganization, consolidation or other business combination) and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto without the prior written consent of the other party.
13. Governing Law. This Agreement and its validity, construction and performance shall be governed in all respects by the laws of the State of New York without giving effect to principles of conflict of law.
14. Jurisdiction and Venue. The parties shall promptly cooperate in good faith to carry out the provisions of this Agreement and the activities contemplated hereby and shall also cooperate in good faith to resolve any disputes or differences which may arise in connection with the provisions hereof and the activities contemplated hereby. Except as otherwise noted in this Agreement, any dispute, question, difference, controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be finally settled by arbitration before a panel of three arbitrators in New York, NY in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as then in effect at the time of filing of the notice of demand. The parties consent to the jurisdiction of the courts of the State of New York, and of the United States District Court for the Southern District of New York, for all purposes in connection with arbitration. The application of either party to said courts, and any paper in connection therewith may be delivered by mail, personal service or in such other manner as may be permissible under the rules of the applicable court or arbitration tribunal, provided a reasonable time for appearance is allowed. The arbitrators shall not alter or disregard any express provisions of this Agreement. Any arbitration award in accordance with this Section 14 shall be final and binding upon the parties and judgment thereon may be entered in any court having jurisdiction over such party. In the event of litigation or arbitration hereunder, the prevailing party in such action shall be entitled to reasonable attorney fees and disbursements. Nothing in this Section 14, however, shall limit the Company's rights to commence litigation for equitable relief pursuant to Section 8.
15. Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall be deemed to evidence one and the same agreement.
16. Headings. The headings of the Sections of this Agreement are inserted for convenience only and shall not constitute a part hereof or affect in any way the meaning or interpretation of this Agreement.
17. Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein, and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto.
18. Third Parties. Except as specifically set forth or referred to herein, nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person or corporation, other than the parties hereto and their successors or assigns, any rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year first above written.
RECOTON TO ACQUIRE INTERNATIONAL JENSEN
IN STOCK AND CASH TRANSACTION
Lake Mary, FL -- January 3, 1996 - Recoton Corporation (NASDAQ National Market: RCOT) and International Jensen Inc. ("IJI") (NASDAQ National Market: IJIN) jointly announced today that the companies have executed a definitive merger agreement in which Recoton, the leading supplier of consumer electronic accessories, would acquire IJI, a leading marketer of home and automotive loudspeakers, for $8.90 per share in a cash and stock merger. As a condition of this transaction, IJI has agreed to sell, contemporaneously, its OEM (Original Equipment Manufacturing) manufacturing and marketing business for automotive loudspeakers to Robert G. Shaw, IJI's President, for $15 million. Net of the proceeds from the OEM sale, Recoton will acquire IJI for approximately $36 million, or $6.27 per share plus the assumption of IJI debt and agreed-upon transaction expenses. For the trailing twelve months ended November 30, 1995, IJI generated revenue of $160.3 million for the businesses to be retained by Recoton.
Recoton will also receive a worldwide license to all rights to the Acoustic Research ("AR") trademark prior to the Winter Consumer Electronics show which begins January 5, 1996 in Las Vegas, plus an option to purchase such trademark.
Under the terms of the agreement, each IJI stockholder may elect to receive either Recoton stock or cash; however, the amount of Recoton stock to be received will be adjusted, on a pro-rata basis, such that the value of the total number of shares to be issued will equal 40% of the purchase price. The number of Recoton shares to be issued will be calculated based on an average closing share price for an agreed-upon number of days prior to the required IJI shareholder vote. In the event the average share price is lower than $16.00 and in certain other circumstances, Recoton has the right to pay all cash. Recoton expects the transaction to be earnings-per-share neutral in 1996, with accretion in future years.
The transaction, which has been unanimously approved by both boards of directors: (1) is intended to be tax-free to the extent that IJI shareholders receive Recoton stock; (2) will be accounted for on a purchase basis; (3) is subject to certain closing conditions, including its approval by IJI shareholders, the effectiveness of a Recoton registration statement for the shares to be issued and the expiration of applicable waiting periods under the Hart-Scott-Rodino Act; and (4) is expected to close no earlier than the end of March 1996.
Robert L. Borchardt, President of Recoton said "We believe this transaction firmly establishes Recoton in several important new product categories: home and automotive loudspeakers and audio electronics. Our joining with IJI significantly enhances our strategic plan for this market segment, which we entered in the Fall of 1995 by establishing Christie Design Inc. as our loudspeaker design, manufacturing and marketing group. The Advent, AR, Jensen, Phase Linear, Mac Audio, Magnat and NHT (Now Hear This) brand names are some of the most well recognized in the industry, both domestically and worldwide. We intend to use these names to promote various product line extensions and will unveil an exciting new line of AR speakers designed and manufactured by our Christie Design subsidiary, headed by noted designer Cary Christie, at the Winter Consumer Electronics Show."
Mr. Borchardt added, "As one of the largest and most responsive suppliers to consumer electronics stores, mass merchandisers and other retailers, we can now distribute a much broader array of speaker and audio accessory products for both home and automotive applications. The transaction will allow Recoton to more readily sell its branded products in the international markets, enhancing Recoton's position as a global company. IJI has substantial operations in Europe where the Magnat, Mac Audio and Jensen brands are well established. Approximately one-third of IJI's sales for the businesses Recoton will retain are attributable to the European operations."
Robert G. Shaw, International Jensen's President, stated, "I am delighted with the opportunities that this transaction presents for IJI's aftermarket business prospects. The merging of our aftermarket products into the Recoton organization will be a definite advantage for the long-term growth of these well recognized brand names. Recoton provides a compatible entrepreneurial management style, enhanced customer relationships, broader sourcing capabilities and certain additional technologies which will enhance IJI's business opportunities. The combined strength of the two organizations should create synergies that will benefit our customer base and the industry as a whole."
In addition to heading the operations of the unaffiliated OEM business, Mr. Shaw will join Recoton's executive management team as President and CEO of Recoton Audio Corporation, the successor to IJI. Both Mr. Borchardt and Mr. Shaw contemplate that Mr. Shaw will devote a substantial amount of time to furthering the growth of IJI brands within the Recoton organization. Mr. Shaw stated, "The competitive OEM environment requires an intensified focus in order to be more responsive to customer needs. Accordingly, the OEM business will operate as a stand-alone, properly capitalized company, which will enhance OEM's business prospects and provide greater opportunities for its employees. We are fortunate to have a very capable senior management team at OEM, which will allow me the time to work with Recoton to direct the future growth of IJI's product lines." Mr. Borchardt added, "I am very much looking forward to having Bob Shaw becoming an important member of our executive management team. I am certain his talents will add considerable value to our efforts."
International Jensen Inc., located in Lincolnshire, Illinois, is currently one of the largest, most vertically-integrated loudspeaker companies in the world. The company designs its own products and assembles them in its own factories. International Jensen markets loudspeakers and other audio products for new automobiles (OEM), the automotive aftermarket and for home listening under the brands names AdventR, ARR (Acoustic Research), JensenR, Phase LinearR, Mac AudioTM, MagnatR and NHTR (Now Hear This).
Recoton Corporation products, which are sold under the AmbicoR, AmpersandTM, CalibronR, DiscwasherR, InteractTM, ParsecR, RembrandtR, RecotonR, SoleControlR and SoundQuestTM brand names, encompass over 3,500 highly functional and versatile accessories. They are used for the installation, enhancement, hook-up, interconnection, maintenance, storage and replacement of consumer electronic equipment such as audio, video, telephone, cellular, car audio, camcorder, multi- media/computer, music, home office, video and computer games and 900 MHz wireless technology.
Furman Selz LLC is acting as financial advisor to Recoton. Lehman Brothers Inc. is acting as financial advisor to International Jensen. | 8-K | EX-99 | 1996-01-12T00:00:00 | 1996-01-12T12:30:01 |
0000912057-96-000444 | 0000912057-96-000444_0005.txt | THIS AGREEMENT is made this 4th day of October, 1988, by and between LEE PHARMACEUTICALS, INC., a California corporation ("Lee") and ROBERTS PROPRIETARIES, INC., a New York corporation ("Roberts").
WHEREAS, Lee has acquired certain Assets, including the Products from Roberts pursuant to a Purchase and Sale Agreement between Lee, Roberts and Keith Roberts, dated September 30, 1988 (the "Purchase Agreement"); and
WHEREAS, in connection with the acquisition of such Assets, Lee is to pay to Roberts the Royalties provided for herein.
NOW, THEREFORE, it is agreed by and between the parties hereto as follows:
(a) "Products" means those depilatory drug products listed on Schedule A hereto and any developments, innovations or improvements made thereon marketed under the tradename or trademark "Zip" or "Zip Wax." The Products shall include all hot wax and cold wax depilatory drug producs. The Products shall not include any depilatory drug products currently being sold under the "Bikini Bare" trademark or any other non-hot wax or non -cold wax depilatory drug products which Lee acquires or develops after the date hereof unless subsequently sold under the "Zip" or "Zip Wax" tradename or trademark.
(b) "Net Sale Price" means the actual price received from the domestic or international sale of the Products (less the actual sale prices of any Products returned), exclusive of freight, handling, insurance, custom duties and any sales, use or value added or similar taxes levied on the sale of the Products. "Net Sales" shall not include (i) receipts through salon operations by Lee, its Subsidiaries or its licensees for treatment of the Products directly through or in connection with a salon or salons owned or operated by Lee, such Subsidiaries or such licensees and (ii) sales by Lee to its Subsidiaries or licensees or its Subsidiaries to licensees for resale, but in such instances the obligations to pay Royalties shall arise upon the sale by Lee's Subsidiaries or licensees to third parties.
(c) "Lee" shall mean Lee Pharmaceuticals, Inc., its permitted successors and assigns and any Subsidiaries thereof.
(d) "Minimum Royalty" shall mean the payments of Royalties for each Fiscal Period hereof equal to Five Hundred Thousand Dollars ($500,000).
(e) "Fiscal Period" shall mean (i) the period from the Closing of the Agreement to September 30, 1989, and (ii) a fiscal year beginning October 1 each year (commencing with October 1, 1989) until the termination of the Royalty Period.
(f) "Maximum Royalty" shall mean Five Million Dollars ($5,000,000).
(g) "Royalty Period" shall mean the ten (10) Fiscal Periods beginning on the Closing and ending on September 30, 1998.
(h) "Subsidiary" shall mean a company in which at least fifty percent (50%) of the voting stock of which at the time of reference is legally, equally or factually owned, directly or indirectly, by Lee or an entity controlling, controlled by or under common control with Lee.
(i) Other terms not defined herein shall have the meaning set forth in the Purchase Agreement.
(a) ROYALTY RATE. Lee shall pay royalties to Roberts for all Products sold or otherwise disposed of subsequent to the date of this Agreement by Lee, its Subsidiaries and its licensees at the rate equal to ten percent (10%) of the Net Sales Price of each Product sold during the Royalty Period ("Royalty" or "Royalties").
(b) QUARTERLY ROYALTY PAYMENT. The aggregate amount of Royalties accruing during each fiscal quarter of each Fiscal Period pursuant to Section 2(a) hereof is hereinafter referred to as the "Quarterly Royalty Payment." The Quarterly Royalty Payment shall be made by Lee to Roberts within forty-five (45) days of the end of each such fiscal quarter in which a sale or other disposition of a Product takes place, at which time there shall be delivered to Roberts an accounting of the operations upon which such Quarterly Royalty Payment is based, certified by an officer of Lee, which accounting and certification shall be in form and substance reasonably satisfactory to Roberts. The first such accounting shall include all Products sold or otherwise disposed of pursuant to this Agreement between the Closing and the date of such accounting. The aggregate of Quarterly Royalty Payments is hereinafter referred to as "Royalty Payment."
(c) MINIMUM ROYALTY. If the total amount of earned Royalty Payments for a Fiscal Period pursuant to Section 2(a) hereof is less than the Minimum Royalty, then with the payment for the fourth fiscal quarter of such Fiscal Period, Lee shall pay to Roberts an additional amount (the "Additional Amounts") so that Roberts receives for such Fiscal Period the Minimum Royalty. Any Royalty Payments due for a Fiscal Period in excess of the Minimum Royalty shall be reduced by any Additional Amounts for any prior Fiscal Period that has not been previously offset until all such Additional Amounts have been so offset and then shall be credited against any Additional Amounts due in subsequent Fiscal Periods.
(d) MAXIMUM ROYALTY. Notwithstanding any other provisions of this Agreement, in no case shall the aggregate of all Royalty Payments (including any Additional Amounts paid pursuant to the Minimum Royalties) exceed the Maximum Royalty. Upon payment of the Maximum Royalty, this Agreement and all obligations of Lee to pay further Royalties shall terminate.
(e) ROYALTY PERIOD. Unless otherwise terminated sooner, this Agreement and all obligations of Lee to pay Royalties shall terminate on the last day of the Royalty Period.
(f) LATE PAYMENT. Any Royalty Payment (including any Additional Amounts) or part thereof which is not made on or before the date when due shall accrue interest thereon from and after such date and until the date of payment at the rate of one percent (1%) above the published prime rate of Bank of America NT&SA, from time to time in effect, compounded quarterly, but in no event shall such rate exceed the rate permitted by applicable law.
3. FUTURE PATENTS. All inventions registered with the United States or any foreign patent office and any and all rights thereunder, both domestic and international, relating to the Products or the method of manufacturing, using or selling the Products that may be obtained, discovered or made by Lee during the term of this Agreement shall be the property of Lee and Roberts shall have no rights therein, except the rights to the Royalties provided for in Section 2 hereof relating to the Products.
4. DUTY TO EXPLOIT. Lee shall use its best efforts to market, manufacture and otherwise commercially exploit the Products. Lee will take no action the effect of which is to reduce the amount of the Royalties payable under Section 2 hereof.
5. PROTECTION OF CONFIDENTIAL INFORMATION. Lee and Roberts shall each take all steps which are necessary or reasonable to safeguard the secrecy and confidentiality of information related to the Products.
6. TERM AND TERMINATION. Accrual of Royalties under this Royalty Agreement shall continue in effect from the date of this Agreement until the later to occur of: (i) payment of the Maximum Royalty or (ii) the last day of the Royalty Period. Thereafter, Lee shall have the right to manufacture and sell anywhere in the world the Products without payment of any further Royalties and the provisions hereof concerning reports, records and disclosure shall no longer apply. Royalties accrued as of the date of the termination of this Agreement shall remain due and payable notwithstanding termination of this Agreement.
7. SECURITY. Payment of the Royalties is secured by a Security Agreement attached to the Purchase Agreement hereto as Exhibit "D."
(a) In the event that Lee shall sell, assign or transfer the business relating to all or any of the Products or to the trademarks or tradenames "Zip" or "Zip Wax", Lee shall, within five (5) days after such sale, assignment or transfer, send a written notice thereof to Roberts, stating the date thereof, a description of that which was sold, assigned or transferred, and the name and post office address of the purchaser, assignee or transferee, and shall, as a condition to such sale, assignment or transfer, obtain an undertaking of the purchaser, assignee or transferee to continue to pay the Royalties specified herein in Section 2 hereof, with respect to such Product or Products, to Roberts in accordance with the terms hereof and upon obtaining such undertaking, Lee shall be released of its obligations hereunder with respect to such Product(s) which were sold, assigned or transferred.
(b) In the event all or any part of the rights to receive Royalties payable hereunder are sold, assigned or transferred by Roberts or its successors or assigns, payment of the Royalties relating to the Royalties so sold, assigned or transferred shall thereafter be made to such purchaser, assignee or transferee, provided that the party making such sale, assignment or transfer shall have given due written notice to Lee of such sale, assignment or transfer, stating in such notice the proportion of the Royalty and the name and address of the person to whom such sale, assignment or transfer is made. Thereafter, all payment of the Royalties pursuant to Section 2 above, and all reports required by Section 2(b) above, shall be made to such purchaser, assignee or transferee. In the event any such purchaser, assignee or transferee shall desire to exercise the rights of Roberts under Section 9 hereof, Lee shall not be required to comply with such request except at the request of a person having a right to receive not less than twenty- five percent (25%) of the Royalties payable hereunder.
9. RECORDS. Lee shall keep complete and accurate records of all sales of the Products for at least three (3) years after the date of each report of such sales, which records shall be open during reasonable business hours at Lee's place of business to a certified public accountant selected by Roberts and reasonably acceptable to Lee who shall, at Roberts' expense, have access to such records for the sole purpose of verifying for Roberts, not more often than once each year (except in the event a claim is filed), the sales and payments accrued as herein provided. Such accountant shall treat as confidential and shall not disclose to Roberts any information other than information relating solely to the sales payments accrued and the accuracy of the reports and payments required to be made under this Agreement and, in no event, are the quantities or prices to the individual customers to be disclosed to Roberts by said accountant, provided, however, that in the event any claim by Roberts be asserted during the three (3) year period, then Lee shall preserve all relevant records until the resolution of the claim.
10. CURRENCIES. The payments provided for in Section 2 hereof, to be made by Lee to Roberts, shall accrue and be payable in the currency of the country where the sale is made or the currency in which the payment is received by Lee, a Subsidiary or a licensee. In the case of sales made or payments received outside the United States of America, Lee will, for the convenience and account of Roberts, make diligent efforts, subject to pertinent laws and regulations, to secure the transfer and conversion of the payments due hereunder into the equivalent of United States dollars at the applicable rate of exchange at the date of payment and the remittance thereof to Roberts in United States dollars in the United States, less all necessary related taxes, assessments, charges and expenses incurred or required by any local government in order to convert said foreign currency into United States dollars. In the event such transfer or conversion is not lawful or practicable, the payment shall be made by deposit thereof in the national currency of the country where said sales are made or payment or royalties received, to the credit and account of Roberts or their nominee in any commercial bank or trust company of Roberts' choice in said country and prompt written notice of each deposit shall be given to Roberts.
11. OFFSET. Payments of Royalties hereunder may be reduced by amounts due Lee pursuant to Section 20 of the Purchase agreement. Amount to be so offset against further Royalties shall bear simple interest equal to the reference (prime rate) charged by the Bank of America NT&SA from time to time (but in no case shall the interest rate at any time exceed maximum rate permitted by law) until the Royalty being offset is otherwise due and payable.
12. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of California.
13. ENTIRE AGREEMENT. This Agreement, the Security Agreement and the Purchase Agreement contain the entire agreement of the parties with respect to the subject matter hereof. This Agreement may not be changed orally, but only by written agreement of both parties hereto.
14. SEVERABILITY. In the event that any provision of this Agreement is adjudicated invalid, illegal or unenforceable, such adjudication will not affect the validity, legality or enforceability of any other provision, and this Agreement will be construed as though such invalid, illegal or unenforceable provision had never been contained herein.
15. RELATIONSHIP OF PARTIES. Nothing in this Agreement will be deemed to create a relationship of employment or agency or to constitute the parties as partners or joint venturers.
16. CAPTIONS. The underlined captions are included herein for convenience and do not constitute a part of this Agreement.
17. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.
18. NOTICES. Notices will be deemed given when received if sent by telecopy, hand delivery, or mailed, first class and postage prepaid to the following address or to such other address as either party may notify the other in writing: If to Lee:
South El Monte, California 91733 Attention: Ronald G. Lee, President
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
(1) Zip Wax Hair Remover (2) Zip Wax Tube For Face (3) Zip Wax Tube For Body | 10KSB40 | EX-10.21 | 1996-01-12T00:00:00 | 1996-01-12T14:39:28 |
0000893877-96-000005 | 0000893877-96-000005_0005.txt | KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
KNOW ALL MEN BY THESE PRESENTS that the undersigned constitutes and appoints Charles E. Robinson, James H. Huesgen and Brian M. Wirkkala, and each of them, the undersigned's true and lawful attorneys and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place and stead, in any and all capacities, to sign a Registration Statement under The Securities Act of 1933, as amended, prepared in connection with the issuance of not to exceed $200,000,000 aggregate principal amount of Medium-Term Notes, Series C of Pacific Telecom, Inc., and any and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys and agents, and each of them, full power and authority to do any and all acts and things necessary or advisable to be done, as fully and to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that such attorneys and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. | S-3 | EX-24 | 1996-01-12T00:00:00 | 1996-01-12T17:21:24 |
0000816249-96-000002 | 0000816249-96-000002_0000.txt | THIS DOCUMENT IS A COPY OF THE STOCK PURCHASE AND REDEMPTION AGREEMENT (EXHIBIT TO FORM 8-K) FILED ON JANUARY 4, 1996, PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
FORM 8-K WAS FILED ELECTRONICALLY JANUARY 4, 1996, THIS EXHIBIT--STOCK PURCHASE AND REDEMPTION AGREEMEN--WAS FILED WITH FORM SE PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION ON JANUARY 4, 1996.
STOCK PURCHASE AND REDEMPTION AGREEMENT
This Agreement entered into as of the 21st day of December, 1995 by and between Corporacion Inmobiliaria Textil (CINTEX), a Puerto Rico corporation ("Cintex"), Fideicomiso Hispamer, a Puerto Rico trust ("Hispamer"), Estampados Deportivos, Inc., a Delaware corporation ("Estampados"), and Olympic Holding Corp., a Puerto Rico corporation ("Holding") (all said entities hereinafter sometimes from time to time collectively referred to as "Sellers"); and Coachman Incorporated, a Delaware corporation (hereinafter referred to as "Purchaser").
WHEREAS, Estampados owns all of the issued and outstanding shares of common stock of Olympic Mills Corporation (the "Olympic Common Shares"), a corporation duly organized, validly existing and in good standing under and by virtue of the laws of the State of Delaware ("Olympic"); and WHEREAS, Cintex and Hispamer own all of the issued and outstanding shares of Class A preferred stock of Olympic (the WHEREAS, Olympic is the owner of all the issued and outstanding shares of common stock of Yabucoa Industries, Inc. (the "Yabucoa Common Shares"), a corporation duly organized, validly existing and in good standing under and by virtue of the laws of the Commonwealth of Puerto Rico; and WHEREAS, Olympic is indebted to Cintex and Hispamer each in the amount of One Million Seven Hundred Eighty Five Thousand Two Hundred Dollars ($1,785,200.00) for an aggregate liability of Three Million Five Hundred Seventy Thousand Four Hundred Dollars ($3,570,400.00) (such debt(s) and evidence thereto together with any and all existing rights, liens or collateral held by Cintex and Hispamer in connection thereto are hereinafter collectively referred to as the WHEREAS, Holding owns all of the issued and outstanding shares of common stock of Lutania Mills, Inc. (the "Lutania Shares"), a corporation duly organized, validly existing and in good standing under and by virtue of the laws of the Commonwealth of Puerto Rico ("Lutania"); and WHEREAS, Sellers and Purchaser entered into a certain agreement dated as of June 27, 1995, as amended (the "Contract to Acquire"), pursuant to which Sellers granted to Purchaser the exclusive and irrevocable right to purchase the Olympic Common Shares, the Lutania Shares, the Olympic Preferred Shares and the Indebtedness free and clear of Liens (as WHEREAS, Purchaser has notified Sellers of its intention to purchase from Estampados the Olympic Common Shares and from Holding the Lutania Shares and to cause Olympic to acquire from Cintex and Hispamer the Indebtedness and the Olympic Preferred Shares, and Sellers agree to effect such transactions, all under the terms and conditions herein NOW THEREFORE, in consideration of the mutual covenants, representations and agreements set forth herein, intending to be legally bound hereby, the parties hereto agree as follows: 1. SALE AND PURCHASE OF THE OLYMPIC COMMON SHARES AND THE LUTANIA SHARES:
a. Agreement to Sell and to Purchase the Olympic Common Shares and the Lutania Shares.
Upon the terms and conditions set forth in this Agreement: (1) Estampados hereby sells, assigns and transfers to Purchaser and, in reliance on all of the representations and warranties and the covenants of Sellers and of Olympic, Yabucoa and Lutania made herein, Purchaser acquires and accepts from Estampados, for the purchase price of ONE THOUSAND DOLLARS, the Olympic Shares. (2) Holding hereby sells, assigns and transfers to Purchaser and, in reliance on all of the representations and warranties and the covenants of Sellers and of Olympic, Yabucoa and Lutania made herein, Purchaser acquires and accepts from Holding, for the purchase price of ONE THOUSAND DOLLARS, the Lutania Shares. b. Delivery of Share Certificates. Estampados and Holding hereby deliver to Purchaser the certificates representing all the issued and outstanding Olympic Common Shares and Lutania Shares, respectively, free and clear of any and all liens, charges, encumbrances, claims, options, rights of first refusal, rights of first offer, agreements, security interests, restrictions of any kind and rights of others of any description (collectively "Liens"). c. Delivery of Purchase Price. Purchaser hereby delivers and pays to Estampados and Holding, respectively, the full amount of the purchase price for the Olympic Common Shares and the Lutania Shares. 2. CONTRIBUTION BY PURCHASER TO THE CAPITAL OF OLYMPIC: a. Capital contribution. Upon the terms and conditions set forth in this Agreement, Purchaser hereby contributes to the capital of Olympic as additional paid-in capital the following: (1) Cash in the amount of TWO MILLION DOLLARS (2) Six million (6,000,000) shares of common stock of Purchaser (the Purchaser's Common Stock") and its commitment to issue additional common stock as provided in (3) A promissory note issued for the principal amount of FOUR MILLION FOUR HUNDRED FORTY EIGHT THOUSAND EIGHT HUNDRED TWENTY SIX DOLLARS ($4,448,826.00) (the "Bridge Note") which is subject to the following terms and conditions: (i) The Bridge Note shall mature and thus be due and payable on July 15, 1996 (the "Bridge Note Maturity Date"). (ii) No interest will accrue on the principal amount under the Bridge Note paid during the first thirty (30) days after issuance. (iii) Payments of principal made after thirty (30) days of issuance up to and including the Bridge Note Maturity Date shall bear interest from the date of issuance until payment at the rate of eight percent (8%) per annum. (iv) Any principal outstanding under the Bridge Note on the Bridge Note Maturity Date not paid on such date shall bear interest from the date of issuance until full payment thereof at the rate of twelve percent (12%) per annum. (v) While there is any balance outstanding under the Bridge Note, Purchaser will apply the net proceeds from any issuance of shares of Purchaser's stock issued up to or after the Bridge Note Maturity Date to the payment of principal and interest due under the Bridge Note. (vi) As long as there are any amounts due under the Bridge Note and the Availability Note, (i) Mr. Francisco Carvajal will be Chairman of Olympic and if he ceases to be Chairman, Hispamer shall have the right to appoint one member to the Board of Directors of Olympic until such notes are paid in full, (ii) Olympic, without the prior consent of Mr. Carvajal, will not enter into any transaction, agreement, contract, commitment, lease, understanding or arrangement requiring, or which could result in payments by the company with an overall value in excess of ONE HUNDRED THOUSAND DOLLARS ($100,000.00), or incur in or assume any obligation or liability in an amount in excess of ONE HUNDRED THOUSAND DOLLARS ($100,000.00), and (iii) Mr. Carvajal will be held harmless when acting in such capacities through a Hold Harmless Agreement and applicable contractual liability insurance coverage from decisions made by Purchaser and Olympic in course of the transaction. 3. PAYMENT OF INDEBTEDNESS. a. Indebtedness to Cintex. Olympic hereby delivers to Cintex the sum of ONE MILLION SEVEN HUNDRED EIGHTY FIVE THOUSAND TWO HUNDRED DOLLARS ($1,785,200.00) in full payment and satisfaction of the Indebtedness to Cintex. b. Indebtedness to Hispamer. Olympic hereby delivers to Hispamer in full payment and satisfaction of the Indebtedness to Hispamer a promissory note issued by Olympic in the amount of ONE MILLION SEVEN HUNDRED EIGHTY FIVE THOUSAND TWO HUNDRED DOLLARS ($1,785,200.00) (referred to herein as the Availability Note) due and payable on July 15, 1996 (the Availability Note Maturity Date) and bearing interest from the date of issue until full payment at the annual rate of 12% payable monthly on the last day of each calendar month after the date of issue, provided however that if the principal amount on the Availability Note is paid on or before the Availability Note Maturity Date, interest payable on the outstanding balances under the Availability Note shall be recomputed so that the effective interest rate paid on such outstanding balances shall be equivalent to an annual interest rate of 8% payable monthly and the sum equivalent of an annual interest rate of 4% paid monthly shall be determined and applied as payment against the principal of the Availability Note then outstanding. Payment of the Availability is guaranteed by a pledge by Purchaser of the common stock of Olympic acquired by Purchaser pursuant to this Stock Purchase Agreement pursuant to a Pledge Agreement executed between the Purchaser and Hispamer. Payment of the principal amount of the Availability Note shall be accelerated by (i) the available amount under the Congress Credit line of credit, in excess over and above the minimum availability requirement thereunder, which results from the difference between the total value of eligible inventory of the Corporations determined by Congress Credit as of December 31, 1995 and the total value of eligible inventory of $6,591,000 used to determine net availability under the line of credit of Congress Credit as of the date hereof, and (ii) any additional amount available under such credit line which is authorized by Congress Credit, at its sole discretion, provided that such acceleration or payment on the Availability Note shall not exceed the amount of $1,500,000 and provided further, that any payment under this note shall not place Olympic in default under a certain Loan and Security Agreement entered into with Congress Credit Corporation of even date hereof. c. Release of Olympic. Cintex hereby releases and discharges Olympic from all obligations under the promissory notes evidencing the Indebtedness and simultaneously herewith deliver to Olympic all documents necessary to cancel the Chattel Mortgage lien in all sections of the Registry of Property of Puerto Rico where it is recorded that encumbers certain personal property of Olympic. A notation has been made in the promissory note evidencing the Indebtedness releasing Olympic from any further liability under such notes. 4. REDEMPTION OF OLYMPIC PREFERRED SHARES. a. Redemption of Olympic Preferred Shares held by Cintex.
Upon the terms and conditions set forth in this Agreement, Olympic redeems the 39,276 Olympic Preferred Shares owned and held by Cintex for the following consideration: (1) cash in the amount of THREE MILLION SIX HUNDRED SEVENTY THREE THOUSAND TWO HUNDRED SIXTY DOLLARS (2) delivery of a receivable from American Mills C. por A. in the amount of ONE MILLION SEVEN HUNDRED SIXTEEN THOUSAND THREE HUNDRED NINETY TWO DOLLARS (3) a promissory note issued by Olympic in the amount of SIX HUNDRED FIVE THOUSAND FIVE HUNDRED FOURTEEN DOLLARS ($605,514.00) (the "PRIDCO Note") in favor of Cintex, due and payable upon receipt by the Corporations of the sums due to the Corporations by PRIDCO as of the date hereof under the Special Incentives for Infrastructure Contract dated June 19, 1992. No interest will accrue on the principal amounts under the PRIDCO Note repaid during the first thirty (30) days after issuance. Repayments of principal under the PRIDCO Note made after thirty (30) days of issuance up to and including the date of its payment in full shall bear interest at the rate of eight percent (8%) per annum. (4) A promissory note issued by Olympic in the amount of ONE MILLION DOLLARS ($1,000,000) (referred to in the Agreement of June 27, 1995 as the Defense Contract Note) due and payable on the fifth anniversary date from the date of issue and bearing interest from the date of issue until full payment at the annual rate of seven percent (7%) payable quarterly on the last day of each calendar quarter after the date of issue. (5) A promissory note issued by Olympic in the amount of THREE HUNDRED SEVENTY THOUSAND DOLLARS ($370,000.00) (referred to as the Congress Excess Note) due and payable ninety (90) days from the date of issue, bearing interest on the outstanding principal balance thereof at the rate of eleven hundredths of one percent (0.11%) per day from the date of issue until its full payment. (6) FIVE HUNDRED THOUSAND (500,000) shares of Common Stock of Purchaser and its proportionate share of the commitment by Purchaser to issue additional common stock as provided in paragraph 4(b)(1) hereof. Cintex hereby delivers to Olympic all certificates evidencing the Olympic Preferred Shares owned by Cintex duly endorsed for redemption and cancellation by an authorized representative. b. Upon the terms and conditions set forth in this Agreement, Olympic redeems the 57,129 Olympic Preferred Shares owned and held by Hispamer for the following consideration: (1) FIVE MILLION FIVE HUNDRED (5,500,000) shares of Common Stock of Purchaser and its proportionate share of the commitment by Purchaser to issue and deliver to Hispamer additional common stock of Purchaser subject to the following conditions: If (i) Hispamer and Cintex do not voluntarily sell or dispose of (other than to the other Sellers or affiliates thereof and employees of Olympic and Cintex) any or all of the Purchaser's Common Stock and continue to hold such stock or its equivalent on the second anniversary of the date hereof; and (ii) the average price of the Purchaser's Common Stock as quoted on NASDAQ or a national or regional securities exchange for any 30-day period between the date hereof and the date of such second anniversary date is never at least FIFTEEN MILLION DOLLARS ($15,000,000.00); then, in addition to the Purchaser's Common Stock, Purchaser hereby agrees to and shall deliver to Hispamer and Cintex in proportion to their holding, additional shares of common stock of the Purchaser sufficient for Hispamer and Cintex in the aggregate to own shares of common stock of Purchaser as of said second anniversary date having an average price for the 30-day period preceding said second anniversary date of FIFTEEN MILLION DOLLARS ($15,000,000.00). Provided, however, that Purchaser shall not be obliged to deliver to Hispamer and Cintex such additional shares of its own common stock if: (i) Hispamer, Cintex or any one of Sellers or affiliates thereof, as the case may be, voluntarily sell, on or before the second anniversary of the date hereof, any or all of Purchaser's Common Stock to any person, other than among themselves or to an affiliate; or (ii) the actual price of Purchaser's Common Stock as quoted on NASDAQ or a national or regional securities exchange is at least FIFTEEN MILLION DOLLARS ($15,000,000.00) for any 30-day period between the date hereof and the date of such second anniversary date. In case of a voluntary sale or disposition by any of the Sellers or affiliates of any or all of the Purchaser's Common Stock to any person other than among themselves or an affiliate during the two (2) year period ending on the second anniversary of the date hereof, Purchaser shall have the right of first refusal to acquire such shares for the same price such third party is willing to pay in writing for the shares. Purchaser shall exercise this right of first refusal within a period of ten days from the date Sellers or the affiliate notify Purchaser of the proposed sale of the Purchaser's Common Stock. (2) The Bridge Note in the principal amount of FOUR MILLION FOUR HUNDRED FORTY EIGHT THOUSAND EIGHT HUNDRED TWENTY SIX DOLLARS ($4,448,826.00), the payment of which is secured by a Pledge Agreement executed between the Purchaser and Hispamer. (3) The obligation to issue one or more promissory Notes (the Grant Notes) in an aggregate amount equal to the grants granted to Olympic, Yabucoa and/or Lutania after the date hereof, other than grants under a wage incentive program, which were requested as of the date hereof, up to a maximum amount of ONE MILLION DOLLARS ($1,000,000). The Grant Notes shall be due and payable on the fifth anniversary date from the date of issue and bearing interest from the date of issue until full payment at the annual rate of seven percent (7%) payable quarterly on the last day of each calendar quarter after the date of issue and shall be subordinated to the indebtedness to Congress Credit Corporation under the Loan and Security Agreement of even date herewith. (4) The obligation to pay Hispamer the proportionate amount of the net after tax earnings of the Corporations (including their subsidiaries) for the calendar year ending on December 31, 1995 attributable to the period commencing on January 1, 1995 and ending on the date hereof, excluding any reversal of the loss contingency reserve recorded in the books for the payment of excise taxes (the "Proportionate Net Earnings Amount"). The Proportionate Net Earnings Amount shall be paid within ten days after audited financial statements of the Corporations for the calendar year ending on December 31, 1995 are issued but in no event such amount shall be paid after April 30, 1996. The Proportionate Net Earnings Amount shall be determined by dividing the combined net after tax earnings of the Corporations (including subsidiaries) for the year ended on December 31, 1995 (determined under generally acceptable accounting principles but excluding any reversal of the loss contingency reserve recorded in the books for the payment of excise taxes) by 365 and multiplying the result thereof by the number of days elapsed since January 1, 1995 to the date hereof. No payment for this amount will result if the combined operations of the Corporations (including subsidiaries) for the year ended December 31, 1995 does not reflect any net after tax earnings (determined under generally acceptable accounting principles). Hispamer hereby delivers to Olympic all certificates evidencing the Olympic Preferred Shares owned by Hispamer duly endorsed for redemption and cancellation by an authorized representative. 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS: Sellers, jointly and severally, represent, warrant and covenant to the Purchaser as follows: a. Title. Estampados is the lawful, registered and beneficial exclusive owner of the Olympic Common Shares; Holding is the lawful, registered and beneficial exclusive owner of the Lutania Shares; and Cintex and Hispamer are the lawful, registered and beneficial exclusive owners and creditors of the Indebtedness and the lawful, registered and beneficial exclusive owners of the Olympic Preferred Shares. The Shares and the Indebtedness are free and clear of any and all Liens. Each Seller has good and marketable title to the shares set forth opposite such Seller's name in Exhibit 5(a) and has the right to sell, assign, convey, transfer and deliver the same to Purchaser (or surrender the same for redemption in case of the Olympic Preferred Shares) pursuant to this Agreement, free and clear of any and all Liens. Upon delivery of certificates representing the Shares and of the notes evidencing the Indebtedness in accordance with the terms of this Agreement, the Purchaser and Olympic shall have good and marketable title to and will own such Shares and Indebtedness free and clear of any and all Liens. Sellers are not a party to or bound by any contract or commitment relating to the sale, assignment, conveyance, transfer, delivery, right of first refusal, option or limitations on transfer of any shares or securities of the Corporations, except with respect to the transactions herein contemplated. The Shares constitute on the date hereof all of the issued and outstanding capital stock of each of the Corporations. b. Authority: Each Seller has the unconditional right to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All actions required to be taken by each Seller to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and properly taken, including action by stockholders or fiduciaries. c. Violation of Law or Conflict: The execution and delivery of this Agreement by each Seller, the performance of its obligations under this Agreement, the consummation of the transaction contemplated hereby and the compliance with the terms hereof by each Seller will not (i) violate or conflict with any provision of law or of the Certificate of Incorporation or By-Laws of each Seller or any judgment, order or decree, or statute, law, ordinance, rule or regulation applicable to any Seller or to its properties or assets; or (ii) result in any breach of, or constitute a default under, or result in the creation of a lien, encumbrance or claim on any of the properties or assets of any of the Sellers. Except as provided in Exhibit 5(c) hereof with respect to the transactions herein contemplated, no approval is necessary pursuant to any corporate charter, by-law or regulation or any mortgage, lease, license or contract to which any of the Sellers is a party or by which any of the Sellers or any Seller's property or assets are or may be bound or affected. d. Permits and Approvals: All actions, approvals, orders, permits, consents, licenses and authorization required to be taken, given or obtained, as the case may be, by or from any governmental authority or agency of the United States or any political subdivision thereof, or of the Commonwealth of Puerto Rico or any political subdivision thereof or any other party in connection with the transactions contemplated by this Agreement shall have been duly taken, given or obtained, as the case may be, shall be in full force and effect on the date hereof, and shall be satisfactory in form and in substance to the Purchaser for Purchaser to be able to continue to carry out the respective businesses of the Corporations. e. Enforceability: This Agreement has been duly executed and delivered by each of the Sellers and constitutes the valid and legally binding obligation of each of the Sellers enforceable against each of them in accordance with its terms. f. Organization, Corporate Power and Good Standing. Each of Olympic, Yabucoa and Lutania is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and the Commonwealth of Puerto Rico (as to Lutania and Yabucoa), respectively; possesses full corporate power and authority and all governmental franchises, licenses, permits, authorizations and approvals necessary to use its corporate name, to own, lease or otherwise hold its properties and other assets and to carry on its business as currently conducted. Each of Olympic, Yabucoa and Lutania is qualified to do business in any jurisdiction in which such qualification is necessary in order to enable each of said corporations to carry on its business as now conducted or to own, lease or hold its properties and assets as now owned, leased or held. All the minutes of the meetings of the Board of Directors and/or the Shareholders of each of said corporations are contained in their respective minute books, which have been furnished to Purchaser for examination. True and complete copies of the Certificate of Incorporation, as amended to date, and the By- Laws, as in effect on the date hereof of each of said corporations have been delivered to Purchaser.
The authorized capital stock of Olympic consists of 100 shares of common stock, of which 100 shares are issued and outstanding, and 96,405 shares of preferred stock of which 96,405 shares are issued and outstanding. All outstanding shares of capital stock of Olympic were duly authorized for issuance, are validly issued and fully paid and non-assessable and were not issued in violation of, and are not subject to any pre-emptive subscription or similar rights. All the issued and outstanding shares of common stock of Olympic are registered in the name of Estampados and all the issued and outstanding shares of preferred stock of Olympic are registered, 39,276 shares in the name of Cintex and 57,129 shares in the name of Hispamer. Except as set forth above, no shares of capital stock or other equity securities of Olympic are outstanding and no outstanding contracts, warrants, options, calls, convertible or exchangeable securities or other rights or commitments of any nature are outstanding or in existence that give any person or entity any right (beneficial or otherwise) to receive, purchase or otherwise acquire or hold any equity or other security of Olympic or any dispositive rights, voting rights or dividend rights in any equity or other security of Olympic other than by virtue of the Contract to Acquire and this Agreement relating to any of the authorized shares of common stock or preferred stock of Olympic. h. Capitalization of Lutania. The authorized capital stock of Lutania consists of 1,000,000 shares of common stock, of which 1,000 shares are issued and outstanding. All outstanding shares of capital stock of Lutania were duly authorized for issuance, are validly issued and fully paid and non-assessable and were not issued in violation of, and are not subject to any pre-emptive subscription or similar rights. All the issued and outstanding shares of common stock of Lutania are registered in the name of Holding. Except as set forth above, no shares of capital stock or other equity securities of Lutania are outstanding and no outstanding contracts, warrants, options, calls, convertible or exchangeable securities or other rights or commitments of any nature are outstanding or in existence that give any person or entity any right (beneficial or otherwise) to receive, purchase or otherwise acquire or hold any equity or other security of Lutania or any dispositive rights, voting rights or dividend rights in any equity or other security of Lutania other than by virtue of the Contract to Acquire and this Agreement relating to any of the authorized shares of common stock or preferred stock of Lutania. i. Capitalization of Yabucoa: The authorized capital stock of Yabucoa consists of 2,000 shares of common stock, all of which shares are issued and outstanding. All outstanding shares of capital stock of Yabucoa were duly authorized for issuance, are validly issued and fully paid and non-assessable and were not issued in violation of, and are not subject to any pre-emptive subscription or similar rights. All the issued and outstanding shares of common stock of Yabucoa are registered in the name of Olympic. Except as set forth above, no shares of capital stock or other equity securities of Yabucoa are outstanding and no outstanding contracts, warrants, options, calls, convertible or exchangeable securities or other rights or commitments of any nature are outstanding or in existence that give any person or entity any right (beneficial or otherwise) to receive, purchase or otherwise acquire or hold any equity or other security of Yabucoa or any dispositive rights, voting rights or dividend rights in any equity or other security of Yabucoa. j. Equity Interest. Except for the Yabucoa Common Shares owned by Olympic, Olympic, Yabucoa and/or Lutania has no subsidiaries, nor do they directly or indirectly own any capital stock of or other equity interest in any corporation, business trust, firm, partnership or entity. k. Financial Statements. The copies of: (i) Olympic's balance sheets as of December 31, 1994 and 1993 and the related statements of operations and retained earnings and cash flows for the years then ended (including its investment in Yabucoa), all certified without qualifications or exceptions by KPMG Peat Marwick, LLP, and (ii) the unaudited balance sheet of Lutania as of March 25, 1995, all heretofore furnished by Sellers to Purchaser and copies of which are attached hereto as Exhibit 5(k) (all of said financial statements, including the notes, exhibits and schedules thereto, collectively referred to as the "Financial Statements"), have been prepared in accordance with generally accepted accounting principles, are true, correct and complete and the respective balance sheets present fairly the assets and liabilities and the financial condition and the results of the operations of Olympic (and its subsidiary Yabucoa) and of Lutania as of the date of same and for the period indicated in said Financial Statements. Such Financial Statements reflect all claims against and all debts or obligations of Olympic (including Yabucoa) and Lutania (fixed or contingent). To the best knowledge and belief of Sellers, there is no liability or obligation of any nature not fully reflected or reserved in the Financial Statements. Since the date of the Financial Statements, neither Olympic, Yabucoa or Lutania has suffered any material adverse change in its business operations, its obligations (whether absolute, accrued, contingent or otherwise), assets, earnings or working capital, nor have they incurred any obligations or liabilities of any nature, except in the ordinary course of business, or paid, satisfied or discharged any claim, lien, encumbrances or obligation other than in the ordinary course of business, or permitted, allowed or suffered any of its properties or assets to be subjected to any mortgage, pledge, charge or restriction other than those which are listed in Exhibit 5(o) hereof. l. Payment of Taxes. Each of Olympic, Yabucoa and Lutania has filed or caused to be filed in a timely manner all Federal, state, Puerto Rico, local, municipal and foreign income, sale, use, payroll, employment, withholding, excise, property and other taxes and social security returns, reports, notices, declarations, and forms required to be filed by each of them by applicable laws, regulations and municipal ordinances governing such matters and the amount of tax liability and social security payments shown in such returns, reports, notices, declarations and forms are correct in all material respects. Olympic, Yabucoa and Lutania each has paid in full or accrued on its financial statements all taxes and social security obligations which have become due pursuant to such returns or pursuant to any assessment or levy received by either of them. The amounts set forth as liabilities for all taxes on the unaudited financial statements of each of said entities as of the date hereof are sufficient for the payment of all accrued and unpaid Federal, state, Puerto Rico, local, municipal and foreign income, withholding, excise, property and other taxes (and any related penalties and interest) of or due by each of said entities. No tax liens have been filed and no claims are being threatened or asserted against either of such entities for additional taxes of any kind with respect to any year or the portion of the year ending as of the date hereof for the taxable period that includes (but does not end on) such day. Neither of such entities is the subject of any tax audit or other proceeding that could result in the assessment of additional taxes or is aware of any threat or notification that such an audit will or may be performed. m. Licenses and Authorizations. Exhibit 5(m) sets forth a complete list and brief description of all licenses, permits, consents, franchises, certificates of compliance, or other authorizations from, or pending applications to, any person or governmental authority held by Olympic, Yabucoa and Lutania on the date hereof. The licenses, permits, consents, certificates of compliance, authorizations and applications listed in such Exhibit 5(m) are presently in effect and constitute the only licenses, permits, consents, certificates of compliance, authorizations and applications for any of the foregoing necessary to conduct the businesses of Olympic, Yabucoa and Lutania as now conducted. n. Absence of Certain Changes. Since the date of the Financial Statements, the business of each Olympic, Yabucoa and Lutania has been conducted in the ordinary and usual course of business and none of said entities has: (i) Suffered any material adverse change in its business, operations, conditions (financial or otherwise), liabilities (whether absolute, accrued, contingent or otherwise and whether due or to become due), assets, earnings, working capital or prospects, nor has there been any event which has had or will have a materially adverse effect on any (ii) Incurred in or assumed any obligation, indebtedness or liability of any nature (whether absolute, accrued, contingent or otherwise and whether due or to become due) other than items incurred in the ordinary course of business, or increased, or experienced, any change, in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (iii) Paid, discharged or satisfied or agreed to pay, discharge or satisfy, any claim, lien, encumbrance, obligation or liability (whether absolute, accrued, contingent or otherwise and whether due or to become due) other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of claims, liens, encumbrances, obligations or liabilities which are reflected or reserved against in the Financial Statements or which were incurred since the date of the Financial Statements in the (iv) Permitted, allowed or suffered any of their properties or assets to be subjected to any mortgage, pledge, lien, encumbrance, restriction or charge of any kind other than liens and encumbrances specifically set forth in the Financial Statements and/or disclosed to the Purchaser in (v) Written down or written up the value of any inventory (including write-downs by reason of shrinkage or mark-downs), determined as collectable any notes or accounts receivable or any portion thereof which were previously considered uncollectible, or written off as uncollectible any notes or accounts receivable or any portion thereof, except for write-downs, write-up and write-offs in the ordinary (vi) Cancelled any debts or waived any claims or rights of substantial value, except in the ordinary course (vii) Sold, transferred or otherwise disposed of any of its properties or assets (personal, permits, tangible or intangible), except in the ordinary course of (viii) Cancelled, disposed of, voluntarily relinquished or permitted to lapse any right to use any of its trademarks, assumed names, trade names, licenses or applications therefore or disposed of, or disclosed to any person not authorized to have such information, any trade secret, formulae, process or know-how not theretofore a matter of public knowledge or existing in the public domain; (ix) Granted any increase in the compensation of officers or employees or any increase in the compensation payable or to become payable to any officer or employee that is inconsistent with past practice; (x) Made any change in any material method of accounting principles, practice or policy other than those (xi) Paid, loaned or advanced any amounts due to, or sold, transferred or leased any property or assets (personal or mixed tangible or intangible) to, or entered into any agreement or arrangement with, any of its stockholders, affiliated entities, employees, officers or directors except (xii) Entered into any collective bargaining or labor agreement, or experienced any labor dispute or (xiii) Redeemed or otherwise acquired any shares of its capital stock or entered into any agreement, contract or instrument relating to the issuance or sale of its capital stock other than the Agreement providing for the Right to Acquire Shares of Stock and Indebtedness dated June 27, 1995 (the Agreement to Acquire); (xiv) Declared, paid or set aside for payment any dividend or distribution whether in cash or in kind; (xv) Entered into any lease agreement or any agreement modifying or amending any existing lease agreement with respect to any real estate property used in the conduct (xvi) Made or agreed to any change or modification in the terms of any contract or instrument to which it is a party which may have a material adverse effect on its properties or businesses. (xvii) Entered into any agreement, the terms of which would be violated by the consummation of the (xviii) Suffered any material destruction, damage or loss related to the assets or properties of its business, whether or not covered by insurance; (xix) Committed, suffered, permitted or incurred in any default, liability or obligation which has, had or will have any adverse effect on its assets or business; (xx) Amended or modified its Certificate of Incorporation or By-Laws. o. Title to Properties; Encumbrances. Each of Olympic, Yabucoa and Lutania has good, valid and marketable title to all properties and assets (personal and mixed, tangible and intangible) which are used in, with or are related to its business and which it represents Purchaser to own, including, without limitation, all the properties and assets reflected in the Financial Statements, except for those properties and assets which it has since sold or disposed of in the ordinary course of business. Except as set forth in Exhibit 5(o), said properties, rights and assets are free and clear of mortgages, liens, claims, charges, pledges, security interests or other encumbrances. p. Inventory. All inventory of each Olympic, Yabucoa and Lutania consist of items that are merchantable, in good conditions, usable and saleable in its ordinary course of business and is reflected in its books and records in accordance with GAAP. q. Accounts Receivable. All accounts receivable of each Olympic, Yabucoa and Lutania, whether reflected in the Financial Statements or subsequently created, represent sales actually made or services actually performed in the ordinary course of business and are collectable in accordance with their terms.
Exhibit 5(r) contains an accurate and complete list of all leases pursuant to which Olympic, Yabucoa and Lutania lease real or personal property. All such leases are valid, binding and enforceable in accordance with their terms, and are in full force and effect and have not been modified or amended except as set forth in such Exhibit; no event has occurred which (whether with or without notice, lapse of time or the happening or occurrence of any other event) constitute a default thereunder. No written consents from Landlords under the leases are required by reason or as a result of the transactions contemplated herein. s. Conduct of Business. Since the date of the Financial Statements, each of Olympic, Yabucoa and Lutania has used its best efforts to preserve intact its business operations and maintained satisfactory relationship with licensors, suppliers, distributors, clients and others with whom it had business relationship. Neither of said entities has engaged since that date in any transaction not in the ordinary course of business. t. Legal Proceedings. Except as set forth and described in Exhibit 5(t), there are no actions, suits, claims, proceedings or investigations, pending or threatened against or affecting Olympic, Yabucoa and/or Lutania or any of their assets, properties or operations, at law or in equity, before any Federal, local, Puerto Rico, municipal, foreign or other governmental department, commission, board, bureau, agency or instrumentality, which might result in any material adverse change in the businesses, operations, prospects, properties, assets or conditions, financial or otherwise of Olympic, Yabucoa or Lutania or affect the transactions contemplated in this Agreement. Sellers, Olympic, Yabucoa and Lutania are not in default with respect to any order, writ, injunction or decree of any Federal, Puerto Rico, municipal or other governmental department in any case, domestic or foreign. u. Insurance. Exhibit 5(u) contains an accurate and complete list of all insurance policies presently in effect with respect to the businesses, properties and employees of Olympic, Yabucoa and Lutania. All such policies are in full force and effect and to the best of Sellers' knowledge or that of any of said entities, no event has occurred which would give any insurance carrier a right to terminate any of such policies. All premiums due and payable with respect thereto have been paid, and no notice of cancellation or termination have been received with respect to any such policy. v. ERISA Plans. Except as set forth in Exhibit 5(v), or as may be required by local statute, Olympic, Yabucoa and Lutania are not and have not been a party to, or are not and have not been bound by, nor contributed to any bonus, deferred compensation, hospitalization, medical, dental, vacation, sick pay, disability or severance plan or policy, pension, profit- sharing or retirement plan or arrangement, stock purchase, stock option or group insurance plans or programs or any other fringe benefit plan, contract or arrangement providing benefits to its employees, including, without limitation, any "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") whether qualified or non-qualified under ERISA, formal or informal and whether legally binding or not (hereinafter collectively, the "Plans"). No liability has been or is expected to be incurred by any of said entities in connection to any such Plans or their respective terminations, under or pursuant to any provision of law or regulation, including but not limited to Title I or IV of ERISA that could, following the closing on the date hereof, become or remain a liability of any of them or the Purchaser or become a liability to any of their respective successors and/or assigns. w. Bank Accounts. Exhibit 5(w) sets forth the names and locations of all banks, savings and loan association and other financial institutions at which Olympic, Yabucoa and/or Lutania maintains accounts or safe deposit boxes and the name of all persons authorized to draw thereon or to have access thereto.
x. No Condemnation or Expropriation. To the best knowledge of Sellers and the Corporations, neither the whole nor any portion of the leaseholds or any other assets of Olympic, Yabucoa and Lutania, are subject to any governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment or compensation therefor, nor any such condemnation, expropriation or taking has been proposed. y. Personnel and Employment Matters. Each of Olympic, Yabucoa and Lutania has conducted its business in compliance with all Federal and local laws, rules and regulations related to or affecting employment and employment practices, including terms and conditions of employment and wages and hours. Neither of said entities has engaged in any unfair labor practice; there are no complaints against any of the Corporations pending or threatened before the National Labor Relations Board, Department of Labor of the Commonwealth of Puerto Rico or any similar federal or local labor agency; there are no labor strikes, slow-downs or stoppages pending or to its best knowledge threatened, with respect to its employees; there are no charges pending before the Equal Employment Opportunity Commission or any Commonwealth or local agency responsible for the prevention of unlawful employment practices nor any notice has been received indicating the intentions of any Federal, Commonwealth or local agency responsible for the enforcement of employment and labor laws to conduct an investigation. Each of said entities has complied with all laws and regulations of, and have timely paid all workmen's compensation insurance premiums to the State Insurance Fund Administration. They have also made in full all payments corresponding to their employees for wages, salaries, commissions, bonuses, benefits, payroll withholding taxes and any other salary withholding obligation, vacation time, leave of absence, disability, Christmas bonus, severance and any other payment due and payable to their employees as of the date hereof or such amounts have been accrued pursuant to the law or otherwise, for or related to the period comprised between the date of employment of such employees and the date hereof. z. Brokers. Neither Sellers nor Olympic, Yabucoa or Lutania has retained or employed a broker, finder or other person as such, nor taken any action which would give any person any valid claim against any of them hereto for a commission or brokerage in connection with the transactions contemplated hereby. aa. Property Used by Olympic, Yabucoa and Lutania. There is no defect, deficiency or other condition of the property, equipment or premises used by either Olympic, Yabucoa and Lutania in the conduct of their respective businesses that has been alleged and notified to Sellers, by any governmental authority or third party as constituting a violation of any Fire, Plumbing, Electrical Safety or Building Code or Environmental Protection Law, or governmental regulation of any similar import, or any applicable zoning or other land use regulation of any governmental authority, nor to the best of Sellers' knowledge or that of the Corporations, there is any basis for such an allegation, or any proposed or contemplated amendment or modification thereto, which, if in effect on the date hereof, would characterize any condition of any such property, equipment or premises, as a material violation thereof. bb. Compliance with the Law. Olympic, Yabucoa and Lutania has each conducted its business in compliance in all material respect with all applicable statutes, ordinances, laws, rules, orders and regulations of any governmental authority or instrumentality, domestic or foreign (including without limitation, those related to Hazardous Substances (as defined herein). Except as set forth in Exhibit 5(bb), none of such entities has received any notice from a governmental authority that alleges that they are not in compliance, in all material respects with any such federal, commonwealth, local or foreign law, ordinance, rule or regulation. cc. Intellectual Property. Exhibit 5(cc) sets forth a true and complete list of all patents, trademarks (registered or unregistered), trade names, service marks, copyrights and similar rights and applications therefor owned by, licensed to or used or filed by either Olympic, Yabucoa and Lutania (collectively the "Intellectual Property"), and contains a list of all jurisdictions in which all registered trademarks are registered or registration has been applied for and all registration and application numbers. Each of Olympic, Yabucoa and Lutania owns or has the right to use, without payment to or need of consent by, any other party, the Intellectual Property and the consummation of the transactions contemplated hereby will not alter or impair such rights. The use by either of said entities of the Intellectual Property does not infringe upon the rights of any third party. Neither the Sellers nor any of said entities has granted to any person or entity any right or license to use any such name and/or any variation thereof nor any other Intellectual Property. To the best knowledge of Sellers and the Corporations, no shareholder, officer, director or employee of the Corporations, has an interest or right of any nature whatsoever in any of the Intellectual Property. There is no actual or, to the best knowledge of Sellers and the Corporations, threatened or asserted claim that challenge the rights of either of the entities in any respect in and to, or restrict their rights to use, or charges any of said entities with infringement of, or make any other claim with respect to, any of the Intellectual Property. dd. Contracts and Commitments. Exhibit 5(dd) lists all agreements, contracts, commitments, understandings, arrangements or restrictions (collectively the "Contracts") to which Olympic, Yabucoa and/or Lutania are a party or by which either of them is bound and which are individually or in the aggregate material to their respective business operations. The Contracts are valid, binding and in full force and effect and are enforceable by each of Olympic, Yabucoa and/or Lutania, as the case may be, in accordance with their terms. Each entity which is a party to the Contracts has performed all material obligations required to be performed by it under the contracts and is not in breach or default in any respect thereunder (with or without the lapse of time or the giving of notice, or both). To the best of Sellers' and each of said entities knowledge, no other party to any of the Contracts is in breach or default in any respect thereunder. True, correct and complete copies of each Contract have been delivered by Sellers or any of the Corporations to Purchaser before the date hereof. ee. Customers and Suppliers. Exhibit 5(ee) lists the five largest customers and the five largest suppliers of Olympic, Yabucoa and Lutania. None of the customers in the list has notified Sellers or any of the entities that it intends to terminate its business relationship with or decrease its purchases from the Corporations. None of the suppliers has notified any of the Corporations that it intends to change its terms of sale to or its relationship with any of the Corporations in a manner adverse thereto. ff. Environmental Matters. Except as set forth in Exhibit 5(ff), each of the Corporations has complied and is in compliance with all applicable federal, Commonwealth of Puerto Rico and local laws, ordinances, regulations, policies, orders or decrees relating to pollution control and environmental contamination, including but not limited to, the generation, use, collection, treatments, storage, transportation, recovery, removal, discharge or disposal of Regulated Substances (as defined hereafter), as well as those regarding record-keeping, notification and reporting requirements respecting Regulated Substances. No real property now or previously used or leased by any of the Corporations (the "Property") has been used by it or any other party for the handling, treatment, storage or disposal of Regulated Substances. No release, discharge or spillage of any Regulated Substance and no soil, water or air contamination by any Regulated Substance has occurred or is occurring in, from or on the Property. Each of the Corporations has all permits, approvals and consents under all applicable environmental statutes and regulations to operate lawfully the business which it currently conducts and currently expects to conduct. There are no Enforcement Notices in effect and the Sellers and the Corporations do not know and have no reason to know of any facts which might result in the issuance of any Enforcement Notice with respect to the Corporations. Except as described in Exhibit 5(ff), there are no claims, actions, suits, proceedings or investigations related to the presence, release, production, handling, discharge, spillage, transportation or disposal of Regulated Substance or contamination of soil, water or air by Regulated Substance pending or threatened with respect to the Property or otherwise against any of the Corporations in any court or before any federal, state, Commonwealth of Puerto Rico or other local government agency or private arbitration panel. For purposes of this Agreement, "Regulated Substance" shall mean any pollutant, chemical substance, hazardous or toxic wastes, or contaminants regulated under, defined in or pursuant to any applicable federal, state, Commonwealth of Puerto Rico or local law, ordinance, regulation, order or decree, including, without limitation, the Solid Waste Disposal Act, as amended (42 U.S.C. 6901 et seq.), the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") (42 U.S.C. 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. 1801 et seq.), the Toxic Substance Control Act, as amended (15 U.S.C. 2601 et seq.), the Clean Air Act, as amended (42 U.S.C. 7401 et seq.), and the Clean Water Act, as amended (33 U.S.C. 1251 et seq.). gg. Disclosure of Material Facts. All representations, warranties, covenants or statement of Sellers and each of Olympic, Yabucoa and Lutania contained herein or in any certificate, schedule, list, exhibit or other information delivered to Purchaser pursuant to or in connection with this Agreement, are and will be true, complete and correct in all respects and do not contain or will contain any untrue statement of any material fact or omit or will omit to state a material fact necessary in order to avoid making the statements contained herein or therein misleading when considered in light of the circumstances in which made or delivered. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER. The Purchaser represents, warrants and covenants to the Sellers as follows: a. Organization, Corporate Power and Good Standing. Purchaser is a corporation duly organized, validly existing and in good standing under the State of Delaware, U.S.A., jurisdiction of its incorporation, and has the corporate power and authority to own or lease its properties, to carry on its business and to perform its undertakings and obligations herein provided. b. Authorization, Execution and Delivery. All corporate acts and/or other proceedings required to be taken by or on the part of the Purchaser to authorize it to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby have been duly taken and are valid and binding obligations of Purchaser enforceable in accordance with its terms; except that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditor's rights.
Purchaser has not retained or employed any broker, finder or other person as such, nor taken any action which would give any person any valid claim against any party hereto for such a commission or brokerage in connection with the transactions contemplated hereby, except for AGA & Associates, Inc. and RK Grace & Co. which are acting as financial advisors on behalf of Purchaser who will be solely responsible for their fees. d. Violation of Law or Conflict. The execution and delivery of this Agreement by Purchaser, the performance of its obligations under this Agreement, the consummation of the transaction contemplated hereby and the compliance with the terms hereof by Purchaser will not (i) violate or conflict with any provision of law or of the Certificate of Incorporation or By-Laws of Purchaser or any judgment, order or decree, or statute, law, ordinance, rule or regulation applicable to Purchaser or to its properties or assets; or (ii) result in any breach of, or constitute a default under, or result in the creation of a lien, encumbrance or claim on any of the properties or assets of any of Purchaser. Except as provided in Exhibit 6(d) hereof with respect to the transactions herein contemplated, no approval is necessary pursuant to any corporate charter, by-law or regulation or any mortgage, lease, license or contract to which the Purchaser is a party to or by which the Purchaser or Purchaser's property or assets are or may be bound or affected. e. Compliance with Securities Laws. Purchaser has filed or caused to be filed as of the date thereof, all reports required to be filed by it with respect to the transactions contemplated in this Agreement pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934. 7. ADDITIONAL DOCUMENTS DELIVERED BY PARTIES. In connection with the transactions herein contemplated, the parties have delivered or caused to be delivered the following documents: a. Resignation of Directors. The Purchaser received the signed resignations dated the as of the date hereof of all the Directors and Corporate Officers of Olympic, Yabucoa and Lutania. b. Execution of Lease Agreement and Pledge Agreement.
Olympic executed with Cintex a Lease Agreement with respect to the Guaynabo facilities under mutually acceptable terms and conditions and Purchaser shall have executed a Pledge Agreement with Hispamer to secure the payment of the Bridge Note and the Availability Note. c. Opinion of Counsel to Seller. Purchaser shall have received an opinion from Jose R. Cestero-Calzada, counsel for Sellers, dated as of the date hereof, which opinion shall be in form and substance acceptable to Purchaser. d. Hispamer Note. Purchaser shall have caused Olympic or its successor to issue a promissory note to Hispamer for the principal amount of Four Hundred Sixty-Five Thousand Dollars ($465,000.00) (the "Hispamer Note") representing the interest amount owed by Olympic to Hispamer on the portion of the Indebtedness. The Hispamer Note will be due and payable on the fifth anniversary of the Closing Date and shall bear interest from the date of issue to its full payment at an annual rate of seven percent (7%) payable quarterly on the last day of each calendar quarter. Upon repayment in full of the Bridge Note, any additional equity raised by the Purchaser, Olympic or its subsidiary, shall be used to prepay the then outstanding balance of the Hispamer Note. e. Release of Guarantees. Sellers shall provide Purchaser with the release of a guarantee issued by Olympic to the Development Fund of Puerto Rico, a subsidiary of the Government Development Bank of Puerto Rico in connection with a loan granted by the fund to America Mills C. por A. Sellers represent that there are no other guarantee issued by any of the Corporations with respect to liabilities or obligations of any entity other than the Corporations. 8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION.
a. Survival of Representations and Warranties of the Sellers.
covenants and obligations made or undertaken by the Sellers in this Agreement or in any document or instrument executed and delivered pursuant hereto are material, have been relied upon by Purchaser, shall survive the Closing hereunder and shall not merge in the performance of any obligation by any party hereto. The Sellers, jointly and severally, agree to indemnify and hold Purchaser and its officers, directors and agents harmless from and against all claims, liability, deficiency, loss, damage, or injury and all reasonable costs and expenses (including reasonable counsel fees and costs of any suit related thereto) suffered or incurred by any such indemnified party arising from (i) any misrepresentation, or breach of any covenant or warranty of the Sellers contained in this Agreement or any exhibit, certificate, document or other instrument furnished or to be furnished by the Corporations or the Sellers pursuant hereto; (ii) any claim or cause of action by any third party (regardless of whether the claimant is ultimately successful) arising out of any action, inaction, event, condition, liability or obligation of or by any of the Corporations or the Sellers occurring or existing on or prior to the date hereof not otherwise accrued in the financial statements; and (iii) any matter regarding Regulated Substances on any Property or regarding any applicable federal, state, Commonwealth of Puerto Rico or local environmental laws or permits pertaining to the Property or the business or assets of any of the Corporations existing on or prior to the date hereof not otherwise accrued in the financial statements. Any examination, inspection by audit of the Property, financial condition or other matters of the Corporations and their businesses and operations conducted by Purchaser pursuant to this Agreement shall in no way limit, affect or impair the ability of Purchaser to rely upon the representations, warranties, covenants and obligations of the Sellers and the Corporations set forth herein. b. Survival of Representations and Warranties of Purchaser.
covenants and obligations made or undertaken by Purchaser in this Agreement or in any document or instrument executed and delivered pursuant hereto, have been relied upon by the Sellers, shall survive the Closing hereunder, and shall not merge in the performance of any obligation by any party hereto. Purchaser agrees to indemnify and hold the Sellers and their officers, directors and agents harmless from and against all liability, claim, loss, damage or injury and all reasonable costs and expenses (including reasonable counsel fees and costs of any suit related thereto) suffered or incurred by the Sellers arising from (i) any misrepresentation, or breach of any covenant or warranty or Purchaser contained in this Agreement or any certificate or other instrument furnished or to be furnished by Purchaser hereunder; and (ii) any claim or cause of action by any third party arising out of any action, inaction, event, condition, liability or obligation of or by any of the Corporations or Purchaser occurring after the date of this Agreement. c. Sellers' Indemnification to Purchaser of Olympic's Excise Taxes.
Sellers agrees to indemnify and hold Purchaser and/or Olympic harmless for any excise taxes on taxable sales made by Olympic of products manufactured by it, which excise taxes are included as accrued expenses in the Financial Statements. Sellers shall have the right to present any objection with the corresponding government authorities for the imposition and/or collection of such excise taxes. Purchaser shall be obliged to notify Sellers of any such actions by the government authorities. d. Remedies Cumulative. Except as herein expressly provided, the remedies provided herein shall be cumulative and shall not preclude assertion by any party hereto of any other rights or the seeking of any other remedies against any other party hereto.
9. COVENANT NOT TO COMPETE. Sellers and Francisco Carvajal agree that for a period of five (5) years commencing on the date hereof, they, or any of them, directly or indirectly, within the Commonwealth of Puerto Rico shall not engage in, or become an officer, director, employee, consultant or stockholder, partner, joint venturer or proprietor (as applicable) in any entity, concern, store or business engaged in the textile, apparel, clothing and/or garment business, neither as a manufacturer, wholesaler or retailer, in competition with Purchaser or any subsidiary or affiliate of Purchaser. Excepted from this covenant not to compete are the operations listed in Exhibit 9 hereof. Sellers and Carvajal acknowledge that this covenant not to compete constitutes an important and essential element in Purchaser's decision to enter into this Agreement. In the event that a court of competent jurisdiction should find and hold that any of the restrictive provisions of this covenant not to compete are in any way unreasonable and contrary to applicable law, the parties hereto authorize the court to reform such provisions and to impose such restrictions as reformed and the remaining provisions as it may deem reasonable. 10. COST AND EXPENSES. The parties hereto shall each pay all of their own expenses relating to the transactions contemplated by this Agreement, including without limitation, the fees and expenses of their respective counsel, accountants, financial advisers and any other. 11. APPLICABLE LAW. This Agreement and its Exhibits, Schedules and Attachments shall be governed by and construed in accordance with the laws of the Commonwealth of Puerto Rico. 12. ASSIGNABILITY. This Agreement, including its exhibits and attachments thereto and the rights and obligations thereunder shall not be assignable or transferable by any of the parties hereto without the express prior written consent of the other parties hereto, and any attempted assignment, without such consent, shall be null and void. 13. THIRD PARTIES BENEFICIARIES AND SUCCESSORS. This Agreement, Exhibits and Attachments are for the sole benefit of the parties hereto and nothing herein expressed or implied shall create any rights, claims or benefits inuring to any person or entity that is not a party hereto nor create or establish any third party beneficiary hereto. This Agreement and its Exhibits and Attachments shall be binding on and inure to the benefit of the respective successors and permitted assigns of the parties hereto. 14. CAPTIONS, EXHIBITS, ATTACHMENTS. Captions appearing herein and in the Exhibits and Attachments are for the convenience of the parties only, and shall not be construed to affect the meaning of the provisions of this Agreement. All Exhibits and Attachments referred to in this Agreement shall be attached hereto, unless otherwise indicated by the context, and in any case shall be deemed to be incorporated in and to form a part of this Agreement. 15. ENTIRE AGREEMENT. This Agreement, together with its Exhibits and Attachments, set forth the entire understanding and agreement of the parties with respect to its subject matter, and unless otherwise agreed to by the parties in writing, supersedes any prior agreement(s) among them. No amendment to this Agreement shall be effective unless it shall be in writing and signed by all parties hereto. 16. NOTICE. All notices and communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when delivered personally or sent by registered or certified mail, postage prepaid, return receipt requested, addressed to the respective parties to the following addresses: If to Purchaser:
301 N.C. 63rd St., Suite 500
or to such other address as a party shall designate by a written notice to the other party. Notices given by facsimile shall be deemed to be in writing, provided there is confirmation of receipt of transmission and further provided that any notice period shall start running with the transmission of the facsimile. Either party shall notify in writing the other in case of any change to their respective address(es) or name of legal representative set forth above. Any notice of change of address or change of party to receive notice shall not be deemed received or delivered until actual receipt or delivery. 17. WAIVER. Any waiver of any terms, conditions, obligations or covenant on this Agreement must be in writing and signed by the party against whom enforcement is sought. A waiver of any breach or failure to enforce any of the terms, conditions, obligations or covenants of this Agreement shall not in any way affect, limit or waive a party's rights hereunder at any time to enforce strict compliance thereafter with every term , condition, obligation or covenant herein. 18. COUNTERPARTS. This Agreement may be executed simultaneously in several counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument. 19. EXECUTION OF FURTHER DOCUMENTS. The parties hereto agree that from time to time upon the reasonable written request by any party hereto, the other party or parties shall execute and deliver or cause to be executed and delivered any additional document or instrument and shall take or cause to be taken, all such further actions as such other party may reasonably deem necessary to consummate the transactions contemplated herein, and/or to comply fully with the terms and conditions of this Agreement. 20. SEVERABILITY. If any provision of this Agreement or the application thereof to any person or circumstances shall be held void, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect the remaining terms and provisions hereof. 21. COVENANT OF PURCHASER. Purchaser hereby covenants to Hispamer to cause Lutania to become a subsidiary of Olympic or, in the alternative, at its sole option, to deliver in pledge to Hispamer the Lutania Shares to also guarantee the payment of the Bridge Note and the Availability Note under the same terms as the Pledge Agreement of even date herewith. 22. DEFINITION. For the purposes of this Agreement, the term "Affiliate" shall mean with respect to any person (i) each person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, more of the stock having ordinary voting power in the election of directors of such person; (ii) each person that controls, is controlled by or is under common control with such person or any affiliate of such person; or (iii) each of such person's officers, directors, joint venturers and partners. For purposes of this definition control of a person shall mean the possession, directly or indirectly of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise.
IN WITNESS WHEREOF, the parties hereto execute this Agreement at San Juan, Puerto Rico on the date stated hereinabove.
CORPORACION INMOBILIARIA TEXTIL COACHMAN INCORPORATED
Francisco Carvajal Dennis D. Bradford
By: Fundacion Francisco Carvajal, Inc.
Acknowledged and subscribed before me by Dennis D. Bradford, of legal age, married, business executive and resident of Clearwater, Florida, U. S. A., as Chairman of Coachman Incorporated; and by Francisco Carvajal, of legal age, married, business executive and resident of San Juan, Puerto Rico as President of Corporacion Inmobiliaria Textil (CINTEX), Estampados Deportivos, Inc. and Olympic Holding Corp., and Francisco Pedraza, of legal age, married, business executive and resident of San Juan, Puerto Rico, as Director of Fundacion Francisco Carvajal, Inc., Trustee of Fideicomiso Hispamer; all personally known to me. At San Juan, Puerto Rico this 21st day of December, 1995.
Mr. Francisco Carvajal ("Carvajal"), as majority shareholder, director and executive officer of Cintex, Estampados and Holding and Settlor of Hispamer, acknowledges and confirms (i) to have had the opportunity to thoroughly read the contents of this Agreement and any related agreements, documents, exhibits, attachments, and certificates; (ii) to have had the same carefully explained and translated when he so needed; (iii) to be in agreement with the terms and conditions thereof; and (iv) that, in consideration of the economic benefits derived and to be derived, directly or indirectly, by Sellers and Carvajal personally, Carvajal consents and agrees to perform and comply, and becomes hereby obligated to cause each of the Sellers to perform and comply with, all of Carvajal's and Sellers' obligations under this Agreement and the related agreements, documents, schedules and certificates, including, but in no way limited to Sellers' and Carvajal's covenant not to compete.
Acknowledged and subscribed to before me in his personal capacity by Francisco Carvajal, who is of legal age, married, executive and resident of San Juan, Puerto Rico and to me personally known. At San Juan, Puerto Rico, this _____ day of December, 1995.
Olympic Mills Corporation acknowledges and confirms to have read the contents of this Agreement and any related agreements, documents, exhibits, attachments and certificates and agrees to comply with and take all steps required under this Agreement to be performed by it, all in accordance to its terms and conditions. | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T14:41:03 |
0000914760-96-000005 | 0000914760-96-000005_0000.txt | Under the Securities Exchange Act of 1934
COMMON STOCK, $0.01 par value per share (Title of Class of Securities)
5600 Three First National Plaza, Chicago, Illinois 60602 (312) 419-8220 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)
(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 the 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 five percent or less of such class.) (See Rule 13d-7.)
Note: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent.
*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 disclosures provided in a prior cover page.
The information required on 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. 770 539 203 1 NAMES OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON MICHAEL E. HEISLEY, SR. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / / 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) / / 6 CITIZENSHIP OR PLACE OF ORGANIZATION OWNED BY 8 SHARED VOTING POWER PERSON 9 SOLE DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* / / 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14 TYPE OF REPORTING PERSON* *SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
CUSIP No. 770 539 203 1 NAMES OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON HEICO ACQUISITIONS, INC. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / / 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) / / 6 CITIZENSHIP OR PLACE OF ORGANIZATION OWNED BY 8 SHARED VOTING POWER PERSON 9 SOLE DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* / / 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14 TYPE OF REPORTING PERSON* *SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
CUSIP No. 770 539 203 1 NAMES OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON RBC HOLDINGS, L.P. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / / 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) / / 6 CITIZENSHIP OR PLACE OF ORGANIZATION OWNED BY 8 SHARED VOTING POWER PERSON 9 SOLE DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* / / 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14 TYPE OF REPORTING PERSON* *SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
CUSIP No. 770 539 203 1 NAMES 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 BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) / / 6 CITIZENSHIP OR PLACE OF ORGANIZATION NUMBER OF SHARES 1,000,000 shares OWNED BY 8 SHARED VOTING POWER PERSON 9 SOLE DISPOSITIVE POWER 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY REPORTING PERSON 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* / / 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14 TYPE OF REPORTING PERSON* *SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
Common Stock, par value $0.01 per share
The information contained in the original Schedule 13D ("Original Schedule 13D") filed November 19, 1993 by Heico Acquisitions, Inc. ("Heico") and Michael E. Heisley, Sr. ("Heisley"), in the Amendment No. 1 to the Original Schedule 13D ("Amendment No. 1") filed December 14, 1993 by Heico, Heisley and RBC Holdings, a Delaware limited partnership ("RBC"), and in the Amendment No. 2 to the Original Schedule 13D dated November 20, 1995 by Heico, Heisley, RBC, Michael E. Heisley, Jr. and Emily Heisley Stoeckel is incorporated herein by reference.
ITEM 1. SECURITY AND ISSUER
This Schedule 13D Amendment No. 3 relates to the Common Stock, par value $0.01 per share, (the "Common Stock") of Robertson Ceco Corporation, a Delaware corporation (the "Company"). The address of the principal executive offices of the Company is 222 Berkeley Street, Boston, Massachusetts, 02116.
ITEM 2. IDENTITY AND BACKGROUND
This Amendment No. 3 on Schedule 13D is filed on behalf of (i) RBC, (ii) Heico, (iii) Heisley and (iv) Pettibone Corporation, a Delaware corporation ("Pettibone"). Emily Heisley Stoeckel and Michael E. Heisley, Jr. (collectively the "Children") no longer own any Common Stock and therefore are no longer included in this Schedule 13D.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
On January 3, 1996, Pettibone acquired 500,000 shares from Michael E. Heisley, Jr. and 500,000 shares from Emily Heisley Stoeckel (the "Children") for an aggregate purchase price of $4,302,037.91. Pettibone financed its acquisition of the shares of Common Stock held by the Children with its line of credit with Bank of America Illinois. Each of the Children acquired 500,000 shares of Common Stock on November 20, 1995 from Foothill Capital Corporation and its affiliates.
ITEM 4. PURPOSE OF TRANSACTION
On January 3, 1996, upon the expiration of the waiting period under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976, as amended, Pettibone acquired 500,000 shares from Emily Heisley Stoeckel and 500,000 shares from Michael E. Heisley, Jr. pursuant to an agreement dated November 20, 1995 whereby the Children agreed to sell all of their outstanding shares of Common Stock to Pettibone for $4.26 per share, plus interest at the rate payable by Heisley pursuant to the Demand Promissory Note (as defined in Amendment Number 2).
Except as provided herein, RBC, Heico, Heisley and Pettibone have no current plans with respect to the disposition of the shares of Common Stock or the acquisition of additional shares of Common Stock. However, subject to their obligations under various loan agreements disclosed herein or in the Original 13D, Amendment Number 1 or Amendment Number 2, they may dispose of all or a portion of the Shares, if they determine at any time that such disposition may be made at prices and on terms and conditions they believe to be favorable, and they may acquire additional shares of Common Stock if they determine at any time that such shares are available at prices and on terms and conditions they believe to be favorable.
ITEM 5. INTEREST IN SECURITIES OF THE ISSUER
RBC (and Heisley and Heico, indirectly through RBC) owns 3,333,333 shares of Common Stock. Such shares represent 20.6% of the issued and outstanding shares of Common Stock (based on the number of shares of Common Stock issued and outstanding on October 31, 1995). RBC, Heico and Heisley have sole voting and dispositive power with respect to all of such Shares.
Heisley also directly owns 1,127 shares of Common Stock, over which he has sole voting and dispositive power.
Pettibone (and Heisley, indirectly through Pettibone) owns 1,000,000 shares of Common Stock, which represents 6.2% of the issued and outstanding Common Stock (based on the number of shares of Common Stock issued and outstanding on October 31, 1995). Heisley, as controlling partner of the sole stockholder of Pettibone and Chief Executive Officer of Pettibone, has sole voting and dispositive power.
When the above shares are aggregated, RBC, Heico, Heisley and Pettibone collectively beneficially own 4,334,460 shares of Common Stock, which represents 26.7% of the issued and outstanding Common Stock (based on the number of shares of Common Stock issued and outstanding on October 31, 1995).
Neither of the Children own any shares of Common Stock.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDING OR RELATIONSHIPS WITH RESPECT TO SECURITIES OF THE ISSUER
Except as described in Items 2, 3 and 4 above or stated in the Original Schedule 13D, Amendment No. 1 or Amendment No. 2, there are no contracts, arrangements, understandings or relationships (legal or otherwise) among RBC, Heico, Heisley, Pettibone and the Children, or between them and any person with respect to any securities of the Company, including but not limited to the transfer or voting of any of the securities, finder's fees, joint ventures, loans or option arrangements, put or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
1. Letter of Intent dated November 9, 1993 between Heico Acquisitions, Inc. and Robertson Ceco Corporation (previously filed with original Schedule 13D).
2. Asset Purchase and Stock Subscription Agreement dated as of December 2, 1993 by and among Heico Acquisitions, Inc., Robertson Ceco Corporation and Robertson Espanola, S.A. (previously filed with Amendment No. 1).
3. Registration Rights Agreement dated December 14, 1993 by and between RBC Holdings, L.P. and Robertson Ceco Corporation (previously filed with Amendment No. 1).
4. Loan Agreement dated as of December 6, 1993 between Michael E. Heisley, Sr. and Gerald D. Hosier (previously filed with Amendment No. 1).
5. Pledge Agreement dated as of December 6, 1993 by RBC Holdings, L.P. in favor of Gerald D. Hosier (previously filed with Amendment No. 1).
6. Security Agreement dated December 6, 1993 by RBC Holdings, L.P. in favor of Gerald D. Hosier (previously filed with Amendment No. 1).
7. Pledge Agreement dated December 6, 1993 by Heico Acquisitions, Inc. in favor of Gerald D. Hosier (previously filed with Amendment No. 1).
8. Pledge Agreement dated December 6, 1993 by Michael E. Heisley, Sr. in favor of Gerald D. Hosier (previously filed with Amendment No. 1).
9. Assignment of Note and Collateral Agreement dated December 6, 1993 between Michael E. Heisley, Sr. and Gerald D. Hosier (previously filed with Amendment No. 1).
10. Promissory Note dated December 14, 1993 made by Heico Acquisitions, Inc., payable to Michael E. Heisley, Sr. (previously filed with Amendment No. 1).
11. Promissory Note dated December 6, 1993 made by Michael E. Heisley, Sr. payable to Gerald D. Hosier (previously filed with Amendment No. 1).
12. Stock Purchase Agreement dated November 20, 1995 among Michael E. Heisley, Jr., Emily Heisley Stoeckel and Foothill Capital Corporation and its affiliates (previously filed with Amendment No. 2).
13. Stock Purchase Agreement dated November 20, 1995 among Michael E. Heisley, Jr., Emily Heisley Stoeckel and Pettibone Corporation (previously filed with Amendment No. 2).
14. Demand Promissory Note dated November 20, 1995 in the amount of $4,260,000 made by Michael E. Heisley, Sr. payable to the order of Bank of America Illinois (previously filed with Amendment No. 2).
15. Guaranty dated as of November 20, 1995 executed by Pettibone Corporation in favor of Bank of America Illinois (previously filed with Amendment No. 2).
16. Promissory Note dated November 20, 1995 in the amount of $2,130,000 made by Emily Heisley Stoeckel payable to the order of Michael E. Heisley, Sr. (previously filed with Amendment No. 2).
17. Promissory Note dated November 20, 1995 in the amount of $2,130,000 made by Michael E. Heisley, Jr. payable to the order of Michael E. Heisley, Sr. (previously filed with Amendment No. 2).
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.
Date: January 8, 1996 HEICO ACQUISITIONS, INC. for itself and as general partner of RBC Holdings, L.P.
By: /s/ Michael E. Heisley, Sr. Name: Michael E. Heisley, Sr.
By: /s/ Larry W. Gies
/s/ Michael E. Heisley, Sr. Michael E. Heisley, Sr.
1. Letter of Intent dated November 9, 1993 between Heico Acquisitions, Inc. and Robertson Ceco Corporation (previously filed with original Schedule 13D).
2. Asset Purchase and Stock Subscription Agreement dated as of December 2, 1993 by and among Heico Acquisitions, Inc., Robertson Ceco Corporation and Robertson Espanola, S.A. (previously filed with Amendment No. 1).
3. Registration Rights Agreement dated December 14, 1993 by and between RBC Holdings, L.P. and Robertson Ceco Corporation (previously filed with Amendment No. 1).
4. Loan Agreement dated as of December 6, 1993 between Michael E. Heisley, Sr. and Gerald D. Hosier (previously filed with Amendment No. 1).
5. Pledge Agreement dated as of December 6, 1993 by RBC Holdings, L.P. in favor of Gerald D. Hosier (previously filed with Amendment No. 1).
6. Security Agreement dated December 6, 1993 by RBC Holdings, L.P. in favor of Gerald D. Hosier (previously filed with Amendment No. 1).
7. Pledge Agreement dated December 6, 1993 by Heico Acquisitions, Inc. in favor of Gerald D. Hosier (previously filed with Amendment No. 1).
8. Pledge Agreement dated December 6, 1993 by Michael E. Heisley, Sr. in favor of Gerald D. Hosier (previously filed with Amendment No. 1).
9. Assignment of Note and Collateral Agreement dated December 6, 1993 between Michael E. Heisley, Sr. and Gerald D. Hosier (previously filed with Amendment No. 1).
10. Promissory Note dated December 14, 1993 made by Heico Acquisitions, Inc., payable to Michael E. Heisley, Sr. (previously filed with Amendment No. 1).
11. Promissory Note dated December 6, 1993 made by Michael E. Heisley, Sr. payable to Gerald D. Hosier (previously filed with Amendment No. 1).
12. Stock Purchase Agreement dated November 20, 1995 among Michael E. Heisley, Jr., Emily Heisley Stoeckel and Foothill Capital Corporation and its affiliates (previously filed with Amendment No. 2).
13. Stock Purchase Agreement dated November 20, 1995 among Michael E. Heisley, Jr., Emily Heisley Stoeckel and Pettibone Corporation (previously filed with Amendment No. 2).
14. Demand Promissory Note dated November 20, 1995 in the amount of $4,260,000 made by Michael E. Heisley, Sr. payable to the order of Bank of America Illinois (previously filed with Amendment No. 2).
15. Guaranty dated as of November 20, 1995 executed by Pettibone Corporation in favor of Bank of America Illinois (previously filed with Amendment No. 2).
16. Promissory Note dated November 20, 1995 in the amount of $2,130,000 made by Emily Heisley Stoeckel payable to the order of Michael E. Heisley, Sr. (previously filed with Amendment No. 2).
17. Promissory Note dated November 20, 1995 in the amount of $2,130,000 made by Michael E. Heisley, Jr. payable to the order of Michael E. Heisley, Sr. (previously filed with Amendment No. 2). | SC 13D/A | SC 13D/A | 1996-01-12T00:00:00 | 1996-01-12T13:15:51 |
0000950130-96-000092 | 0000950130-96-000092_0003.txt | <DESCRIPTION>CONSENT OF COOPERS & LYBRAND
We consent to the incorporation by reference in this Post- Effective Amendment No. 20 to the Registration Statement on Form N-1A (File No. 33-26305) under the Securities Act of 1933 of The PNC Fund of each of our reports dated November 23, 1995 on our audits of the financial statements and fi- nancial highlights as of September 30, 1995 and for the re- spective periods then ended.
We also consent to the incorporation by reference of our reports dated April 14, 1995 on our audits of the financial statements and financial highlights of the following portfo- lios of the Compass Capital Group of Funds as of February 28, 1995 and for the respective periods then ended:
. International Fixed Income Fund (renamed International Bond Portfolio, of
. New Jersey Municipal Money Market Fund (renamed New Jersey Municipal Money Market Portfolio, of The PNC Fund)
. New Jersey Municipal Bond Fund (renamed New Jersey Tax-Free Income Portfolio, of The PNC Fund)
We also consent to the reference to our Firm under the captions "Financial Highlights" in the applicable prospec- tuses and "Miscellaneous--Independent Accountants" and "Fi- nancial Statements" in the Statement of Additional Informa- tion.
/s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. | 485BPOS | EX-11.A | 1996-01-12T00:00:00 | 1996-01-11T17:57:27 |
0000820626-96-000007 | 0000820626-96-000007_0004.txt | The undersigned, being a Director and/or Officer of IMC Global Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints Marschall I. Smith and Allen C. Miller his or her true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute and deliver in the name and on behalf of the undersigned as such Director and/or Officer, a Registration Statement on Form S-8 under the Securities Act of 1933, as amended, with respect to the registration of shares of the Common Stock, par value $1.00 per share, of the Company, together with the associated Preferred Stock Purchase Rights of the Company, to be offered and sold under the 1988 Stock Option and Award Plan, as amended and restated, and to execute and deliver any and all amendments to such Registration Statement, for filing with the Securities and Exchange Commission; and in connection with the foregoing, to do any and all acts and things and execute any and all instruments which such attorneys and agents may deem necessary or advisable to enable the Company to comply with the securities laws of the United States and of any state or other political subdivision thereof. The undersigned hereby grants unto such attorney and agents, and each of them, full power of substitution and revocation in the premises and hereby ratifies and confirms all that such attorneys and agents may do or cause to be done by virtue of these presents.
Dated this 21st day of December, 1995.
The undersigned, being a Director and/or Officer of IMC Global Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints Marschall I. Smith and Allen C. Miller his or her true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute and deliver in the name and on behalf of the undersigned as such Director and/or Officer, a Registration Statement on Form S-8 under the Securities Act of 1933, as amended, with respect to the registration of shares of the Common Stock, par value $1.00 per share, of the Company, together with the associated Preferred Stock Purchase Rights of the Company, to be offered and sold under the 1988 Stock Option and Award Plan, as amended and restated, and to execute and deliver any and all amendments to such Registration Statement, for filing with the Securities and Exchange Commission; and in connection with the foregoing, to do any and all acts and things and execute any and all instruments which such attorneys and agents may deem necessary or advisable to enable the Company to comply with the securities laws of the United States and of any state or other political subdivision thereof. The undersigned hereby grants unto such attorney and agents, and each of them, full power of substitution and revocation in the premises and hereby ratifies and confirms all that such attorneys and agents may do or cause to be done by virtue of these presents. Dated this 21st day of December, 1995.
The undersigned, being a Director and/or Officer of IMC Global Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints Marschall I. Smith and Allen C. Miller his or her true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute and deliver in the name and on behalf of the undersigned as such Director and/or Officer, a Registration Statement on Form S-8 under the Securities Act of 1933, as amended, with respect to the registration of shares of the Common Stock, par value $1.00 per share, of the Company, together with the associated Preferred Stock Purchase Rights of the Company, to be offered and sold under the 1988 Stock Option and Award Plan, as amended and restated, and to execute and deliver any and all amendments to such Registration Statement, for filing with the Securities and Exchange Commission; and in connection with the foregoing, to do any and all acts and things and execute any and all instruments which such attorneys and agents may deem necessary or advisable to enable the Company to comply with the securities laws of the United States and of any state or other political subdivision thereof. The undersigned hereby grants unto such attorney and agents, and each of them, full power of substitution and revocation in the premises and hereby ratifies and confirms all that such attorneys and agents may do or cause to be done by virtue of these presents. Dated this 21st day of December, 1995.
The undersigned, being a Director and/or Officer of IMC Global Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints Marschall I. Smith and Allen C. Miller his or her true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute and deliver in the name and on behalf of the undersigned as such Director and/or Officer, a Registration Statement on Form S-8 under the Securities Act of 1933, as amended, with respect to the registration of shares of the Common Stock, par value $1.00 per share, of the Company, together with the associated Preferred Stock Purchase Rights of the Company, to be offered and sold under the 1988 Stock Option and Award Plan, as amended and restated, and to execute and deliver any and all amendments to such Registration Statement, for filing with the Securities and Exchange Commission; and in connection with the foregoing, to do any and all acts and things and execute any and all instruments which such attorneys and agents may deem necessary or advisable to enable the Company to comply with the securities laws of the United States and of any state or other political subdivision thereof. The undersigned hereby grants unto such attorney and agents, and each of them, full power of substitution and revocation in the premises and hereby ratifies and confirms all that such attorneys and agents may do or cause to be done by virtue of these presents.
Dated this 21st day of December, 1995.
The undersigned, being a Director and/or Officer of IMC Global Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints Marschall I. Smith and Allen C. Miller his or her true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute and deliver in the name and on behalf of the undersigned as such Director and/or Officer, a Registration Statement on Form S-8 under the Securities Act of 1933, as amended, with respect to the registration of shares of the Common Stock, par value $1.00 per share, of the Company, together with the associated Preferred Stock Purchase Rights of the Company, to be offered and sold under the 1988 Stock Option and Award Plan, as amended and restated, and to execute and deliver any and all amendments to such Registration Statement, for filing with the Securities and Exchange Commission; and in connection with the foregoing, to do any and all acts and things and execute any and all instruments which such attorneys and agents may deem necessary or advisable to enable the Company to comply with the securities laws of the United States and of any state or other political subdivision thereof. The undersigned hereby grants unto such attorney and agents, and each of them, full power of substitution and revocation in the premises and hereby ratifies and confirms all that such attorneys and agents may do or cause to be done by virtue of these presents.
Dated this 21st day of December, 1995.
The undersigned, being a Director and/or Officer of IMC Global Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints Marschall I. Smith and Allen C. Miller his or her true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute and deliver in the name and on behalf of the undersigned as such Director and/or Officer, a Registration Statement on Form S-8 under the Securities Act of 1933, as amended, with respect to the registration of shares of the Common Stock, par value $1.00 per share, of the Company, together with the associated Preferred Stock Purchase Rights of the Company, to be offered and sold under the 1988 Stock Option and Award Plan, as amended and restated, and to execute and deliver any and all amendments to such Registration Statement, for filing with the Securities and Exchange Commission; and in connection with the foregoing, to do any and all acts and things and execute any and all instruments which such attorneys and agents may deem necessary or advisable to enable the Company to comply with the securities laws of the United States and of any state or other political subdivision thereof. The undersigned hereby grants unto such attorney and agents, and each of them, full power of substitution and revocation in the premises and hereby ratifies and confirms all that such attorneys and agents may do or cause to be done by virtue of these presents.
Dated this 21st day of December, 1995.
The undersigned, being a Director and/or Officer of IMC Global Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints Marschall I. Smith and Allen C. Miller his or her true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute and deliver in the name and on behalf of the undersigned as such Director and/or Officer, a Registration Statement on Form S-8 under the Securities Act of 1933, as amended, with respect to the registration of shares of the Common Stock, par value $1.00 per share, of the Company, together with the associated Preferred Stock Purchase Rights of the Company, to be offered and sold under the 1988 Stock Option and Award Plan, as amended and restated, and to execute and deliver any and all amendments to such Registration Statement, for filing with the Securities and Exchange Commission; and in connection with the foregoing, to do any and all acts and things and execute any and all instruments which such attorneys and agents may deem necessary or advisable to enable the Company to comply with the securities laws of the United States and of any state or other political subdivision thereof. The undersigned hereby grants unto such attorney and agents, and each of them, full power of substitution and revocation in the premises and hereby ratifies and confirms all that such attorneys and agents may do or cause to be done by virtue of these presents.
Dated this 21st day of December, 1995.
The undersigned, being a Director and/or Officer of IMC Global Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints Marschall I. Smith and Allen C. Miller his or her true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute and deliver in the name and on behalf of the undersigned as such Director and/or Officer, a Registration Statement on Form S-8 under the Securities Act of 1933, as amended, with respect to the registration of shares of the Common Stock, par value $1.00 per share, of the Company, together with the associated Preferred Stock Purchase Rights of the Company, to be offered and sold under the 1988 Stock Option and Award Plan, as amended and restated, and to execute and deliver any and all amendments to such Registration Statement, for filing with the Securities and Exchange Commission; and in connection with the foregoing, to do any and all acts and things and execute any and all instruments which such attorneys and agents may deem necessary or advisable to enable the Company to comply with the securities laws of the United States and of any state or other political subdivision thereof. The undersigned hereby grants unto such attorney and agents, and each of them, full power of substitution and revocation in the premises and hereby ratifies and confirms all that such attorneys and agents may do or cause to be done by virtue of these presents. Dated this 21st day of December, 1995.
The undersigned, being a Director and/or Officer of IMC Global Inc., a Delaware corporation (the "Company"), hereby constitutes and appoints Marschall I. Smith and Allen C. Miller his or her true and lawful attorneys and agents, each with full power and authority (acting alone and without the other) to execute and deliver in the name and on behalf of the undersigned as such Director and/or Officer, a Registration Statement on Form S-8 under the Securities Act of 1933, as amended, with respect to the registration of shares of the Common Stock, par value $1.00 per share, of the Company, together with the associated Preferred Stock Purchase Rights of the Company, to be offered and sold under the 1988 Stock Option and Award Plan, as amended and restated, and to execute and deliver any and all amendments to such Registration Statement, for filing with the Securities and Exchange Commission; and in connection with the foregoing, to do any and all acts and things and execute any and all instruments which such attorneys and agents may deem necessary or advisable to enable the Company to comply with the securities laws of the United States and of any state or other political subdivision thereof. The undersigned hereby grants unto such attorney and agents, and each of them, full power of substitution and revocation in the premises and hereby ratifies and confirms all that such attorneys and agents may do or cause to be done by virtue of these presents. Dated this 21st day of December, 1995. | S-8 | EX-24 | 1996-01-12T00:00:00 | 1996-01-12T17:10:55 |
0000899243-96-000019 | 0000899243-96-000019_0004.txt | This License Agreement (hereinafter, this "Agreement") is made and entered into as of December ____, 1995 (the "Effective Date") by and between Gaia Technologies, Inc., a Texas corporation (hereinafter "Licensor"), and TieTek, Inc., a Texas corporation (hereinafter "Licensee").
W I T N E S S E T H:
WHEREAS, Licensor is the owner of Technology (as that term is defined below) relating to the manufacture of Products (as that term is defined below);
WHEREAS, pursuant to the terms of that one certain Asset Purchase Agreement of even or approximate date herewith executed by and among Licensor and other parties, Licensor is required to grant to Licensee a license of the Technology;
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements hereinafter set forth, the sum of $10.00, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties (as that term is defined below) hereby agree as follows:
The following terms shall have the following meanings for purposes of the Agreement:
1.1 "Affiliate" means "affiliate" and "insider" as those terms are defined in Section 24.002 of the Texas Business & Commerce Code, except that the term "debtor" shall be substituted with "Payor".
1.2 "Applicable Hard Goods" shall mean (a) those Products which take the form of oil field mats, marine structures, railroad ties, and other Products all having advanced structural properties derived from or growing out of Technology used to produce railroad cross-ties, and (b) roofing materials. "Applicable Hard Goods" does not include air conditioning pads.
1.3 "Area of Use" shall mean the entire Universe.
1.4 "Equipment" shall mean that equipment now or hereafter designed, engineered, acquired, created or employed for the implementation or practice of the Technology or Improvements, including any prototypes thereof.
1.5 "Improvements" shall mean additions to or modifications of the Technology, including, without limitation, additions to or modifications of (a) the methods of manufacturing the Products, (b) the methods of use of the Equipment or the Products, (c) the design of the Equipment or the Products, (d) the construction or fabrication of the Equipment or the Products, and/or (e) the operating procedures which improve the manufacture, design, or operation of the Equipment or the Products. The term "Improvements" includes any patent rights associated with any Improvement.
1.6 "Parties" shall mean both Licensor and Licensee and "Party" shall mean either of them.
1.7 "Patents" means (a) United States Patent Numbers 4,191,522, 4,003,408, 4,168,799 and 4,110,420, together with any modifications, Improvements, corrections or substitutions thereto or thereof, and (b) any new patent applications, newly issued patents, patents pending or patent applications, in any way associated therewith.
1.8 "Products" means any tangible good or thing.
1.9 "Research and Development" shall mean those activities involved in (a) the testing and evaluation of the Technology and the Products and (b) the development of Improvements.
1.10 "Technology" shall mean (a) the Patents, (b) the trade secrets, design, instrumentation, technology, method and know-how developed, conceived, owned, acquired and/or reduced to practice by Licensor for materials, processes and methods (including Equipment) to be used in the production, manufacture or refinement of Products, (c) any information, data, or experience relating to the foregoing, including such information, data, or experience relating to the operation and maintenance of the Equipment and the method or procedural steps followed to practice anything described in subparts (a), (b) or (d) hereof, and (d) any Improvements.
Licensor does hereby grant to Licensee the following (collectively, the "License"): (a) a non-exclusive license to incorporate the Technology and all Improvements into one or more manufacturing facilities owned and operated by Licensee in the Area of Use, (b) an exclusive license to use the Technology to manufacture Applicable Hard Goods, (c) an exclusive license to market, distribute, and sell Applicable Hard Goods, (d) a non-exclusive license to engage in research and development with respect to the Technology, and (e) an exclusive license to otherwise exploit the Technology in the Area of Use for purposes of manufacturing, using, marketing, and selling Applicable Hard Goods. The exercise of all aspects of the License shall be at Licensee's sole cost, risk and expense.
3.1 Exchange of Information. Licensor and Licensee hereby mutually agree that, throughout the term of this Agreement, both Parties shall freely exchange all information, data, and results arising from research and development and the manufacture or sale of Applicable Hard Goods which they may develop or which may become known to them, insofar as such activities are applicable to the production of Applicable Hard Goods.
3.2 Disclosure and Ownership of Improvements. Licensor and Licensee agree to make prompt disclosure to each other of any Improvements, as soon as practicable, but in any case, not more that 90 days following the commencement of activities which lead or may lead to Improvements. Licensor and Licensee mutually agree that in the event that Licensee or Licensor (or any Affiliate of Licensor) shall develop Improvements on the Technology during the term of this Agreement, such Improvements shall be promptly disclosed to the other party and any patents which may mature therefrom shall be owned by Licensor. Licensee shall cause any such Improvements, including any patents thereon, to be assigned to Licensor, who, according to the terms of the License, is required to assign such Improvements to the Licensor. Upon (a) the assignment of any Improvement, including any patents thereon, developed by Licensee to Licensor, or (b) Licensor's disclosure of any Improvements developed by Licensor (or its Affiliate), Licensee shall have the option to acquire, from time to time, for the sum of $10.00, the license to use such Improvements in the same manner and subject to the same restrictions as the License. Licensor shall take all necessary action under the License so that such Improvements are treated as a part of the License. Upon Licensee's exercise of option described above, the licenses so acquired shall be deemed to be included within the defined term "License," and shall be governed by the terms of this Agreement without additional payment. Notwithstanding anything contained in this Agreement to the contrary, Licensee shall have the right, but not the obligation, to patent any Improvement so acquired.
Licensor shall not incorporate or use the Technology, nor license to others any rights to the Technology, for purposes of manufacturing, marketing, distributing, selling or otherwise exploiting Applicable Hard Goods. Licensee shall have the exclusive right to manufacture Applicable Hard Goods using all or any part of the Technology.
Licensee agrees to indemnify and defend Licensor against any and all liabilities and/or damages that may be incurred as a result of Licensee's use of the Technology under this Agreement. Licensee agrees to hold Licensor harmless for and defend Licensor from any injuries or claims made by virtue of Licensee's employees', subcontractors', distributors' or agents' manufacture, use, or sale of Applicable Hard Goods.
During the performance of each Party's obligations under this Agreement, each Party may obtain information of various types from the other Party. Each Party agrees that all such information, whether technical, financial, business or other nature shall be held in confidence and not used to the detriment of the disclosing Party by the non-disclosing Party nor disclosed to any third party by the non-disclosing Party. This Article VII shall not apply to any information which (a) can be shown by a Party to have been in that Party's possession prior to the date hereof, (b) is now or hereafter (by operation of law) becomes information in the public domain, (c) can be shown by a Party to have been received on a non-confidential basis from a third party who did not acquire same, directly or indirectly, from the other Party, (d) can be shown by a Party to have been developed without access to any confidential information otherwise covered by this Article VII, (e) is required to be disclosed as a matter of law, or (f) is required to be disclosed pursuant to a written agreement between the Parties.
8.1 Default. Upon the breach of or default under any term of this Agreement by any Party, the non-defaulting Party may give the defaulting Party written notice of such default or breach. After such notice, the defaulting Party shall have thirty (30) days within which to cure such default or breach. If such default or breach is not cured within said thirty day period, then, the non-defaulting Party shall have the right at any time following such thirty (30) day period to submit the issue of whether a default has occurred to mediation (or, if necessary, arbitration) as provided in Article X of this Agreement, and seek an award for damages relating to such default or breach.
8.2 Breach of Confidentiality Provisions. In the event that either Party knows of a breach of Article VII hereof or has a reason to believe a breach of such Article VII is imminent, then such Party shall, in addition to all other remedies available to it under this Agreement, at law, or in equity, be entitled to an immediate temporary restraining order and preliminary injunction until the rights of such party, can be finally determined by a trial on the merits.
8.3 Termination. This License shall be irrevocable and perpetual, and may be terminated only by the express written agreement of the Parties.
Both Parties shall maintain accurate records on Research and Development and the manufacture of Applicable Hard Goods. Each Party shall provide to the other Party timely summaries of such records to keep each other informed of such Research and Development as required by Paragraph 3.1 hereof.
10.1 Mediation. In the event either of the Parties believes the other has committed a breach of this Agreement or the parties cannot agree on an interpretation of one or more provisions of this Agreement, the parties agree to submit same to mediation pursuant to the terms and conditions of the alternative dispute resolution system of Tex. Civ. Prac. & Rem. Code Ann. Sections 152.001 - 154.004. If mediation does not permit the Parties to resolve the dispute between them, then the Parties agree to submit it to binding arbitration in accordance with Paragraph 10.2.
10.2 Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, which cannot otherwise be resolved between the parties shall be settled by arbitration in Houston, Texas in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction thereof. The award rendered by the Arbitrator(s) may include an award of attorney's fees.
11.1 Governing Law. The construction and interpretation of this Agreement shall be in accordance with the laws of the State of Texas and the applicable laws of the United States of America.
11.2 Notice. Any payment, report, communication, request, or notice required or permitted by this Agreement shall be in writing and shall become effective at the time of receipt thereof and shall be addressed to the Parties as follows:
4710 Bellaire Blvd., Suite 301
4710 Bellaire Blvd., Suite 301
Notice may be effected by hand delivery, U.S. mail, or telecopy. Each Party shall have the continuing right to change its address for notice at any time or times by giving ten (10) days' notice in the manner hereinabove described. Notices shall be deemed given only upon actual receipt; however, notice sent by U.S. mail, postage prepaid, certified, return receipt requested shall be deemed received three business days after deposited with the U.S. Postal Service.
11.3 Amendments. This Agreement shall not be modified, amended or otherwise varied by any oral agreement or representation and all modifications, amendments and variations shall be by an instrument in writing executed by the Parties hereto.
11.4 Severability. If, contrary to expectation, any term or provision of this Agreement shall be held invalid or unenforceable, the Parties shall endeavor to replace the invalid term or provision by valid term or provision which correspond as nearly as possible to their original economic terms and general intentions. If the Parties fail to agree, either Party may submit the matter to be resolved in accordance with Article X of this Agreement for the purpose of making such modification to this Agreement as Parties (in the case of mediation) or the arbitrator shall consider appropriate to return the Parties as nearly as possibly to their original economic terms and general intentions. The Agreement shall thereafter be read and interpreted to include such modification.
11.5 Successors and Assigns. Subject to the restrictions of this Section 11.5, this Agreement shall be binding on and inure to the benefit of the Parties hereto and their successors and assigns. Neither Party shall assign its rights or delegate its duties under this Agreement without the prior written consent of the other Party.
11.6 No Partnership. Nothing in this Agreement shall in any way be construed to make Licensor and Licensee partners, joint venturers, agents, servants or employees of one another, and no such relationship is intended.
11.7 Headings. The headings and subheadings that are in this Agreement are for convenience only and are not to be used in the interpretation of the provisions of this Agreement.
11.8 Integration. This Agreement represents the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements by the Parties. There are no unwritten oral agreements between the Parties.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be executed in duplicate by duly authorized persons to be effective as of the Effective Date. | 8-K | EX-10.3 | 1996-01-12T00:00:00 | 1996-01-12T16:52:02 |
0000912057-96-000455 | 0000912057-96-000455_0002.txt | We have acted as counsel for United Asset Management Corporation, a Delaware corporation (the "Company"), with respect to the issuance of a total of 166,376 shares (the "Shares") of the Company's common stock, $.01 par value per share, in connection with the exercise of certain warrants (the "Warrants") issued in connection with the acquisition of Fiduciary Management Associates, Inc. (FMA) and of Sirach/Flinn, Elvins Capital Management, Inc., (S/FE) as more fully described in a warrant agreement dated as of June 24, 1986, with Philip E. Arnold and warrant agreement dated as of January 4, 1989 with SF/E (the "Warrant Agreements").
We have assisted you in the preparation of a Registration Statement (Registration No. 33-64449) on Form S-3 (the "Registration Statement") with respect to the offering of the Shares by the Selling Stockholder named therein, and Amendment No. 1 thereto.
We have made such examination of law and have examined originals or copies, certified or otherwise identified to our satisfaction, of such corporate records and such other documents as we have considered relevant and necessary for the opinions hereinafter set forth.
Based on the foregoing, we express the following opinions:
1. The issuance of the Shares has been duly authorized by all necessary corporate action of the Company.
2. The Shares, upon issuance and delivery against payment as provided in the respective Warrant Agreement will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to Amendment No. 1 to the Registration Statement and to the reference to us under the caption "Legal Matters" in the prospectus forming a part of the Registration Statement.
a Member of the Firm | S-3/A | EX-5 | 1996-01-12T00:00:00 | 1996-01-12T15:54:23 |
0000950134-96-000104 | 0000950134-96-000104_0001.txt | <DESCRIPTION>HERITAGE ON THE RIVER APARTMENTS
Heritage on the River Apartments
Year Ended December 31, 1994
Heritage on the River Apartments
To the Board of Trustees Continental Mortgage and Equity Trust
We have audited the accompanying statement of revenue and direct operating expenses of Heritage on the River Apartments (a real estate project) for the year ended December 31, 1994. This financial statement is the responsibility of the management of Heritage on the River Apartments. 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 historical summary is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical summary. 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 out audit provides a reasonable basis for our opinion.
The accompanying financial statement is prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the form 8-K of Continental Mortgage and Equity Trust) and, as described in Note 1, is not intended to be a complete presentation of the results of operations of Heritage on the River Apartments.
In our opinion, the financial statement referred to above presents fairly, in all material respects, the revenue and direct operating expenses of Heritage on the River Apartments, for the year ended December 31, 1994, in conformity with generally accepted accounting principles.
Heritage on the River Apartments
Statement of Revenues and Direct Operating Expenses Year Ended December 31, 1994
See accompanying notes to financial statements.
Heritage on the River Apartments
Notes to Statement of Revenues and Direct Operating Expenses
1. Basis of Presentation Heritage on the River Apartments is a residential apartment complex located in Jacksonville, Florida. There is a total of 310 rentable units. For the year ended December 31, 1994, and through the period ended December 20, 1995, the property was owned by Lifton-MAQ Associates. On December 20, 1995, the property was acquired by Continental Mortgage and Equity Trust.
The accompanying financial statement has been prepared to substantially comply with the rules and regulations of the Securities and Exchange Commission for business combination accounted for as a purchase. The statement of revenues and direct operating expenses does not include certain historical expenses, such as depreciation and amortization, interest expense or income taxes. Accordingly, this summary is not intended to be a complete presentation of the results of operations.
2. Other Income Other income consists of revenue for laundry, late fees and vending.
3. Management Fees The property has a management agreement with an affiliate Lifton-MAQ Associates. This agreement requires Lifton-MAQ Associates to pay 5% of gross revenues as a management fee. | 8-K/A | EX-99.0 | 1996-01-12T00:00:00 | 1996-01-12T16:31:53 |
0000912057-96-000447 | 0000912057-96-000447_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 / / Confidential, for Use of the Commission Only (as permitted by / / Definitive Additional Materials / / Soliciting Material Pursuant to Section 240.14a-11(c) or
(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 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.:
(holding company for Monarch Bank)
THE ARTICLES OF INCORPORATION TO INCREASE NUMBER OF AUTHORIZED SHARES
To the Shareholders of Monarch Bancorp:
This Written Consent Statement is furnished in connection with the solicitation by the Board of Directors of Monarch Bancorp (the "Company") of consents to a proposed amendment to Article FOUR of the Articles of Incorporation of the Company, which has been previously approved by the Board of Directors of the Company, to increase the number of authorized shares of Common Stock of the Company from 25,000,000 to 100,000,000 shares.
It is expected that this Written Consent Statement and accompanying Consent form will be mailed or delivered to shareholders of the Company on or after January 9, 1996. Written Consents are being solicited from all shareholders of the Company.
Sections 902 and 903 of the California Corporations Code require the approval of the proposed amendment to the Articles of Incorporation by a majority of the outstanding shares of Common Stock of the Company. Section 603 of the Corporations Code and Section 10 of Article II of the Bylaws of the Company authorize the Company to obtain the necessary shareholder approvals by written consent without a meeting. Pursuant to SEC rules, because certain documents are incorporated by reference, the Company will be able to effect the proposed amendment to the Articles of Incorporation after twenty (20) business days have elapsed from the date the Written Consent Statements are sent to shareholders.
Shareholders of the Company are requested to complete, sign and date the accompanying Written Consent form and return it to the Company as soon as possible. Any shareholder may revoke his or her Written Consent at any time prior to receipt by the Company of the number of Written Consents required to authorize the proposed amendment to the Articles of Incorporation. To effect a revocation prior to that time, a shareholder must file a written instrument revoking such shareholder's Written Consent with the Secretary of the Company. Any shareholder who signs and returns the Written Consent form but does not indicate a choice thereon will be deemed to have consented to the proposed amendment to the Articles of Incorporation.
This solicitation is being made by the Board of Directors of the Company. The expense of preparing, assembling, printing and mailing this Written Consent Statement and other material used in this solicitation of Written Consents will be paid by the Company. It is anticipated that all of the Written Consents will be solicited through the mail, but directors, officers and regular employees of the Company may solicit Written Consents personally or by telephone, without receiving special compensation therefor. Although there is no formal agreement to do so, the Company may reimburse banks, brokerage houses, and other custodians, nominees and fiduciaries for their reasonable expense in forwarding this Written Consent Statement to their principals. In addition, the Company may utilize the services of individuals or companies not regularly employed by the Company in connection with the solicitation of written consents if the Board of Directors of the Company determines that this is advisable.
THE COMPANY MUST RECEIVE WRITTEN CONSENTS REPRESENTING A MAJORITY OF THE OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK FOR APPROVAL OF THE PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION.
RECORD DATE AND PERSONS ENTITLED TO GIVE WRITTEN CONSENTS
There were issued and outstanding 8,228,436 shares of the Company's Common Stock at the close of business on December 12, 1995, which has been set as the Record Date for the purpose of determining the shareholders entitled to consent to the proposed amendment to the Articles of Incorporation. The Company has no other class of stock outstanding. Consent to the proposed amendment to the Articles of Incorporation may be given by any person in whose name shares of Common Stock stand on the books of the Company as of the Record Date, or by his or her duly authorized agent.
Approval of the proposed amendment to the Articles of Incorporation will require the affirmative written consent of shareholders holding at least a majority of the shares of the Company's Common Stock outstanding on the Record Date. The directors and executive officers of the Company are expected to consent to the proposed amendment to the Articles of Incorporation.
Management of the Company knows of no person who owns beneficially(1) more than five percent (5%) of the outstanding common stock of the Company, other than the entities listed in the following table. The following table reflects the ownership of 5% or more shareholders and the ten (10) directors as a group as of the Record Date:
(1) Beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (a) voting power, which includes the power to vote, or to direct the voting power, of such security; and/or (b) investment power, which includes the power to dispose, or to direct the disposition of, such security. Beneficial owner also includes any person who has the right to acquire beneficial ownership of such security as defined above within 60 days of the Record Date. The calculation includes vested stock options.
Beneficial Owner Amount and Nature Percent Director Beneficial Ownership of Class
Paramus, NJ 07652 530,000 6.44%
Launch & Co. Mutual Discovery Fund 530,000 6.44%
Peter H. Huizenga(3) 800,000 9.72%
NB Bank Partners II 592,600 7.20%
New York, NY 800,000 9.72%
Robert A. Schoelhorn Trust 750,000 9.12%
as a group 377,771 (4) 4.59%
The following table sets forth, as of December 12, 1995, as to each of the directors of the Company, such person's age, such person's principal occupation during the past five years, and the period during which such person has served as a director of the Company and the Bank.
(2) Company shares of Basswood Partners are held in affiliated entities as follows: 462,147 shares beneficially owned by Basswood Financial Partners, L.P., and 67,853 shares beneficially owned by Basswood International Fund, Inc. (3) Company shares of Peter Huizenga are held in affiliated entities as follows: 400,000 shares beneficially owned by Peter H. Huizenga Huizenga Capital Management, and 400,000 shares beneficially owned by the Peter Huizenga Testamentary Trust. (4) All stock options as of the Record Date under terms of the Company's 1983 Stock Option Plan, as amended in 1989, and the Company's 1993 Stock Option Plan, as amended in 1995, have been cancelled.
(5) Mr. Demmin was appointed Executive Vice President and Chief Financial Officer of the Company. Mr. Demmin has served as a senior executive officer and Corporate Secretary for the Company and Bank since 1987. His appointment to the Company and Bank Board of Directors is effective as of May 15, 1993. (6) Mr. Rose has been an Executive Vice President in charge of community banks for FNB Corporation for approximately one year. He formerly worked as President of McAllan Capital Partners, an investor in and advisor to community banks.. (7) Mr. Schielein, since the start of 1995. has served as President and COO of the Balbo Bay Club in Newport Beach. From 1993 until 1995 he was President of the Grand Wailea Resort in Hawaii and previously served as Vice President and General Manage The Ritz Carlton at Laguna Niguel. Mr. Schielein previously served as a Director of the Board of Directors for both the Company Bank from 1988 until June 1993.
The following table sets forth as to each of the persons who currently serves as an Executive Officer of the Company and the Bank, such person's age, such person's principal occupation during the past five years, such person's current position with the Bank, and the period during which the person has served in such position.
COMMITTEES OF THE BOARD OF DIRECTORS
During 1995, the Board of Directors of the Company held eight (8)
(8) Mr. Wooten has been the President of International Bay Clubs, Inc. in Newport Beach since March 1993; previously he was President of Integrated Protein Technology. (9) On July 27, 1987, Mr. E. Lynn Caswell was appointed President and Chief Executive Officer and a member of the Board of Directors of the Company and the Bank. Mr. Caswell was formerly the President and Chief Executive Officer of the Bank of San Diego, and Chief Operating Officer of BSD Bancorp, its parent Company, from 1984 to 1987, and he has over 27 years of banking experience. (10) On August 10, 1987, Mr. William C. Demmin was appointed Senior Vice President and Chief Financial Officer of the Company and the Bank. Mr. Demmin was promoted to Executive Vice President of the Company and the Bank in April 1995. From 1986 to 1987 Demmin served as Cashier of Commercial Center Bank of Santa Ana, California and he had previously served as Senior Vice President, Chief Financial officer, and Cashier of First American Bank & Trust in Laguna Beach from 1983 to 1986. Mr. Demmin had previously served Bank of America for 11 years, and has over 28 years of banking experience. (11) On April 28, 1995, Mr. Louis F. Cumming was appointed Executive Vice President and Senior Credit Officer of the Bank. Mr. Cumming was formerly the Executive Vice President and Senior Credit Officer of Cuyamaca Bank from 1992 to April 1994, Senior Vice President of First National Bank from 1989 to 1992, and he has over 30 years of banking experience.
during 1995, held twelve (12) regular meetings, and three (3) special meetings. All Directors attended at least 70% of the Board meetings of the Company and Bank.
The Bank Loan Committee, which is responsible for reviewing and approving loans, held twenty-four (24) meetings during 1995. Members of the Bank Loan Committee also function as the Bank's Investment Committee.
The Board of Directors Audit Committee held four (4) meetings in 1995 to meet with outside auditors to review the audit findings and other matters, and also met with outside auditors who are engaged to perform internal control audits and review and approve various financial reports.
The Company and Bank do not have Compensation or Nominating committees and handle matters that might otherwise be delegated to these committees in executive session; all Board members are included in the executive sessions.
COMMON STOCK OWNERSHIP DIRECTORS, EXECUTIVE OFFICERS, AND CERTAIN PRINCIPAL
The following table sets forth information concerning the beneficial ownership of the Company's common stock as of December 12, 1995 by each director and executive officer. The Company knows of no person who is the beneficial owner of more than five percent of its outstanding common stock, other than as specified below.
Beneficial Owner Director Beneficial Ownership(12) Percent of Class
Rice E. Brown 7,891 0.01% E. Lynn Caswell(13) 81,690 0.99% Raymond B. Cox 25,000 0.30% Louis F. Cumming(14) 18,500 0.22% William C. Demmin(13) 15,224 0.19% Alfred H. Jannard 22,842 0.28% Margaret A. Redmond 23,996 0.29% John W. Rose 185,185 2.25% Henry E. Schelein 4,000 0.05% David C. Wooten 4,235 0.05%
a group (11 in number) 396,271 4.82%
(12) Beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (a) voting power, which includes the power to vote, or to direct the voting power, of such security; and/or (b) investment power, which includes the power to dispose, or to direct the disposition of such security. Beneficial owner also includes any person who has the right to acquire beneficial ownership of such security as defined above withing 60 days of the Record Date. (13) Mr. Caswell and Mr. Demmin are also executive officers. (14) Mr. Cumming is an executive officer of the Bank, but he does not hold an officer position with the Company.
PROPOSAL: APPROVE AMENDMENT TO THE INCREASE THE NUMBER OF AUTHORIZED SHARES FROM 25,000,000 TO 100,000,000
The Board of Directors believes it is advisable and in the best interests of the Company and its shareholders, and has directed that the Company solicit its shareholders, to amend Article FOUR of the Company's Articles of Incorporation which would increase the authorized number of shares of Common Stock of the Company from 25,000,000 to 100,000,000 shares. As a result of the one-for-five reverse stock split effected December 14, 1993, the authorized number of shares of Common Stock decreased form 10,000,000 shares to 2,000,000 shares. In the first quarter of 1994, the Company received shareholder approval and increased the number of authorized shares from 2,000,000 to 25,000,000.
As of December 12, 1995, 8,228,436 shares of Common Stock of the Company were issued and outstanding. There are no other classes of stock outstanding, and the Company has 5,000,000 shares of Preferred Stock authorized.
On March 31, 1995, the Company completed a private placement offering of 4,547,111 shares of its Common Stock, no par value at the price of $1.35 per share to several accredited investors as defined in SEC Regulation D, and the Company raised approximately $5,669,000 in net proceeds in the private placement. The private placement offering was undertaken in order to raise capital in accordance with a Section 8(b) Order issued by the FDIC and entered into between Monarch Bank, the wholly-owned subsidiary of the Company, and the FDIC, and a Section 1913 Order ("1913 Order") issued by the California Superintendent of Banks and agreed to by the Bank (collectively referred to herein as the "Orders"), and (ii) to provide additional capital for prudent expansion of the Bank and the Company through continued growth of its present facility and possible future facilities. With the completion of the initial phase of the private placement offering on March 31, 1995, the Bank's leverage capital ratio increased to approximately 7.85%. The Company retained $53,500 from the net proceeds of the private placement offering for the retirement of debt and $2,065,000 for general corporate purposes.
On July 14, 1995, the Company commenced an offering of up to 3,177,296 shares of its Common Stock in a rights and public offering at a price of $1.35 per share. This offering concluded in September 1995. The Company raised approximately $3,464,000 in net proceeds in the public offering, and the Company increased its leverage capital ratio as of September 30, 1995 to 15.4%.
The California State Banking Department has recently completed an examination of the Bank, that the Bank has now been rated satisfactory, and management of the Bank anticipates that the California Superintendent of Banks will remove the 1913 Order in the near future. Management of the Bank has also applied to the FDIC for removal of the Section 8(b) Order, and the Company believes that the Section 8(b) Order will also be removed in the near future.
If approved by the stockholders, the balance of the increased number of authorized shares of Common Stock will be available for issuance from time to time for such other purposes as the
Board of Directors may approve and no further vote of stockholders of the Company will be required, except as provided under California law. The availability of additional shares for issue, without the delay and expense of obtaining the approval of stockholders at a meeting, will also afford the Company greater flexibility in acting upon proposed transactions, such as stock dividends, mergers and acquisitions, and possible additional infusions of capital into the Company and the Bank.
The additional shares of Common Stock for which authorization is sought would have identical rights as the shares of Common Stock of the Company now authorized. Holders of Common Stock do not have preemptive rights to subscribe for any additional securities which may be issued by the Company. The issuance of additional shares of Common Stock to new investors may have the affect of diluting the interest of existing stockholders of the Company. The Company has several reasons for the increase in authorized shares, including possible mergers and acquisitions and possible additional infusions of capital into the Company and the Bank. The Board of Directors has therefore approved an amendment to the Articles of Incorporation to increase the number of authorized shares of Common Stock from 25,000,000 to 100,000,000 shares. This proposal must now be approved by a majority of the outstanding shares of Common Stock of the Company to be effective.
The Board of Directors of the Company believes that the approval of the proposed amendment to the Articles of Incorporation to increase the number of authorized shares of Common Stock of the Company from 25,000,000 to 100,000,000 shares is in the best interests of the Company and therefore recommends that you tender your written consent in favor of the proposal.
The Company's Annual Report on Form 10-KSB for the year ended December 31, 1994, and Quarterly Reports on Form 10-QSB for the periods ended March 31, 1995, June 30, 1995 and September 30, 1995 are hereby incorporated in this Written Consent Statement by reference.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Written Consent Statement shall be deemed to be incorporated by reference in this Written Consent Statement and to be a part hereof from the date such documents are filed. 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 Written Consent Statement to the extent that a statement contained herein or in any other subsequently filed document that also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Written Consent Statement.
The Company will provide by first class mail within one business day of an oral or written request without charge to each person to whom a copy of this Written Consent Statement is delivered a copy of any or all of the documents incorporated by reference herein other than exhibits to such documents. Requests should be directed to Monarch Bancorp, 30000 Town Center Drive, Laguna Niguel, California 92677, Attention: William C. Demmin, Executive Vice President and Chief Financial Officer.
The Board of Directors of the Company asks that you complete, date and execute the enclosed Consent to the proposed amendment to Articles of Incorporation and that you return the executed Consent to the Company in the enclosed envelope.
If you have any questions regarding the Proposal, the Written Consent Statement, or any related matter, please contact Mr. E. Lynn Caswell, President and Chief Executive Officer, Mr. William C. Demmin, Executive Vice President and Chief Financial Officer, or Ms. Carole Bowman, Executive Vice President of Monarch Bank, telephone number (714) 495-3300.
Your interest and participation are appreciated.
Date: ______________, 1996 By Order of the Board of Directors
President and Chief Executive Officer
(bank holding company for Monarch Bank) TO AMEND THE ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 25,000,000 TO 100,000,000
The undersigned record holder of _______ shares of Common Stock of Monarch Bancorp, Laguna Niguel, California (the "Company"), hereby consents to, and does hereby approve, an amendment to the Articles of Incorporation of the Company which, when filed with the California Secretary of State, will increase the number of authorized shares of Common Stock of the Company from 25,000,000 to 100,000,000 shares.
_ FOR _ AGAINST _ ABSTAIN
By signing this Written Consent, a shareholder of the Company shall be deemed to have voted all shares of the Company's Common Stock which he is entitled to vote in accordance with the specifications made above, with respect to the proposal described above. IF A SHAREHOLDER SIGNS AND RETURNS THIS WRITTEN CONSENT, BUT DOES NOT INDICATE THEREON THE MANNER IN WHICH HE WISHES HIS SHARES TO BE VOTED WITH RESPECT TO THE PROPOSAL DESCRIBED ABOVE, THEN SUCH SHAREHOLDER WILL BE DEEMED TO HAVE GIVEN HIS AFFIRMATIVE WRITTEN CONSENT TO THE PROPOSAL. A Written Consent marked "abstain" will not be voted either for or against such proposal.
THIS WRITTEN CONSENT IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY. THIS WRITTEN CONSENT MAY BE REVOKED AT ANY TIME PRIOR TO THE RECEIPT BY THE COMPANY OF AFFIRMATIVE WRITTEN CONSENTS REPRESENTING A MAJORITY OF THE COMPANY'S OUTSTANDING SHARES OF COMMON STOCK BY FILING A WRITTEN INSTRUMENT REVOKING THE WRITTEN CONSENT WITH THE COMPANY'S SECRETARY.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU GIVE YOUR AFFIRMATIVE WRITTEN CONSENT TO THE PROPOSED INCREASE IN AUTHORIZED SHARES OF COMMON STOCK FROM 25,000,000 TO 100,000,000 SHARES.
(Please date this Written Consent and sign your name as it appears on your stock certificates. Executors, administrators, trustees, etc., should give their full titles. All joint owners | DEF 14A | DEF 14A | 1996-01-12T00:00:00 | 1996-01-12T14:42:09 |
0000950130-96-000108 | 0000950130-96-000108_0016.txt | dated as of _________, 1996
LORAL SPACE & COMMUNICATIONS CORPORATION
STOCKHOLDERS AGREEMENT, dated as of ________, 1996 (the "Agreement"), by and among Loral Corporation, a New York corporation ("Loral"), and Loral Space & Communications Corporation, a __________ corporation (the "Company"). Loral and those of its Affiliates who are transferees with respect to any of the Equity Securities (as defined below), are sometimes collectively referred to herein as the "Stockholders".
WHEREAS, the Company, Lockheed Martin Corporation, a Maryland corporation ("LMC"), Loral and certain subsidiaries of Loral entered into a Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996 (the "Restructuring Agreement"; all capitalized terms used in this Agreement but not otherwise defined herein, shall have the respective meanings assigned to such terms in the Restructuring Agreement), pursuant to which, after giving effect to the Restructuring and the Distribution, Loral acquired _______ shares of Series A Non-Voting Convertible Preferred Stock, par value $0.01 per share, of the Company (the "Preferred Stock"); and
WHEREAS, the Company and Loral desire to establish in this Agreement certain conditions with respect to the relationship between the Stockholders and
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and in the Restructuring Agreement, the parties hereto agree as follows:
Section 1.1. Restrictions on Certain Actions by the Stockholders. (a) During the Term (as defined in Article V below), each Stockholder will not, and will cause each of its Affiliates (such term, as used in this Agreement, as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act) not to, singly or as part of a partnership, limited partnership, syndicate or other group (as those terms are used in Section 13(d)(3) of the Exchange Act), directly or indirectly:
(i) acquire, offer to acquire, or agree to acquire, by purchase, gift or otherwise, any Equity Securities (as defined below in Section 1.1(c)), except pursuant to a stock split, stock dividend, rights offering, recapitalization, reclassification, merger, consolidation, corporate reorganization or similar transaction; provided that at any time in which the Stockholders hold, in the aggregate, less than twenty percent (20%) of the Total Voting Power, then the Stockholders may acquire Equity Securities so that the Stockholders hold, in the aggregate, up to twenty percent (20%) of the Total Voting Power;
(ii) make, or in any way actively participate in, any "solicitation" of "proxies" to vote (as such terms are defined in Rule 14a- 1 under the Exchange Act), solicit any consent or communicate with or seek to advise or influence any third party with respect to the voting of any Equity Securities or become a "participant" in any "election contest" (as such terms are defined or used in Rule 14a-11 under the Exchange Act), in each case with respect to the Company;
(iii) form, join or encourage the formation of, any "person" within the meaning of Section 13(d)(3) of the Exchange Act with respect to any Equity Securities; provided that this Section 1.1(a)(iii) shall not prohibit any such arrangement solely among the Stockholders and any of
(iv) deposit any Equity Securities into a voting trust or subject any such Equity Securities to any arrangement or agreement with respect to the voting thereof; provided that this Section 1.1(a)(iv) shall not prohibit any such arrangement solely among the Stockholders and any of
(v) initiate, propose or otherwise solicit stockholders for the approval of one or more stockholder proposals with respect to the Company as described in Rule 14a-8 under the Exchange Act, or induce or attempt to induce any other third party to initiate any stockholder proposal;
(vi) except as otherwise contemplated or permitted by this Agreement (including, without limitation, pursuant to Section 1.2 hereof), seek to place a representative on the Board of Directors of the Company or seek the removal of any member of the Board of Directors of the Company, except with the approval of the Board of Directors or management of the
(vii) except with the approval of the Board of Directors or management of the Company, call or seek to have called any meeting of the
(viii) except through its representatives on the Board of Directors (or any committee thereof) of the Company (if any) and except as otherwise contemplated by this Agreement or the Restructuring Agreement (including the agreements and other documents referred to therein, including, without limitation, the Tax Sharing Agreement), otherwise act to seek to control the management or policies of the Company, except with the approval of the Board of Directors or management of the Company;
(ix) sell or otherwise transfer in any manner any Equity Securities to any "person" (within the meaning of Section 13(d)(3) of the Exchange Act) who, immediately following such sale or transfer, would, to the best of the Stockholder's knowledge, own more than four percent (4%) of any class of Equity Securities or who, without the approval of
the Board of Directors of the Company, (A) has publicly proposed a business combination or similar transaction with, or a change of control of, the Company or who has publicly proposed a tender offer for Equity Securities or (B) who has discussed with Loral or any of its respective Affiliates the possibility of proposing a business combination or similar transaction with, or a change in control of, the Company;
(x) sell or otherwise transfer in any manner to any person (as defined in clause (ix) above) in any single transaction or series of related transactions more than 2% of the outstanding Equity Securities;
(xi) solicit, seek to effect, negotiate with or provide any information to any other party with respect to, or make any statement or proposal, whether written or oral, to the Board of Directors of the Company or any director or officer of the Company or otherwise make any public announcement or proposal whatsoever with respect to, any form of business combination transaction involving the Company, including, without limitation, a merger, exchange offer or liquidation of the Company's assets, or any corporate reorganization or similar transaction with respect to the Company, except in each case with the approval of the Board of Directors or management of the Company; or
(xii) instigate or encourage any third party to do any of the foregoing.
Notwithstanding clauses (ix) and (x) above, the Stockholders may effect any transaction contemplated by Article III hereof.
(b) Notwithstanding the provisions of this Section 1.1, nothing herein shall apply with respect to any Equity Securities acquired from any person other than a Stockholder (x) held by any pension, retirement or other benefit plan managed by any Stockholder or any of its subsidiaries or other Affiliates or (y) held in any account managed for the benefit of another person, by any subsidiary or other Affiliate of any of the Stockholders which is engaged in the financial services business. In addition, notwithstanding the provisions of this Section 1.1, nothing herein shall prohibit or restrict any transfer of Equity Securities to or among any of the subsidiaries or other Affiliates of any of the Stockholders (provided that such subsidiary or Affiliate agrees to be bound to the provisions of this Agreement, upon which such subsidiary or Affiliate shall be entitled to all rights and benefits, and shall be subject to all obligations, of a Stockholder under this Agreement).
(c) For the purposes of this Agreement, (i) the term "Equity Securities" shall mean the Preferred Stock and any securities entitled to vote generally in the election of directors of the Company, or any direct or indirect rights or options to acquire any such securities or any securities convertible or exercisable into or exchangeable for such securities (provided that, in the event that the Guaranty Warrants (as defined below) become warrants to acquire Equity Securities, such Guaranty Warrants and any securities issued pursuant to the exercise of such Guaranty Warrants, shall not (so long, in each case, as they are held by the Stockholder) constitute Equity Securities for purposes of determining the appropriate number of shares of Common Equity Securities which Loral is entitled to acquire hereunder, including in connection with the determination of the Target Percentage pursuant to Section 1.4(a) hereof), (ii) the term "Voting Power" shall mean the voting power in the general election of directors of the Company, (iii) the term "Total Voting Power" shall mean the total combined Voting Power of all the Equity Securities then outstanding, including, without limitation, the Preferred Stock, and, insofar as the Preferred Stock is concerned, it is deemed to have Voting Power equal to that of the Common Stock into which it is convertible, (iv) the term "Change of Control" shall mean the occurrence of any of the following events: (A) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the beneficial owner of Equity Securities which represent at least forty percent (40%) of the Total Voting Power, or (B) during any one-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office, (v) the term "beneficial owner", and terms having similar import, shall mean any direct or indirect "beneficial owner", as such term is defined in Rules 13d-3 and 13d-5 under the Exchange Act, and (vi) the term "Guaranty Warrants" shall mean those warrants which accrue to the benefit of the Company in connection with the Globalstar Bank Guarantee, as described in the Globalstar Warrant Memorandum.
(a) At any time after the date hereof (but subject to the provisions of Section 1.2(b) below), following a written request by Loral to the Company (such request, the "HSR Notice"), the Company and the Stockholders will (i) take promptly all actions necessary to make the filings required of the Stockholders, the Company or any of their respective Affiliates under the HSR Act (as defined in the Merger Agreement) with respect to the right to convert Preferred Stock and continue to own the securities so received, the ownership and voting of Equity Securities by the Stockholders, any of the transactions contemplated by this Agreement or any other similar matters (all such exercise, ownership, voting, transaction and other similar matters, the "Filing Matters"), (ii) comply at the earliest practicable date with any request for additional information or documentary material received by the Company or the Stockholders or any of their Affiliates from any of the Federal Trade Commission, the Antitrust Division of the Department of Justice, state attorneys general, the Commission, or other governmental or regulatory authorities (all such authorities, the "Antitrust Authorities"), and (iii) cooperate with each other in connection with any of the filings referred to in clause (i) above and in connection with resolving any investigation or other inquiry commenced by any of the Antitrust Authorities. To the extent reasonably requested by Loral, the Company shall use all reasonable efforts to resolve such objections, if any, as may be asserted with respect to the Filing Matters. If any administrative, judicial or legislative action or proceeding is instituted (or threatened to be challenging any aspect of the Filing Matters as violative of any Antitrust Law, each of the Stockholders and the Company shall cooperate with each other to contest and resist any such action or proceeding, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent) that is in effect and that restricts, prevents or prohibits the exercise by the Stockholders of the right to convert Preferred Stock and continue to own the securities so received, or the exercise by Loral of its rights with respect to the ownership and voting of Equity Securities or any of the transactions contemplated by this Agreement (any such decree, judgment, injunction or other order is hereafter referred to as an "Order"), including, without limitation, by pursuing all reasonable avenues of administrative and judicial appeal, provided that nothing contained in this Section 1.2(a) shall be construed to require any party hereto to hold separate or divest any of their respective assets or businesses or agree to any substantive restriction thereon or on the conduct thereof. Each of the Company and Loral shall promptly inform the other party of any material communication received by such party from any Antitrust Authority regarding any of the Filing Matters or any of the other transactions contemplated hereby. For the purposes of this Agreement, the term "HSR Clearance Date" shall mean the first date on which (x) any applicable waiting period under the HSR Act with respect to the Filing Matters shall have expired or been terminated, (y) there shall not be pending any Action commenced by any Antitrust Authority relating to any of the Filing Matters or any of the other transactions contemplated hereby, and (z) there shall not be in effect any Order.
(b) Notwithstanding the provisions of Section 1.2(a) above, in the event that Loral delivers the HSR Notice to the Company, the Company shall be entitled to postpone for a reasonable period of time (but in no event later than 45 days), any filing referred to in Section 1.2(a)(i) above if the Company determines in its reasonable judgment and in good faith that such filing would delay the obtaining of any approval from an Antitrust Authority with respect to any announced or imminent material acquisition or disposition which would require a filing by the Company under the HSR Act. In the event of such postponement, Loral shall have the right to withdraw its HSR Notice and may deliver any such HSR Notice at any time thereafter.
(a) General Voting Provisions. Subject to the provisions of Section 1.3(b) below, prior to the HSR Clearance Date, no Stockholder shall have the right to convert Preferred Stock into common stock or the right to vote any Equity Securities with respect to the election of directors of the Company or on any other matters submitted to a vote of the stockholders of the Company (other than those matters set forth in Section 1.3(b) below). Following the HSR Clearance Date, each Stockholder shall have the right to vote its Equity Securities to the extent permitted by the terms thereof on any matters submitted to a vote of the stockholders of the Company (including, without limitation, those matters set forth in Section 1.3(b) below); provided that following the HSR Clearance Date any Stockholder shall have the right to vote any Equity Securities to the extent permitted by the terms thereof with respect to the election of directors of the Company only (i) as recommended by the Board of Directors or management of the Company or (ii) in the same proportions as the holders of Equity Securities (other than Stockholders) vote their Securities. On each matter with respect to which a Stockholder is entitled to vote pursuant to this Section 1.3, each such Stockholder shall be present, in person or represented by proxy, at all such stockholder meetings of the Company so that all Equity Securities beneficially owned by it shall be counted for the purpose of determining the presence of a quorum at such meetings. For purposes of this Section 1.3, all references to the term "vote" shall include the execution and delivery of any written consent with respect to the taking of any stockholder action in lieu of a meeting of stockholders.
(b) Exceptions to General Voting Provisions. Notwithstanding anything to the contrary contained in this Agreement, each Stockholder shall have the right to vote freely, in any manner in which they determine, with respect to any of the following matters:
(i) any amendment to or modification or repeal of any provision of the Company's Certificate of Incorporation including any of the
any certificate of designation or By-laws (or similar organizational
(ii) any merger, consolidation, corporate reorganization or similar transaction involving the Company;
(iii) any sale, lease, exchange, transfer or other disposition, directly or indirectly, in a single transaction or series of related transactions, of all or substantially all of the assets of the Company or
(iv) any plan or proposal for the liquidation or dissolution of the Company or any assignment by the Company for the benefit of creditors, or any filing by the Company of a petition in bankruptcy; or
(v) any restructuring, extension, modification, substitution, refinancing or amendment of any indebtedness of the Company.
(c) Company Call. If, within one year following the date hereof, the Stockholders vote against any Call Event Triggering Transaction (as defined below), the Company shall have the right, for 10 days following the date on which such vote is held, to purchase, and the Stockholders shall be required to sell to the Company, all, but not less than all, of the Equity Securities held by the Stockholders at a per share cash price equal to the Call Event Trigger Price (as defined below). The Company may exercise such right by delivering to each Stockholder, within such 10-day period, a written notice stating that the Company has irrevocably agreed to purchase in cash all (but not less than all) of the Equity Securities held by the Stockholders at the Call Event Trigger Price upon the terms and conditions set forth in this Section 1.3(c). The closing with respect to the purchase of Equity Securities by the Company pursuant to this Section 1.3(c) shall be on a mutually determined closing date which shall not be more than 15 days after the date on which the Company's written notice referred to above is delivered to the Stockholders. The closing shall be held at 10:00 A.M., local time, at the principal office of the Company, or at such other time or place as the parties mutually agree. On such closing
Stockholder shall deliver (i) certificates representing the shares of Equity Securities being sold, free and clear of any lien, claim or encumbrance, and (ii) such instruments of transfer and evidence of ownership and authority as the Company may reasonably request. The purchase price shall be paid by the Company to each Stockholder by wire transfer of immediately available funds no later than 2:00 P.M. on the closing date to the account(s) designated by the Stockholders prior to such closing date. For purposes of this Section 1.3(c), (i) the term "Call Event Triggering Transaction" shall mean any transaction described in Sections 1.3(b)(ii) and 1.3(b)(iii) between the Company, on the one hand, and any Spinco Company (or any other Subsidiary of either the Company or a Spinco Company), on the other; provided that the term "Call Event Triggering Transaction" shall not include any transaction involving any party which is not a Spinco Company (or any other Subsidiary of either the Company or a Spinco Company), (ii) the term "Call Event Trigger Price" shall mean the sum of (x) $344,000,000.00, plus (y) all amounts expended by the Stockholders following the date hereof in connection with the acquisition of Equity Securities other than acquisitions from another Stockholder following the date hereof, minus (z) any net sales proceeds received by the Stockholders following the date hereof in connection with the sale of Equity Securities (other than sales to another Stockholder) following the date hereof.
(a) General Provisions Relating to Loral Option. If, within one year following the date hereof, any Option Event Triggering Transaction (as defined below) occurs, Loral shall have the right, within 90 days after the consummation of the Option Event Triggering Transaction, to purchase, and the Company (for purposes of this Section 1.4, all references to the "Company" shall be deemed to include the Surviving Corporation (as defined below), shall be required to sell to Loral, a number of shares of Preferred Stock which would cause Loral to own Equity Securities with Voting Power equal to the Target Percentage (as defined below) of the Total Voting Power immediately after giving effect to the consummation of the Option Event Triggering Transaction, at a per share cash price equal to the Option Event Trigger Price (as defined below). Loral may exercise such right by deliv- ering to the Company, within such 90-day period, a written notice stating that Loral (or any Subsidiary of Loral designated by Loral; for purposes of this Section 1.4, all references to "Loral" shall be deemed to include such designated Subsidiary) has irrevocably agreed to purchase in cash the number of shares of Preferred Stock specified in the preceding sentence, at the Option Event Trigger Price, upon the terms and conditions set forth in this Section 1.4. The closing with respect to the purchase of Preferred Stock by the Company pursuant to this Section 1.4 shall be on a mutually determined closing date which shall not be more than 15 days after the date on which Loral's written notice referred to above is delivered to the Company. The closing shall be held at 10:00 A.M., local time, at the principal office of the Company, or at such other time or place as the parties mutually agree. On such closing date, the Company shall issue to Loral certificates representing the shares of Preferred Stock being sold, which shall be validly issued, fully paid and non-assessable and free and clear of any lien, claim or encumbrance. The purchase price shall be paid by Loral to the Company by wire transfer of immediately available funds no later than 2:00 P.M. on the closing date to the account designated in writing by the Company prior to such closing date. For purposes of this Section 1.4, (i) the term "Option Event Triggering Transaction" shall mean any transaction described in clauses (ii), (iii) or (iv) of Section 1.3(b) hereof, involving as parties, among others, the Company or any of its Affiliates (other than GTL and Globalstar), on the one hand, and either GTL or Globalstar or any of their respective Subsidiaries, on the other, (ii) the term "Option Event Trigger Price" shall mean a $6.00 per share cash purchase price, subject to adjustment pursuant to the provisions of Section 1.4(b) hereof, (iii) the term "Surviving Corporation" shall mean any successor to the rights and obligations of the Company as a result of or in connection with any Option Event Triggering Transaction, and (v) the term "Target Percentage" shall mean a percentage amount equal to the percentage of the Total Voting Power represented by the Equity Securities held by the Stockholders immediately prior to the closing of the Option Event Triggering Transaction; provided, however, that if there has occurred within the five days preceding such closing an event that diluted the Voting Power of the Equity Securities held by the Stockholders, the Target shall be determined as of the date five days prior to the closing of such Option Event Triggering Transaction.
(b) Adjustment of Loral Option Event Trigger Price. The Option Event Trigger Price shall be equitably adjusted from time to time after the date hereof to take into account of any of the following events: (i) if the Company shall pay a dividend or make any other distribution with respect to any Equity Securities which is payable in the form of Equity Securities or in the form of any other Asset (other than normal, periodic cash dividends of the Company), (ii) if the Company shall subdivide its outstanding common stock, (iii) if the Company shall combine its outstanding common stock into a smaller number of shares, (iv) if the Company shall issue any shares of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a merger, consolidation or other business combination involving the Company), or (v) in any other similar transaction affecting the Company or the number or value of the outstanding Equity Securities. The parties acknowledge and agree that each such equitable adjustment shall preserve for Loral the economic benefits of the Loral option set forth in Section 1.4(a) above.
Section 1.5. Globalstar Warrant Put Option. In the event of any of the following transactions (each such transaction, a "Warrant Trigger Event"):
(i) any merger, consolidation, corporate reorganization or similar transaction involving Globalstar or GTL;
(ii) any sale, lease, exchange, transfer or other disposition, directly or indirectly, of all or substantially all of the assets of
(iii) any liquidation or dissolution of Globalstar or GTL;
in which it is proposed that the Globalstar Warrants be converted into cash or the right to receive cash, or any other interest (or the right to receive any other interest) in Globalstar other than common stock thereof the Stockholders shall have the right (the "Limited Warrant Put") to require the Company to
Warrants for a price equal to their Option Privilege Value (as defined below). The Stockholders may exercise the Limited Warrant Put by delivering to the Company, at least 10 days prior to the scheduled closing of the Warrant Trigger Event, a notice to such effect accompanied by appropriate documentation or certificates evidencing the Globalstar Warrants. The Option Privilege Price shall be payable by the Company 10 days after the determination thereof. As used herein, the term "Option Privilege Price" means the greater of (x) the consideration payable in respect of the Globalstar Warrants in the Warrant Trigger Event and (y) the hypothetical fair market value that would be assigned to the Globalstar Warrants at the date of the Warrant Trigger Event assuming (1) that no Warrant Trigger Event were to occur then or at any time prior to the expiration of the Globalstar Warrants, (2) that the Globalstar Warrants would remain outstanding until such expiration in accordance with their terms, exercisable for shares of or interests in the issuer thereof, and (3) that such issuer would remain a public company during such period. The Option Privilege Price shall be determined by an investment banking firm of national standing selected by agreement of the Company and the Stockholders or, failing such agreement, by agreement of Bear Stearns Co. Inc. and Lehman Brothers. Such investment banking firm shall, in determining the Option Privilege Price, give full effect to (i) the spread between the exercise price and the fair market value of the securities into which the Globalstar Warrants are exercisable and (ii) the value of the "option privilege" in the Globalstar Warrants (that is, the value of the right, without risking any capital, to speculate on and benefit from appreciation in the underlying securities).
2.1. Certain Transactions. Notwithstanding anything contained in this Agreement to the contrary, a Stockholder may without restriction:
(i) assign, pledge, mortgage, hypothecate, or otherwise encumber or transfer all or any of its
Equity Securities in connection with any bona fide financing arrangement entered into by such person or otherwise in connection with any indebtedness owed by such Stockholder; provided that in the event that the Stockholder in question defaults, the creditor's rights and obligations with respect to the voting and transfer of such Equity Securities and the registration thereof shall be the same as the Stockholder in question had under the provisions of this Agreement and the creditor in question shall be deemed to be a Stockholder under this
(ii) transfer any Equity Securities to another Stockholder or any subsidiary or other Affiliate thereof (provided that such subsidiary or Affiliate agrees to be bound to the provisions of this Agreement, upon which such subsidiary or Affiliate shall be entitled to all rights and benefits, and shall be subject to all obligations, of a Stockholder under this Agreement);
(iii) transfer any Equity Securities pursuant to any registered public offering in connection with the provisions of Article III hereof or pursuant to the provisions of Rule 144 (or any similar provision then in force) under the Securities Act provided that such transfer under Rule 144 or any similar provision meets the volume restrictions set forth in Rule 144 as in effect on the date hereof; or
(iv) transfer any Equity Securities pursuant to any merger, consolidation, corporate reorganization, restructuring or any other similar transaction affecting the Company or pursuant to any involuntary transfer.
Section 2.2. Rights Pursuant to a Tender Offer. Each Stockholder (any such Stockholder shall, for purposes of this Section 2.2, be referred to as a "Tendering Stockholder") shall have the right to sell or exchange all its Equity Securities pursuant to a tender or exchange offer for the Equity Securities (an "Offer"). However, during the Term, prior to such sale or exchange, the Tendering Stockholder shall give the Company the opportunity to purchase such Equity Securities in the following manner:
(i) The Tendering Stockholder shall give notice (the "Tender Notice") to the Company in writing of its intention to sell or exchange Equity Securities in response to an Offer no later than three calendar days prior to the latest time (including any extensions) by which Equity Securities must be tendered in order to be accepted pursuant to such Offer, specifying the amount of Equity Securities proposed to be tendered by the Tendering Stockholder (the "Tendered Shares") and the purchase price per share specified in the Offer at the time of the Tender Notice.
(ii) If the Tender Notice is given, the Company shall have the right to purchase all, but not less than all, of the Tendered Shares exercisable by giving written notice (an "Exercise Notice") to the Tendering Stockholder at least two calendar days prior to the latest time after delivery of the Tender Notice by which Equity Securities must be tendered in order to be accepted pursuant to the Offer (including any extensions thereof) and depositing in any escrow or similar arrangement reasonably acceptable to the Tendering Stockholder, a sum in cash sufficient to purchase all Tendered Shares at the price then being offered in the Offer, without regard to any provision thereof with respect to proration or conditions to the offeror's obligation to purchase. The delivery by the Company of an Exercise Notice and deposit of funds as provided above will, except as provided below, constitute an irrevocable agreement by the Company to purchase, and the Tendering Stockholder to sell, the Tendered Shares in accordance with the terms of this Section 2.2, whether or not the Offer or any other tender or exchange offer (a "Competing Tender Offer") for Equity Securities that was outstanding during the Offer is consummated.
(iii) The purchase price to be paid by the Company for any Equity Securities purchased by it pursuant to this Section 2.2 shall be the highest price offered or paid in the Offer or in any Competing Tender Offer. For purposes hereof, the price offered or paid in a tender or exchange offer for Voting Shares shall be deemed to be the price offered or paid pursuant thereto, without regard to
any provisions thereof with respect to proration or conditions to the offeror's obligation to purchase. If the purchase price per share specified in the Offer includes any property other than cash (the "Offer Noncash Property"), the purchase price per share at which the Company shall be entitled to purchase all, but not less than all, of the Equity Securities specified in the Tender Notice shall be (y) the amount of cash per share, if any, specified in such Offer (the "Cash Portion"), plus (z) an amount of cash per share equal to the value of the Offer Noncash Property per share (the "Cash Value of Offer Noncash Property"), as determined in good faith by the mutual agreement of the parties hereto, or if the parties cannot agree, by an independent, nationally recognized investment banking firm selected by the Tendering Stockholders and reasonably acceptable to the Company. If the Company exercises its right of first refusal by giving an Exercise Notice, the closing of the purchase of the Equity Securities with respect to such right (the "Closing") shall take place at 3:00 p.m., local time (or, if earlier, two hours before the latest time by which Equity Securities must be tendered in order to be accepted pursuant to the Offer), on the last day on which Equity Securities must be tendered in order to be accepted pursuant to the Offer (including any extensions thereof) (the "Last Tender Date"), and the Company shall pay the purchase price for the Equity Securities specified above. The Tendering Stockholder shall be entitled to rescind its Tender Notice at any time prior to the Last Tender Date by notice in writing to the Company; provided that if on or before the Last Tender Date, the Company publicly announces that the Company has approved, proposed or entered into an agreement with respect to (either individually or together with any other persons) a recapitalization, reorganization or business combination with respect to the Company or all or substantially all of its assets, or a self-tender offer, the Tendering Stockholder shall be entitled to rescind its Tender Notice by notice in writing to the Company at any time prior to the Closing on the Last Tender Date. If the Tendering Stockholder rescinds its Tender Notice pursuant to the immediately preceding sentence, the Company's Exercise Notice with respect to such Offer shall be
deemed to be immediately rescinded and the Tendering Stockholder's disposition of its Equity Securities in response to the Offer with respect to which the Tender Notice is rescinded or any other Offer shall again be subject to all of the provisions of this Section 2.2.
(iv) If the Company does not exercise its right of first refusal set forth in this Section 2.2 within the time specified for such exercise by giving an Exercise Notice, then the Tendering Stockholder shall be free to accept, for all its Equity Securities, the Offer with respect to which the Tender Notice was given or any Competing Tender Offer (including any increases and extensions thereof).
Section 3.1. Registration Upon Request.
(a) At any time commencing on the date hereof and continuing thereafter, each Stockholder (any such Stockholder, whether registering securities pursuant to this Section 3.1 or Section 3.2, shall be referred to as a "Registering Stockholder") shall have the right to make written demand upon the Company, on not more than five separate occasions (subject to the provisions of this Section 3.1), to register under the Securities Act, any common stock or other securities of the Company held by it (the securities subject to such demand hereunder or subject to the provisions of Section 3.2 being referred to in each case as the "Subject Securities"), and the Company shall use its best efforts to cause such securities to be registered under the Securities Act as soon as reasonably practicable so as to permit the sale thereof promptly; provided that each such demand shall cover at least ________ shares of Common Stock (subject to adjustment for stock splits, reverse stock splits, stock dividends and similar events after the date hereof). In connection therewith, the Company shall prepare, and as soon as reasonably practicable but in no event later than 90 days of the receipt of the request, file, on Form S-3 if permitted or otherwise on the appropriate form, a registration statement under the Securities Act to effect such registration. Such registration shall be effected in accordance with the intended method or methods of disposition specified by the Registering Stockholders (including, but not limited to, an offering on a delayed or continuous basis pursuant to Rule 415 (or any successor rule to similar effect) promulgated under the Securities Act). Each Registering Stockholder agrees to provide all such information and materials and to take all such action as may be reasonably required in order to permit the Company to comply with all applicable requirements of the Securities Act and the SEC and to obtain any desired acceleration of the effective date of such registration statement. If the offering to be registered is to be underwritten, the managing underwriter shall be selected by the Registering Stockholders and shall be reasonably satisfactory to the Company. Notwithstanding the foregoing, the Company (i) shall not be obligated to prepare or file more than one registration statement other than for purposes of a stock option or other employee benefit or similar plan during any twelve-month period, (ii) shall be entitled to postpone for a reasonable period of time (but in no event later than 60 days), the filing of any registration statement otherwise required to be prepared and filed by the Company if (A) the Company is, at such time, conducting or about to conduct an underwritten public offering of securities and is advised by its managing underwriter or underwriters in writing (with a copy to the Registering Stockholders), that such offering would, in its or their opinion, be materially adversely affected by the registration so requested, or (B) the Company determines in its reasonable judgment and in good faith that the registration and distribution of the Subject Securities would interfere with any announced or imminent material financing, acquisition, disposition, corporate reorganization or other material transaction of a similar type involving the Company. In the event of such postponement, the Registering Stockholders shall have the right to withdraw the request for registration by giving written notice to the Company within 20 days after receipt of the notice of postponement (and, in the event of such withdrawal, such request shall not be counted for purposes of determining the number of registrations to which the Registering Stockholders are entitled pursuant to this Section 3.1).
(b) The Company shall not grant to any other holder of its securities, whether currently outstanding or issued in the future, any incidental or piggyback registration rights with respect to any registration statement filed pursuant to a demand registration under this Section 3.1 and without the prior consent of the Registering Stockholders, the Company will not itself, and will not permit any other holder of its securities to, participate in any offering made pursuant to a demand registration under this Section 3.1. The Company may grant to other holders of its securities incidental or piggyback registration rights on a primary offering by the Company which are no more favorable to such holders than the provisions set forth in Section 3.2 are to the Stockholders. If the Registering Stockholders consents to the inclusion of offers and sales of any other securities in a registration pursuant to this Section 3.1 and the underwriter(s) retained in connection with such registration subsequently advise the Registering Stockholders that such offering would be adversely affected by the inclusion of such other securities, the Registering Stockholders may in their sole discretion exclude all or some of such securities from such registration.
(c) Any registration requested by any Registering Stockholder pursuant to this Section 3.1 shall not be deemed to have been effected (and, therefore, not requested for purposes of this Section 3.1), (i) unless it has become effective, (ii) if after it has become effective such registration is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason other than a misrepresentation or an omission by the Registering Stockholders and, as a result thereof, the Subject Securities requested to be registered cannot be completely distributed in accordance with the plan of distribution set forth in the related registration statement or (iii) if the closing pursuant to the purchase agreement or underwriting agreement entered into in connection with such registration does not occur. Any registration effected pursuant to Section 3.2 shall not be deemed to have been requested by a Registering Stockholder for purposes of this Section 3.1.
Section 3.2. Incidental Registration Rights. If the Company proposes to register any of its Equity Securities under the Securities Act for its own
(other than (i) pursuant to Section 3.1 hereof, (ii) securities to be issued pursuant to a stock option or other employee benefit or similar plan, and (iii) securities proposed to be issued in exchange for securities or assets of, or in connection with a merger or consolidation with, another corporation), the Company shall, as promptly as practicable, give written notice to the Registering Stockholders of the Company's intention to effect such registration. If, within 15 days after receipt of such notice, a Registering Stockholder submits a written request to the Company specifying the amount of Equity Securities that it proposes to sell or otherwise dispose of in accordance with this Section 3.2, the Company shall use its best efforts to include the securities specified in the Registering Stockholder's request in such registration. If the offering pursuant to such registration statement is to be made by or through underwriters, the managing underwriters shall be chosen by the Company and shall be reasonably satisfactory to the Registering Stockholders and the Company, and the Registering Stockholders and such underwriter shall execute an underwriting agreement in customary form. If the managing underwriter reasonably determines in good faith and advises the Registering Stockholders in writing that the inclusion in the registration statement of all the Equity Securities proposed to be included would interfere with the successful marketing of the securities proposed to be registered, then the Company and the Registering Stockholders shall negotiate in good faith to agree upon an equitable adjustment in the number or amount of securities of each to be included in such underwriting (provided that in the event that the Company and the Registering Stockholders are unable to agree upon an equitable adjustment in the number or amount of securities of each to be included in such underwriting, then the number of securities which the Company and the Registering Stockholders propose to register shall be reduced pro rata (based upon the respective market values of each party's respective share of the total number of securities proposed to be registered). No registration effected under this Section 3.2 shall relieve the Company of its obligation to effect any registration upon request under Section 3.1. If the Registering Stockholders are permitted to participate in a proposed offering pursuant to this Section 3.2, the Company thereafter may determine either not to file a registration statement relating thereto, or to withdraw such registration statement, or otherwise not to consummate such offering, without any liability hereunder. Any underwriters participating in a distribution of the Subject Securities pursuant to Sections 3.1 and 3.2 hereof shall use all reasonable efforts to effect as wide a distribution as is reasonably practicable, and in no event shall any sale of Subject Securities be made knowingly to any person (including its Affiliates and any group in which that person or its Affiliates shall be a member, or the Registering Stockholders or the underwriters know of the existence of such a group or Affiliate) that, immediately prior to giving effect to any such sale, beneficially owned Equity Securities representing five percent (5%) or more of the Total Voting Power. The Registering Stockholders and the Company shall use all reasonable efforts to secure the agreement of the underwriters, in connection with any underwritten offering of its Equity Securities, to comply with the foregoing.
Section 3.3. Registration Mechanics. (a) In connection with any offering of Subject Securities registered pursuant to Section 3.1 or 3.2 herein, the Company shall (i) furnish to the Registering Stockholders such number of copies of any prospectus (including preliminary and summary prospectuses) and conformed copies of the registration statement (including amendments or supplements thereto and, in each case, all exhibits) and such other documents as any Registering Stockholder may reasonably request; (ii)(A) use its best efforts to register or qualify the Subject Securities covered by such registration statement under such blue sky or other state securities laws for offer and sale as the Registering Stockholders shall reasonably request and (B) keep such registration or qualification in effect for so long as the registration statement remains in effect; provided that the Company shall not be obligated to qualify to do business as a foreign corporation under the laws of any jurisdiction in which it shall not then be qualified or to file any general consent to service of process in any jurisdiction in which such a consent has not been previously filed or subject itself to taxation in any jurisdiction wherein it would not otherwise be subject to tax but for the requirements of this Section 3.3; (iii) use its best efforts to cause all Subject Securities covered by such registration statement to be registered with or approved by such other federal or state government agencies or authorities as may be necessary, in the opinion of counsel to the Registering Stockholders, to enable the
Registering Stockholders to consummate the disposition of such Subject Securities; (iv) notify the Registering Stockholders any time when a prospectus relating thereto is required to be delivered under the Securities Act upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and (subject to the good faith determination of the Company's Board of Directors as to whether to permit sales under such registration statement), at the request of any Registering Stockholder promptly prepare and furnish to it a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances under which they were made; (v) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC; (vi) use its best efforts to list the Subject Securities covered by such registration statement on the New York Stock Exchange or on any other Exchange on which the Subject Securities are then listed, if required by the rules of any such Exchange; (vii) use its best efforts to obtain a "cold comfort" letter from the independent public accountants for the Company in customary form and covering matters of the type customarily covered by such letters as may be reasonably requested by the Registering Stockholders, in the event of a registration effected pursuant to Section 3.1 hereof; (viii) execute and deliver all instruments and documents (including in an underwritten offering an underwriting agreement in customary form) and take such other actions and obtain such certificates and opinions as the Registering Stockholders reasonably request in order to effect an underwritten public offering; and (ix) before filing any registration statement or any amendment or supplement thereto, and as far in advance as is reasonably practicable, furnish to each Registering Stockholder and its counsel copies of such documents. In connection with any offering of Subject Securities registered pursuant to Section 3.1 or 3.2, the Company shall (x) furnish to the underwriter, if any, unlegended certificates representing ownership of the Subject Securities being sold in such denominations as requested and (y) instruct any transfer agent and registrar of the Subject Securities to release any stop transfer orders with respect to such Subject Securities. Upon any registration becoming effective pursuant to Section 3.1, the Company shall use its best efforts to keep such registration statement current for a period of 60 days (or 90 days, if the Company is eligible to use a Form S-3, or successor form) or such shorter period as shall be necessary to effect the distribution of the Subject Securities.
(b) Before filing with the SEC any registration statement referred to herein or any amendments or supplements thereto, the Company shall furnish to the Registering Stockholders or their respective counsel copies of all such documents proposed to be filed, in order to give the Registering Stockholders or their respective counsel sufficient time to review such documents, and such documents may thereafter be filed subject to any timely and reasonable comments of the Registering Stockholders or their respective counsel. The Company shall (i) deliver promptly to the Registering Stockholders or their respective counsel copies of all written communications between the Company and the SEC relating to the registration statement, and (ii) advise the Registering Stockholders or their respective counsel promptly of, and provide the Registering Stockholders or their respective counsel with the opportunity to participate in (to the extent reasonably practicable), all telephonic and other non-written communications between the Company and the SEC relating to such registration statement. The Company shall respond promptly to any comments from the SEC with respect thereto, after consultation with the Registering Stockholders or their respective counsel, and shall take such other actions as shall be reasonably required in order to have each such registration statement declared effective under the Securities Act as soon as reasonably practicable following the date hereof.
(c) Each Registering Stockholder agrees that upon receipt of any notice from the Company of the happening of any event of the kind described in subdivision (iv) of this Section 3.3, it will forthwith discontinue its disposition of Subject Securities pursuant to the registration statement relating to such Subject Securi- ties until its receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (iv) of this Section 3.3 and, if so directed by the Company, will deliver to the Company all copies (other than permanent file copies) then in its possession of the prospectus relating to such Subject Securities current at the time of receipt of such notice. If any Registering Stockholder's disposition of Subject Securities is discontinued pursuant to the foregoing sentence unless the Company thereafter extends the effectiveness of the registration statement to permit dispositions of Subject Securities by the Registering Stockholder for an aggregate of 60 days (or 90 days, if the Company is eligible to use a Form S-3, or successor form), whether or not consecutive, the registration statement shall not be counted for purposes of determining the number of registrations to which the Registering Stockholders are entitled pursuant to Section 3.1.
Section 3.4. Expenses. The Registering Stockholders shall pay all agent fees and commissions and underwriting discounts and commissions related to Subject Securities being sold by the Registering Stockholders and the fees and disbursements of its counsel and accountants and the Company shall pay all fees and disbursements of its counsel and accountants in connection with any registration pursuant to this Article III. All other fees and expenses in connection with any registration statement (including, without limitation, all registration and filing fees, all printing costs, all fees and expenses of complying with securities or blue sky laws) shall (i) in the case of a registration pursuant to Section 3.1, be borne equally by the Registering Stockholders and the Company and (ii) in the case of a registration pursuant to Section 3.2, be shared pro rata based upon the respective market values of the securities to be sold by theCompany, the Registering Stockholders and any other holders participating in such offering; provided that the Registering Stockholders shall not be obligated to pay any expenses relating to work that would otherwise be incurred by the Company including, but to limited to, the preparation and filing of periodic reports with the SEC.
Section 3.5. Indemnification and Contribution. (a) In the case of any offering registered pursuant to this Article III, the Company agrees to indemnify and hold each Registering Stockholder, each underwriter, if any, of the Subject Securities under such registration and each person who controls any of the foregoing within the meaning of Section 15 of the Securities Act, and any officer, employee or partner of the foregoing, harmless against any and all losses, claims, damages, or liabilities (including reasonable legal fees and other reasonable expenses incurred in the investigation and defense thereof) to which they or any of them may become subject under the Securities Act or otherwise (collectively "Losses"), insofar as any such Losses shall arise out of or shall be based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the registration statement relating to the sale of such Subject Securities (as amended if the Company shall have filed with the SEC any amendment thereof), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in the prospectus relating to the sale of such Subject Securities (as amended or supplemented if the Company shall have filed with the SEC any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided that the indemnification contained in this Section 3.5 shall not apply to such Losses which shall arise primarily out of or shall be based primarily upon any such untrue statement or alleged untrue statement, or any such omission or alleged omission, which shall have been made in reliance upon and in conformity with information furnished in writing to the Company by the Registering Stockholders or any such underwriter, as the case may be, specifically for use in connection with the preparation of the registration statement or prospectus contained in the registration statement or any such amendment thereof or supplement therein.
(b) In the case of each offering registered pursuant to this Article III, the Registering Stockholders and each underwriter, if any, participating therein shall agree, substantially in the same manner and to the same extent as set forth in the preceding paragraph, severally to indemnify and hold harmless the Company and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, and the directors and executive officers of the Company, with respect to any statement in or omission from such registration statement or prospectus contained in such registration statement (as amended or as supplemented, if amended or supplemented as aforesaid) if such statement or omission shall have been made in reliance upon and in conformity with information furnished in writing to the Company by the Registering Stockholders or such underwriter, as the case may be, specifically for use in connection with the preparation of such registration statement or prospectus contained in such registration statement or any such amendment thereof or supplement thereto.
(c) Each party indemnified under this Section 3.5 shall, promptly after receipt of notice of the commencement of any claim ("Claim") against such indemnified party in respect of which indemnity may be sought hereunder, notify the indemnifying party in writing of the commencement thereof. The failure of any indemnified party to so notify an indemnifying party shall not relieve the indemnifying party from any liability in respect of such Claim which it may have to such indemnified party on account of the indemnity contained in this Section 3.5, unless (and only in the event) the indemnifying party was materially prejudiced by such failure, and in no event shall such failure relieve the indemnifying party from any other liability which it may have to such indemnified party. In case any Claim in respect of which indemnification may be sought hereunder shall be brought against any indemnified party and it shall notify an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may desire, jointly with any other indemnifying party similarly notified, to assume the defense thereof through counsel reasonably satisfactory to the indemnified party by notifying the indemnified party in writing of such election within 10 days after receipt of the indemnified party's initial notice of the Claim, and after such 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 this Section 3.5 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation (unless such indemnified party reasonably objects to such assumption on the grounds that there may be defenses available to it which are different from or in addition to those available to such indemnifying party in which event the indemnified party shall be reimbursed by the indemnifying party for the reasonable expenses incurred in connection with retaining separate legal counsel). If the indemnifying party undertakes to defend against such Claim within such 10-day period, the indemnifying party shall control the investigation, defense and settlement thereof; provided that (i) the indemnifying party shall use its reasonable efforts to defend and protect the interests of the indemnified party with respect to such Claim, (ii) the indemnified party, prior to or during the period in which the indemnifying party assumes control of such matter, may take such reasonable actions as the indemnified party deems necessary to preserve any and all rights with respect to such matter, without such actions being construed as a waiver of the indemnified party's rights to defense and indemnification pursuant to this Agreement, and (iii) the indemnifying party shall not, without the prior written consent of the indemnified party, consent to any settlement which (A) imposes any Liabilities on the indemnified party (other than those Liabilities which the indemnifying party agrees to promptly pay or discharge), and (B) with respect to any non- monetary provision of such settlement, would be likely, in the indemnified party's reasonable judgment, to have an adverse effect on the business operations, assets, properties or prospects of any Stockholder (in the event that a Registering Stockholder or any of its Affiliates is the indemnified party), or the Company (in the event that the Company is an indemnified party), or such indemnified party. If the indemnifying party does not undertake within such 10-day period to defend against such Claim, then the indemnifying party shall have the right to participate in any such defense at its sole cost and expense, but the indemnified party shall control the investigation, defense and settlement thereof (provided that the indemnified party may not settle any such Claim without obtaining the prior written consent of the indemnifying party (which consent shall not be unreasonably withheld by the indemnifying party; provided that in the event that the indemnifying party is in material breach at such time of the provisions of this Section 3.5, then the indemnified party shall not be obligated to obtain such prior written consent of the indemnifying party) at the reasonable cost and expense of the indemnifying party
(which shall be paid by the indemnifying party promptly upon presentation by the indemnified party of invoices or other documentation evidencing the amounts to be indemnified). In addition to the foregoing, no indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which the indemnified party could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability arising out of such claim or proceeding.
(d) If the indemnification provided for in this Section 3.5 is unavailable to an indemnified party or is insufficient to hold such indemnified party harmless from any Losses in respect of which this Section 3.5 would otherwise apply by its terms (other than by reason of exceptions provided herein), then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the amount paid or payable by such indemnified party as a result of such Losses, in such proportion as is appropriate to reflect the relative benefits received by and fault of the indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the offering to which such contribution relates as well as any other relevant equitable considerations. The relative benefit shall be determined by reference to, among other things, the amount of proceeds received by each party from the offering to which such contribution relates. The relative fault shall be determined by reference to, among other things, each party's relative knowledge and access to information concerning the matter with respect to which the claim was asserted, and the opportunity to correct and prevent any statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include any legal or other fees or expenses incurred by such party in connection with any investigation or proceeding, to the extent such party would have been indemnified for such expenses if the indemnification provided for in this Section 3.5 was available to such party.
(e) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 3.5 were determined by pro rata any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
Section 3.6. Rule 144. The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Commission thereunder (or, if the Company is not required to file such reports, it will, upon the request of any Stockholder, make publicly available other information), and it will take such further action as any Stockholder may reasonably request, all to the extent required from time to time to enable such Stockholder to sell Subject Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Stockholder, the Company will deliver to such Stockholder a written statement as to whether it has complied with such requirements.
SECTION 3.7. Holdback Agreement. The Company agrees that it and its Affiliates will not effect any sale, offer for sale, or grant any option to purchase any shares of common stock (or securities convertible into or exchangeable or exercisable for common stock) (collectively, "Sales") during the 10-day period prior to, and the 90-day period (or such longer period, not to exceed 120 days, as the managing underwriter(s) therefor determines) beginning on the effective date of a registration statement filed pursuant to Section 3.1 without the consent of such managing underwriter(s). The Stockholders agree not to effect any Sales during the 10-day period prior to, and the 90-day period (or such longer period, not to exceed 120 days, as the managing underwriter(s) therefor determines) beginning on the effective date of a registration statement relating to a primary offering (other than one described in clauses (i), (ii) or (iii) of the first sentence of Section 3.2 hereof) without the consent of such managing underwriter(s); provided that this sentence shall be of no force and effect if the Company effects a Sale or files any registration statement for the benefit of any other party during such 120-day period.
SECTION 4.1. Representations and Warranties of the Company. The Company hereby represents and warrants to each of the Stockholders as follows:
(a) The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated by this Agreement are within its corporate powers and have been duly authorized by all necessary corporate action on its part. This Agreement constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, (i) except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally, including the effect of statutory and other laws regarding fraudulent conveyances and preferential transfers, and (ii) subject to the limitations imposed by general equitable principles (regardless of whether such enforceability is considered in a proceeding at law or in equity).
(b) The execution, delivery and performance of this Agreement by the Company does not and will not contravene or conflict with or constitute a default under the Company's Certificate of Incorporation or By-laws or any of its material Contracts.
(c) Immediately after giving effect to both the Restructuring and the Distribution (including, without limitation, after giving effect to the distribution of shares of Spinco Common Stock to the holders of common stock of Loral and the holders of options with respect to common stock of Loral, who or which may be entitled to receive shares of Spinco Common Stock pursuant to or in connection with the Distribution Agreement, the
otherwise), (i) the Company's authorized capital stock shall consist of ________ shares of Spinco Common Stock and ________ shares of Preferred Stock, of which ________ shares of Spinco Common Stock and ________ shares of Preferred Stock shall be issued and outstanding, (ii) Loral will be the record and beneficial owner of _______ shares of Preferred Stock, all of which will be validly issued and fully paid and nonassessable and all of which will be free of all Liens, (iii) except for the shares of Spinco Common Stock and the shares of Preferred Stock specified in clause (i) above, there will be no other Equity Securities, and (iv) the Wing Stockholders will hold, in the aggregate, at least twenty percent (20%) of the Total Voting Power.
Section 5.1. Term. The term (the "Term") of this Agreement shall commence on the date hereof and shall continue until the earlier of (x) the date on which the Voting Power of the Equity Securities, on a fully diluted basis, beneficially owned by Loral and its Affiliates shall represent less than five percent (5%) of the Total Voting Power, (y) the seventh anniversary of the date hereof, or (z) a Change of Control (as defined in Section 1.1(c) above). Upon expiration of the Term, the provisions of this Agreement shall terminate, and be of no further force or effect, automatically without any further action on the part of any parties hereto; provided that the provisions of Articles III and VI shall continue without regard to the term limitation set forth in this sentence; provided further that no such termination shall relieve any party of any liability to the other parties hereto, to the extent such liability is incurred prior to the expiration of the Term.
Section 6.1. Certain Restrictions. The Company shall not take or recommend to its stockholders any action, including any amendment of its Certificate of Incorporation, By-laws or stockholder rights plan, if any, which would impose restrictions applicable to Loral and not to other securityholders generally based upon the size of Loral' security holdings, the business in which it is engaged or other considerations applicable to it and not to securityholders generally. In addition, the Company shall not take or recommend to its stockholders any action, including any amendment of its Certificate of Incorporation, By-laws or stockholder rights plan, if any, which would likely adversely affect in any material respect, either directly or indirectly, any of the rights or obligations of the Stockholders under the provisions of this Agreement.
The Stockholders agree that the Company may adopt a stockholders rights plan similar to the stockholders rights plan adopted by Loral except that Loral (and its Affiliates and associates) shall not be deemed to be an "Acquiring Person" unless Loral and its Affiliates become the beneficial owner of 25% or more of the outstanding shares of common stock of the Company.
Section 6.2. Entire Agreement. This Agreement and the Restructuring Agreement (including the schedules and exhibits and the agreements and other documents referred to therein, including, without limitation, the Tax Sharing Agreement and the Transition Services Agreements) constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior negotiations, commitments, agreements and understandings, both written and oral, between the parties or any of them with respect to the subject matter hereof.
Section 6.3. Fees and Expenses. Except as otherwise provided in this Agreement, all costs and expenses incurred by the Stockholders and the Company in connection with consummating such party's obligations hereunder or otherwise shall be paid by the party incurring such cost or expense.
Section 6.4. Access to Information. During the Term, the Company shall provide to each Stockholder reasonable access to the books and records of the Company and its subsidiaries during the regular business hours of the Company and such subsidiaries, following the Company's receipt of a written notice from such Stockholder requesting such access; provided that the Company shall not be required to provide any confidential information if the Company reasonably determines that the providing of such information would result in (x) a violation of applicable antitrust laws or (y) create a substantial likelihood of a significant adverse effect on the Company; provided, further, that the Stockholder shall keep confidential any confidential information disclosed to it except as required by law, service of process, interrogatories, or similar legal process, and except for any such information which becomes publicly available through no fault of the Stockholder.
Section 6.5. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CHOICE OF LAW PRINCIPLES THEREOF (EXCEPT IN THOSE CIRCUMSTANCES WHERE THE CORPORATE LAW OF THE COMPANY'S JURISDICTION OF ORGANIZATION REQUIRES THE APPLICATION OF THE LAW OF THE COMPANY'S JURISDICTION OF ORGANIZATION WITH RESPECT TO A PARTICULAR MATTER).
Section 6.6. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given upon (a) transmitter's confirmation of a receipt of a facsimile transmission, (b) confirmed delivery by a standard overnight carrier or when delivered by hand or (c) the expiration of five Business Days after the day when mailed by certified or registered mail, postage prepaid, addressed at the following addresses (or at such other address for a party as shall be specified by like notice):
(a) If to any of the Stockholders, to:
New York, New York 10022 Attention: Peter Allan Atkins, Esq. Lou R. Kling, Esq.
New York, New York 10022 Attention: C. Douglas Kranwinkle, Esq. Jeffrey J. Rosen, Esq.
(b) If to the Company, to:
Loral Space & Communications Corporation
New York, New York 10022 Attention: Robert B. Hodes, Esq. Bruce R. Kraus, Esq.
In addition to providing any notice required to be given by the Company pursuant to its Certificate of Incorporation in the manner specified therein, the Company shall send to each Stockholder by telecopy in accordance with this Section 6.6 a copy of each such notice.
Section 6.7. Successors and Assigns; Reclassifications; No Third Party Beneficiaries. 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, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto (whether by operation of law or otherwise) without the prior written consent of the other parties hereto (which consent may not be unreasonably withheld), except that any party shall have the right, without the consent of any other party hereto, to assign all or a portion of its rights, interests and obligations hereunder to one or more direct or indirect subsidiaries, but no such assignment of obligation shall relieve the assigning party from its responsibility therefor. In the event of any recapitalization or reclassification of any Equity Securities, or any merger, consolidation or other transaction with like effect, the securities issued in replacement or exchange for such Equity Securities shall be deemed Equity Securities hereunder. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement; provided that the indemnified parties referred to in Section 3.5 hereof are intended to be third party beneficiaries of the provisions of Section 3.5 hereof, and shall have the right to enforce such provisions as if they were parties hereto.
Section 6.8. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
Section 6.9. Further Assurances. Each party hereto or person subject hereto shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments and documents as any other party hereto or person subject hereto may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
Section 6.10. Interpretation. The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Unless otherwise specified in this Agreement, all references in this Agreement to "days" shall be deemed to be references to calendar days.
Section 6.11. Legal Enforceability. 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 affecting the validity or enforceability of the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.
Section 6.12. Consent to Jurisdiction. Each of the parties hereto irrevocably and unconditionally (a) agrees that all suits, actions or other legal proceedings arising out of this Agreement or any of the transactions contemplated hereby (a "Suit") shall be brought and adjudicated solely in the United States District Court for the District of Delaware, or, if such court will not accept jurisdiction, in the Delaware Chancery Court or any court of competent civil jurisdiction sitting in New Castle County, Delaware, (b) submits to the non-exclusive jurisdiction of any such court for the purpose of any such Suit and (c) waives and agrees not to assert by way of motion, as a defense or otherwise in any such Suit, any claims that it is not subject to the jurisdiction of the above courts, that such Suit is brought in an inconvenient forum or that the venue of such Suit is improper. Each of the parties hereto also irrevocably and unconditionally consents to the service of any process, summons, pleadings, notices or other papers in a manner permitted by the notice provisions of Section 6.6 hereof and agrees that any such form of service shall be effective in connection with any such Suit; provided that nothing contained in this Section 6.12 shall affect the right of any party to serve process, pleadings, notices or other papers in any other manner permitted by applicable Law.
Section 6.13. Specific Performance. Each of the parties hereto acknowledges and agrees that in the event of any breach of this Agreement, each non-breaching party would be irreparably and immediately harmed and could not be made whole by monetary damages. It is accordingly agreed that the parties hereto (a) will waive, in any action for specific performance, the defense of adequacy of a remedy at law and (b) shall be entitled, in addition to any other remedy to which they may be entitled at law or in equity, to compel specific performance of this Agreement in any action instituted in any court referred to in Section 6.12 hereof.
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. | SC 14D1 | EX-99.(C)(4) | 1996-01-12T00:00:00 | 1996-01-12T17:26:30 |
0000902042-96-000006 | 0000902042-96-000006_0000.txt | [NEWSLETTER: FOURTH QUARTER PAUZE' OUTLOOK
Mr. Phil Pauze', is President of PAUZE' SWANSON CAPITAL MANAGEMENT CO., Houston, TX., a firm which specializes in the management of fixed income portfolios. He is President and Trustee of PAUZE'/SWANSON UNITED SERVICES FUNDS and owner of PHILIP C. PAUZE' & ASSOCIATES, a management consulting firm. The Pennsylvania Funeral Trust offers the PAUZE'S U.S. GOVERNMENT TOTAL RETURN BOND FUND and BANDED DURATION(R) method of investing as two of its investment options.
IT'S BEEN A FRIENDLY MARKET
By any measure, 1995 has been a friendlier market than 1994. In the jargon of an investment manager, the term "friendly" is applied to those conditions in which interest rates stay the same or decline. The conditions in 1995 presented a picture in sharp contrast to 1994. Inflation, the worry in 1994, ceased to be viewed as a problem in 1995. Pittsburgh's PNC Bank Corp. reported that even the price of gifts in the holiday classic "The 12 Days of Christmas", including sevens swans a-swimming to five gold rings, were down an impressive 21.7% from a year ago.
The following is a summary of market price activity for the Fourth Quarter of 1995 and for the entire year of 1995.
30 YEAR BOND ........................ 6.22% 21.47% 10 YEAR NOTE ........................ 3.94% 15.09% 5 YEAR NOTE ......................... 2.81% 10.41% 2 YEAR NOTE ......................... 1.19% 4.97% 90 DAY BILL ......................... .38% 1.81%
Here are some significant factors which influence the bond market:
DOLLAR VALUATION. After a rather large roller-coaster ride in mid- year, the dollar ended 1995 holding its own versus the Japanese yen on a year-over-year basis; the dollar gained 2.4%. Against the German deutschmark, the dollar gained significantly, closing 9% higher than a year earlier. The fact that the dollar gained strength against the major foreign currencies is strong indication that inflation is benign and fundamental economic strength in the U.S. is good relative to other countries. We expect that the dollar will continue to gain strength against the Japanese yen and, in the process, assist in higher bond prices.
THE FEDERAL RESERVE. The Federal Reserve is in the cat-bird seat. Having manipulated short rates to the benefit of inflation hawks, it is now in the position of being able to lower rates during an election year...for reasons other than political. President Clinton should hang medals on both Alan Greenspan and Paul Volker for engineering this incredible circumstance. If the President is re-elected, he has them to thank. The Fed will probably lower rates in late spring/early summer to both accommodate a "soft landing" scenario and to pay homage to the incumbent, who most recently appointed most Board members. Whenever it occurs, it most likely will benefit the bond market which is paying little attention to the possibility of inflation as a result of the cheap money.
RAW MATERIALS PRICES. If there is a red flag on the inflation front, it is commodity prices. For the first eight months of this year, the Commodity Research Bureau Index (CRB Index) hovered in a tight zone of +/- 1% of its beginning year prices. Then in August, it popped up a full 3% in a 30 day period. Market watchers shuddered at the prospect of higher raw materials prices and the bond market retreated as it almost always does at the hint of inflation. But just as fast as they went up in August, they came down in November and December finishing the year less than 1% higher than they started the year.
But one year does not a market make. Technicians who have followed this average as an indicator to bond prices (there is an 80% inverse correlation between the CRB INDEX and long term U.S. government bond prices) have noted that the major downtrend in the CRB Index that occurred in the '80s ceased in 1993, and that higher prices were on the horizon. The rise over longer periods illustrates the concern; a 4.4% in the past 24 months; 16.8% in the past 36 months!
GOLD PRICES. The price of gold, another leading indicator for bonds, has been steady for most of 1995. Starting the year at $384 per ounce, it gained a scant $3 during the year and actually lost ground over the previous 24, however, it gained 16.5% over the past 36 month period. While inflation looks tame, the concern is over the longer term.
OUR VIEW OF INTEREST RATES. How much better can the published -fundamentals get? Many are saying that interest rates are headed lower with forecasts in the 5.5-5% range. While that may be true, what will drive them there? The good news is out...low CPI increases, flat commodity prices in 1995, a stable price of gold, and the prospect of a balanced budget. Worlds too good to be true? Is all the good news priced into the market? If there is any disappointment in any of the fundamentals, prices could pull back 5-8% from these levels. On a technical basis, there are divergences between price action and the weekly relative strength index, a very reliable indicator. Additionally, the weekly RSI is overbought, a good indicator that the current rally is maturing. Thus, while the bond market has some upside potential, we feel that it is limited and that extreme caution is warranted during the First and Second Quarters of 1996. However, with bond mutual funds only 91% invested, there will be plenty of cash available for the next leg up.
The dividends for the PAUZE' U.S. GOVERNMENT TOTAL RETURN BOND FUND for the 4th Quarter, 1995, totaled $0.15 and the total return was 4.38%. Twelve (12) month Total Return 12/29/94 through 12/29/95 was 14.25%. Total return for the life of the fund from 1/10/94 to 12/29/95 was 3.92%.
TOTAL RETURN INDEX DECEMBER 29, 1995
TOTAL RATE OF RETURN 3 MO 2 YR 5 YR 10 YR 30 YR IN PERCENT BILL TSY TSY TSY TSY ---------- ---- ----- ----- ----- ----- PAST 90 DAYS .................. 1.35 2.22 3.10 5.29 8.44 ANNUALIZED 5.47 9.01 12.58 21.47 34.25
PAST YEAR ..................... 6.05 10.77 16.28 24.02 33.50
YEAR-TO-DATE .................. 5.99 10.71 16.25 24.03 33.86
12/30/94 ...................... 5.96 10.65 16.16 23.90 33.67
NOTE: ALL RETURNS ON INVESTMENT AND REINVESTMENT IN "CURRENT" ISSUES
Disclaimer: The data shown is from sources generally considered to be reliable and accurate, however, errors may occur and therefore calculations are not guaranteed. Please note that past performance is not a guarantee of future results. Investment return and principal value will fluctuate.
Comments herein do not constitute a solicitation for investment into any registered mutual fund. Such solicitation can only take place through a Prospectus offering. The Prospectus for the PAUZE' U.S. GOVERNMENT TOTAL RETURN BOND FUND may be obtained by calling the Fund at 1-800-647-5436 or by writing PAUZE' SWANSON CAPITAL MANAGEMENT CO., 14340 Torrey Chase Boulevard, Suite 170, Houston, Texas 77014. Read the prospectus before sending money. Past performance does not guarantee future return. Net asset value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Like all mutual funds, neither the fund or its shares are insured or guaranteed by the U.S. Government.
The PAUZE' OUTLOOK is a publication of PAUZE' SWANSON CAPITAL MANAGEMENT CO., 14340 Torrey Chase Boulevard, Suite 170, Houston, Texas 77014. 1-800-647-5436. Annual subscription is $250 and may be placed by calling 1-800-647-5436 or by sending a check to the address above. BANDED DURATION(R) method of investing is a copyright of PAUZE' SWANSON. All rights reserved. | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T17:05:44 |
0000912057-96-000455 | 0000912057-96-000455_0000.txt | UNDER THE SECURITIES ACT OF 1933
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
William H. Park, Executive Vice President (Name, address, including zip code, and telephone number, including area code, of agent for service)
Hill & Barlow, a Professional Corporation
Approximate date of commencement of proposed sale to the public:
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /X/
securities offering aggregate Amount of to be Amount to be price per offering registration registered registered unit * price * fee
Common Stock 166,376 $37.938 $6,311,972.69 $2,176.54
* Estimated solely for the purpose of computing the registration fee. This amount was calculated pursuant to Rule 457 upon the basis of the average of the high and low prices of the registrant's Common Stock as reported in the consolidated reporting system of the New York Stock Exchange on January 8, 1996.
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.
(Par Value $.01 Per Share)
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.
An aggregate maximum of 166,376 shares of Common Stock being offered hereby (the "Shares") will be sold by Allen & Company Incorporated (the "Selling Stockholder") from time to time on exercise of certain warrants (the "Warrants") previously acquired by the Selling Stockholder from the original holders of the Warrants (the "Warrantholders") in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act").
United Asset Management Corporation (the "Company") will not receive any of the proceeds from the sale of either the Warrants to the Selling Stockholder or the sale of the Shares by the Selling Stockholder. The Selling Stockholder will acquire the Shares from the Company upon exercise of Warrants to purchase shares of the Company's Common Stock at prices ranging from $16.222 to $16.499 per share held by the Warrantholders. The Company will receive all of the proceeds from the exercise of the Warrants.
The Warrants were originally issued to Warrantholders in connection with the Company's acquisition of investment advisory firms owned by such Warrantholders ("Affiliated Firms"). The last price of the Company's Common Stock as reported by the New York Stock Exchange on January 8, 1996 was $38.50 per share.
The Selling Stockholder has advised the Company (1) that it proposes, from time to time, to offer for sale and sell or to distribute the Shares to be offered by it hereby (a) in regular brokerage transactions executed on the New York Stock Exchange; (b) in negotiated transactions; or (c) through other means; (2) that sales in negotiated transactions will be effected at such prices as may be obtainable and as may be satisfactory to the Selling Stockholder; and (3) that no sales or distributions other than as described in (1)(a) and (1)(b) above will be effected until after this Prospectus shall have been appropriately amended or supplemented, if required, to set forth the terms thereof. Under the provisions of the Securities Act, Allen & Company Incorporated is acting as an "underwriter" in connection with the Shares offered hereby. In certain cases, brokers executing sales orders on the Selling Stockholder and dealers purchasing Shares from the Selling Stockholder for resale may also be deemed to be "underwriters" as that term is defined in Section 2(11) of the Securities Act. The Company has entered into an indemnification agreement with the Selling Stockholder. See section entitled "The Selling Stockholder."
It is intended that the Selling Stockholder will purchase Warrants at a price that will result in compensation to the Selling Stockholder equivalent to customary brokerage commissions. Other expenses, estimated at $10,000, will be borne by the Company.
The date of this Prospectus is January [__], 1996
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"). Such reports, as well as proxy and information statements, and other information filed by the Company with the Commission can be inspected and copied at the public reference facilities maintained by the Commission in Washington, D.C., at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at certain of its Regional Offices, as follows:
New York Regional Office Chicago Regional Office 75 Park Place 500 West Madison Street, New York, New York 10007 Chicago, Illinois 60604
Copies of such material can be obtained at prescribed rates from the Public Reference Section of the Commission, Washington, D.C. 20549.
The Common Stock of the Company is listed on the New York Stock Exchange. Reports, proxy and information statements, and other information concerning the Company can be inspected at such exchange.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission (File No. 1-9215) and are incorporated herein by reference: (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1994; (ii) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1995, June 30, 1995 and September 30, 1995; (iii) the Company's Current Report on Form 8-K filed on December 1, 1994; (iv) the Company's Current Report on Form 8-K/A filed on March 2, 1995; and (v) the description of the Company's capital stock contained in the Company's Registration Statement under Section 12(b) of the Exchange Act on Form 8-A, filed on July 22, 1986, including any amendment or reports filed for the purpose of updating such description.
All documents filed by the Company subsequent to the filing of the Registration Statement of which this Prospectus is a part, pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, before the termination of this offering, shall be deemed to be incorporated by reference in this Prospectus.
The Company shall, upon written or oral request by a person, including any beneficial owner, to whom this Prospectus is delivered, provide without charge to such person a copy of any and all of the information that has been incorporated by reference in this Prospectus (not including exhibits to the information that is incorporated by reference unless such exhibits are specifically incorporated by reference into the information that this Prospectus incorporates). Such requests should be directed to United Asset Management Corporation, One International Place, Boston, Massachusetts 02110, Attn: William H. Park, Executive Vice President and Chief Financial Officer (telephone 617/330-8900).
The Company is a holding company organized in December 1980 to acquire and to own firms engaged primarily in institutional investment management. The Company's principal executive offices are located at One International Place, Boston, Massachusetts 02110, and its telephone number is (617) 330-8900. As of the date of this Prospectus, the Company has 45 subsidiaries (the "Affiliated Firms"), which serve as managers of investment portfolios for corporate, public and union pension funds and profit sharing plans, endowments, foundations and, to a lesser extent, individuals and other investors, including several investment companies.
The Selling Stockholder is a registered broker-dealer with offices located at 711 Fifth Avenue, New York, New York 10022. The Shares being offered hereby will be acquired by the Selling Stockholder upon exercise of the Warrants. The Selling Stockholder will acquire the Warrants from Warrantholders in private transactions exempt from the registration requirements of the Securities Act. The Warrantholders acquired the Warrants from the Company at least three years prior to sale to the Selling Stockholder upon the Company's acquisition of an Affiliated Firm. None of the Warrantholders are "affiliates" of the Company as that term is defined in the Securities Act. This Registration Statement covers up to a maximum of 166,376 Shares of the Company's Common Stock to be acquired upon exercise of the Warrants by the Selling Stockholder. As of the date hereof, the Selling Stockholder is the beneficial owner of no Warrants. No Warrants are being offered to the public pursuant to this Registration Statement. As of the date hereof, the Selling Stockholder may be deemed to be the beneficial owner of an aggregate of 1,116,194 shares of the Company's Common Stock, par value $.01, held by it and entities affiliated with it. None of such shares are being offered hereby.
The Company has entered into an agreement with the Selling Stockholder providing for indemnification by the Company of the Selling Stockholder and its officers, directors and control persons under certain circumstances, and reimbursement of out-of-pocket expenses including attorneys fees and expenses, incurred by the Selling Stockholder in connection with this offering. Compensation of the Selling Stockholder will consist only of the equivalent of customary brokerage commissions that would be received in connection with the sale of the Shares.
Philip Scaturro, a Managing Director of the Selling Stockholder, is a director of the Company.
On January 8, 1996, there were 29,991,131 shares of the Company's Common Stock issued and outstanding. The following table sets forth certain information, as of January 8, 1996, regarding ownership of the Company's Common Stock (including shares issuable upon exercise of the Warrants and upon exercise of stock options exercisable within sixty (60) days of the date hereof) by each Warrantholder. Each Warrantholder is an officer, former officer, or trust created by such an officer of an Affiliated Firm. The number of shares that may be offered pursuant to this Prospectus by the Selling Stockholder after purchase of a Warrant is equal to the number of shares issuable upon exercise of such Warrant. The number of shares and percentage owned after the offering assumes the sale of all of the shares issuable upon exercise of the Warrantholder's Warrants. Such sales are voluntary on the part of the Warrantholder and may or may not be consummated.
* Less than one (1) percent
The Warrants were originally issued to the Warrantholders in connection with the acquisition by the Company of Affiliated Firms more than three years prior to the date of this Prospectus. At that time, the Warrantholders also received subordinated notes of the Company in principal amounts equal to the aggregate exercise price under the applicable Warrant. Under the terms of the Warrant, such notes may be surrendered in payment of such exercise price. Warrantholders may at any time so exercise the Warrants and sell the shares issued on exercise of such Warrants in transactions exempt from the registration requirement of the Securities Act pursuant to Rule 144 (k) promulgated under such act.
The legality of the Shares offered by this Prospectus has been passed upon by Hill & Barlow, a Professional Corporation, One International Place, Boston, Massachusetts 02110. John C. Vincent, Jr., a member of that firm, is the Secretary of the Company.
The financial statements incorporated in this Prospectus by reference to the Annual Report on Form 10-K of the Company 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.
The financial statements incorporated in this Prospectus by reference to the Company's Current Report on Form 8-K dated December 1, 1994 have been so incorporated in reliance on the reports of Altschuler, Melvoin & Glasser LLP, Maginnis, Knechtel & McIntyre and Horsfall, Murphy & Pindroh, independent accountants, given on the authority of said firms as experts in auditing and accounting.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a reasonably itemized statement of all expenses, other than commissions, in connection with the issuance and distribution of the Shares:
SEC Registration Fee $ 2,176.54 Legal Fees and Expenses 5,000.00*
All of these expenses will be borne by the Company.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware provides for indemnification of officers and directors subject to certain limitations. The general effect of such law is to empower a corporation to indemnify any of its officers and directors against certain expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person to be indemnified in connection with certain actions, suits or proceedings (threatened, pending or completed) if the person to be indemnified acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceedings, if he had no reasonable cause to believe his conduct was unlawful. The Company's by-laws provide that it shall indemnify its officers, directors, employees and agents to the extent permitted by law.
The Company maintains insurance under which the insurers will reimburse the Company for amounts which it has paid to its directors, officers and certain other employees by way of indemnification for claims against such persons in their official capacities. The insurance also covers such persons as to amounts paid by them as a result of claims against them in their official capacities which are not reimbursed by the Company. The insurance subject to certain limitations and exclusions. One of the Company's directors serves as such under the terms of an agreement with a corporation of which he is an officer. In so serving, he is covered by the officers and directors' liability insurance policy maintained by such corporation.
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
(i) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the
(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
B. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
C. Insofar as indemnification for liabilities 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.
Certain of the following exhibits (those marked with an asterisk) are filed herewith. The remainder of the exhibits have heretofore been filed with the Commission and are incorporated herein by reference. Inapplicable items have been omitted.
1* Agreement dated January 8, 1996 between the Company and Allen & Company Incorporated.
4.1 Restated Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4, File No. 33-14565, as amended by Amendment No. 1, filed July 7, 1987).
4.2 By-Laws of the Company, as amended (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, File No. 33-6874, filed August 22, 1986).
4.3 Specimen Certificate of Common Stock, $.01 par value, of the Company (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, File No. 33-6874, filed August 22, 1986).
5* Opinion of Hill & Barlow, a Professional Corporation.
24.1* Consent of Hill & Barlow, a Professional Corporation (included in Exhibit 5).
24.2* Consent of Price Waterhouse LLP.
24.3* Consent of Altschuler, Melvoin and Glasser LLP
24.4* Consent of Maginnis, Knechtel & McIntyre
24.5* Consent of Horsfall, Murphy & Pindroh
25 Power of Attorney (included in original filing of this Registration Statement).
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts, on January 9, 1996.
By: /s/ William H. Park
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Norton H. Reamer Director January 9, 1996
/s/ William H. Park Executive Vice President January 9, 1996 ------------------------ and Chief Financial Officer William H. Park (principal accounting
* Director January 9, 1996
* Director January 9, 1996 Charles E. Haldeman, Jr.
* Director January 9, 1996
* Director January 9, 1996
* Director January 9, 1996
* Director January 9, 1996
* Director January 9, 1996
*By: /s/ William H. Park | S-3/A | S-3/A | 1996-01-12T00:00:00 | 1996-01-12T15:54:23 |
0000795402-96-000004 | 0000795402-96-000004_0000.txt | THIS STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 1, 1996, IS NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUSES OF TEMPLETON INCOME FUND DATED JANUARY 1, 1996, AND TEMPLETON MONEY FUND DATED JANUARY 1, 1996, EACH AS AMENDED FROM TIME TO TIME, WHICH MAY BE OBTAINED WITHOUT CHARGE UPON REQUEST TO THE PRINCIPAL UNDERWRITER, FRANKLIN TEMPLETON DISTRIBUTORS, INC., 700 CENTRAL AVENUE, P.O. BOX 33030 TOLL FREE TELEPHONE: 800/DIAL BEN
-The Templeton Global Bond Managers
Purchase, Redemption and Pricing of -Special Net Asset Value Purchases..................37
Templeton Income Trust (the "Trust") was organized as a Massachusetts business trust on June 16, 1986, and is registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end management investment company with two series of Shares: Templeton Income Fund, a non-diversified fund ("Income Fund") and Templeton Money Fund, a diversified fund ("Money Fund") (collectively, the "Funds").
INVESTMENT POLICIES. The investment objective and policies of each Fund are described in each Fund's Prospectus under the heading "General Description--Investment Objective and Policies."
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. The Templeton Global Bond Managers Division of Templeton Investment Counsel, Inc. (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 a Fund's ability to dispose of the underlying securities. A Fund will enter into repurchase agreements only with parties who meet creditworthiness standards approved by the Board of Trustees, 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.
DEBT SECURITIES. Income Fund may invest in debt securities which are rated in any category by Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"). See the Appendix for a description of the S&P and Moody's ratings. As an operating policy, Income Fund will invest no 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 Income Fund's net asset value.
Although they may offer higher yields than do higher rated securities, high risk, low rated debt securities (commonly referred to as "junk bonds") 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 securities are traded. The existence of limited markets for particular securities may diminish Income 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 each 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 Income Fund to achieve its investment objective may, to the extent of investment in low rated debt securities, be more dependent upon such creditworthiness analysis than would be the case if Income 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, Income Fund may incur additional expenses seeking recovery.
Income Fund may accrue and report interest income on high yield bonds, such as zero coupon bonds or pay-in-kind securities, 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, and to be relieved of federal tax liabilities, Income Fund must distribute substantially all of its net income and gains to Shareholders (see "Tax Status") generally on an annual basis. Income 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.
STRUCTURED INVESTMENTS. Included among the issuers of debt securities in which Income 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 purchase 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 Income Fund anticipates investing typically involve no credit enhancement, their credit risk will generally be equivalent to that of the underlying instruments.
Income 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, Income 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.
FUTURES CONTRACTS. Income Fund may purchase and sell financial futures contracts. Currently, futures contracts are available on several types of fixed-income securities including: U.S. Treasury bonds, notes and bills, commercial paper and certificates of deposit.
Although some financial futures contracts call for making or taking delivery of the underlying securities, in most cases these obligations are closed out before the settlement date. The closing of a contractual obligation is accomplished by purchasing or selling an identical offsetting futures contract. Other financial futures contracts by their terms call for cash settlements.
Income Fund may also buy and sell index futures contracts with respect to any stock or bond index traded on a recognized stock exchange or board of trade. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. 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.
At the time Income Fund purchases a 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 Income Fund's custodian. When selling a stock index futures contract, Income 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, Income Fund may "cover" its position by owning the instruments underlying the contract or, in the case of a stock index futures contract, 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 Income Fund to purchase the same futures contract at a price no higher than the price of the contract written by Income Fund (or at a higher price if the difference is maintained in liquid assets with Income Fund's custodian).
OPTIONS ON SECURITIES, INDICES AND FUTURES. Income Fund may write covered put and call options and purchase put and call options on securities, securities indices and futures contracts that are traded on United States and foreign exchanges and in the over-the-counter markets.
An option on a security or a futures contract is a contract that gives the purchaser of the option, in return for the premium paid, the right to buy a specified security or futures contract (in the case of a call option) or to sell a specified security or futures contract (in the case of a put option) from or to the writer of the option at a designated price during the term of the option. An option on a securities index gives the purchaser of the option, in return for the premium paid, the right to receive from the seller cash equal to the difference between the closing price of the index and the exercise price of the option.
Income Fund may write a call or put option only if the option is "covered." A call option on a security or futures contract written by Income Fund is "covered" if Income Fund owns the underlying security or futures contract covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option on a security or futures contract is also covered if Income Fund holds a call on the same security or futures contract 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 Income Fund in cash or high grade U.S. Government securities in a segregated account with its custodian. A put option on a security or futures contract written by Income Fund is "covered" if Income Fund maintains cash or fixed income securities with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same security or futures contract and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written.
Income Fund will cover call options on securities indices that it writes by owning securities whose price changes, in the opinion of the Investment Manager, are expected to be similar to those of the index, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. Nevertheless, where Income Fund covers a call option on a securities index through ownership of securities, such securities may not match the composition of the index. In that event, Income Fund will not be fully covered and could be subject to risk of loss in the event of adverse changes in the value of the index. Income Fund will cover put options on securities indices that it writes by segregating assets equal to the option's exercise price, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations.
Income Fund will receive a premium from writing a put or call option, which increases its gross income in the event the option expires unexercised or is closed out at a profit. If the value of a security, index or futures contract on which Income Fund has written a call option falls or remains the same, Income Fund will realize a profit in the form of the premium received (less transaction costs) that could offset all or a portion of any decline in the value of the portfolio securities being hedged. If the value of the underlying security, index or futures contract rises, however, Income Fund will realize a loss in its call option position, which will reduce the benefit of any unrealized appreciation in its investments. By writing a put option, Income Fund assumes the risk of a decline in the underlying security, index or futures contract. To the extent that the price changes of the portfolio securities being hedged correlate with changes in the value of the underlying security, index or futures contract, writing covered put options will increase Income Fund's losses in the event of a market decline, although such losses will be offset in part by the premium received for writing the option.
Income Fund may also purchase put options to hedge its investments against a decline in value. By purchasing a put option, Income Fund will seek to offset a decline in the value of the portfolio securities being hedged through appreciation of the put option. If the value of Income Fund's investments does not decline as anticipated, or if the value of the option does not increase, its loss will be limited to the premium paid for the option plus related transaction costs. The success of this strategy will depend, in part, on the accuracy of the correlation between the changes in value of the underlying security, index or futures contract and the changes in value of Income Fund's security holdings being hedged.
Income Fund may purchase call options on individual securities or futures contracts to hedge against an increase in the price of securities or futures contracts that it anticipates purchasing in the future. Similarly, Income Fund may purchase call options on a securities index to attempt to reduce the risk of missing a broad market advance, or an advance in an industry or market segment, at a time when Income Fund holds uninvested cash or short-term debt securities awaiting investment. When purchasing call options, Income Fund will bear the risk of losing all or a portion of the premium paid if the value of the underlying security, index or futures contract does not rise.
There can be no assurance that a liquid market will exist when Income Fund seeks to close out an option position. Trading could be interrupted, for example, because of supply and demand imbalances arising from a lack of either the options exchange could suspend trading after the price has risen or fallen more than the maximum specified by the exchange. Although Income Fund may be able to offset to some extent any adverse effects of being unable to liquidate an option position, it may experience losses in some cases as a result of such inability. The value of over-the-counter options purchased by Income Fund, as well as the cover for options written by Income Fund, are considered not readily marketable and are subject to the Trust's limitation on investments in securities that are not readily marketable. See "Investment Objectives and Policies --Investment Restrictions."
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign currency exchange rate risks, Income Fund may enter into forward foreign currency exchange contracts and foreign currency futures contracts, as well as purchase put or call options on foreign currencies, as described below. Income Fund may also conduct its foreign currency exchange transactions on a spot (I.E., cash) basis at the spot rate prevailing in the foreign currency exchange market.
Income Fund may enter into forward foreign currency exchange contracts ("forward contracts") to attempt to minimize the risk to Income Fund from adverse changes in the relationship between the U.S. dollar and foreign currencies. A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date which is individually negotiated and privately traded by currency traders and their customers. Income Fund may enter into a forward contract, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of the security. In addition, for example, when Income Fund believes that a foreign currency may suffer or enjoy a substantial movement against another currency, it may enter into a forward contract to sell an amount of the former foreign currency approximating the value of some or all of its portfolio securities denominated in such foreign currency. This second investment practice is generally referred to as "cross-hedging." Because in connection with Income Fund's forward foreign currency transactions, an amount of its assets equal to the amount of the purchase will be held aside or segregated to be used to pay for the commitment, Income Fund will always have cash, cash equivalents or high quality debt securities available in an amount sufficient to cover any commitments under these contracts or to limit any potential risk. The segregated account will be marked-to-market on a daily basis. While these contracts are not presently regulated by the Commodity Futures Trading Commission ("CFTC"), the CFTC may in the future assert authority to regulate forward contracts. In such event, Income Fund's ability to utilize forward contracts in the manner set forth above may be restricted. Forward contracts may limit 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 Income Fund than if it had not engaged in such contracts.
Income Fund may purchase and write put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of foreign portfolio securities and against increases in the dollar cost of foreign securities to be acquired. As is the case with other kinds of options, however, the writing of an option on foreign currency will constitute only a partial hedge up to the amount of the premium received, and Income Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against fluctuation in exchange rates, although, in the event of rate movements adverse to its position, Income Fund may forfeit the entire amount of the premium plus related transaction costs. Options on foreign currencies to be written or purchased by Income Fund will be traded on U.S. and foreign exchanges or over-the-counter.
Income Fund may enter into exchange-traded contracts for the purchase or sale for future delivery of foreign currencies ("foreign currency futures"). This investment technique will be used only to hedge against anticipated future changes in exchange rates which otherwise might adversely affect the value of Income Fund's portfolio securities or adversely affect the prices of securities that Income Fund intends to purchase at a later date. The successful use of foreign currency futures will usually depend on the Investment Manager's ability to forecast currency exchange rate movements correctly. Should exchange rates move in an unexpected manner, Income Fund may not achieve the anticipated benefits of foreign currency futures or may realize losses.
INVESTMENT RESTRICTIONS. The Funds have imposed upon themselves certain investment restrictions which, together with their investment objectives, are fundamental policies except as otherwise indicated. No changes in a Fund's investment objectives or investment restrictions (except those which are not fundamental policies) can be made without the approval of the Shareholders of that Fund. For this purpose, the provisions of the 1940 Act require the affirmative vote of the lesser of either (1) 67% or more of that Fund's Shares present at a Shareholders' meeting at which more than 50% of the outstanding Shares are present or represented by proxy or (2) more than 50% of the outstanding Shares of that Fund.
In accordance with these restrictions, each Fund will not:
1. Invest in real estate or mortgages on real estate (although the Funds may invest in marketable securities secured by real estate or interests therein); invest in other open-end investment companies (except in connection with a merger, consolidation, acquisition or reorganization); invest in interests (other than publicly issued debentures or equity stock interests) in oil, gas or other mineral exploration or development programs; purchase or sell commodity contracts (except futures contracts as described in Income Fund's Prospectus).
2. Purchase or retain securities of any company in which Trustees or officers of the Trust or of the 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. Invest in any company for the purpose of exercising control or management.
4. Act as an underwriter; issue senior securities; or purchase on margin or sell short, except that Income Fund may make margin payments in connection with futures, options and currency transactions. Money Fund may not write or buy puts, calls, straddles or spreads.
5. Loan money, except that a Fund may purchase a portion of an issue of publicly distributed bonds, debentures, notes and other evidences of indebtedness.
6. Invest more than 5% of the value of its total assets in securities of issuers which have been in continuous operation less than three years.
7. Invest more than 15% of its total assets in securities of foreign companies that are not listed on a recognized United States or foreign securities exchange, including no more than 5% of its total assets in restricted securities and no more than 10% of its total assets in restricted securities and other securities (including repurchase agreements having more than seven days remaining to maturity) which are not restricted but which are not readily marketable (I.E., trading in the security is suspended or, in the case of unlisted securities, market makers do not exist or will not entertain bids or offers).
8. Invest more than 25% of its total assets in a single industry, except that Money Fund may invest in obligations issued by domestic banks (including certificates of deposit, bankers' acceptances and commercial paper) without regard to this limitation.
9. Borrow money, except that Income Fund may borrow money in amounts up to 30% of the value of that Fund's net assets. In addition, neither Fund may pledge, mortgage or hypothecate its assets for any purpose, except that Income Fund may do so to secure such borrowings and then only to an extent not greater than 15% of its total assets. Arrangements with respect to margin for futures contracts are not deemed to be a pledge of assets.
10. Participate on a joint or a joint and several basis in any trading account in securities. (See "Investment Objectives and Policies -- Trading Policies" as to transactions in the same securities for the Funds and other Templeton Funds and
11. Invest more than 5% of its net assets in warrants whether or not listed on the New York or American Stock Exchanges, and more than 2% of its net assets in warrants that are not listed on those exchanges. Warrants acquired in units or attached to securities are not included in this restriction.
In addition to the above restrictions, Money Fund will not invest more than 5% of its total assets in the securities of any one issuer (exclusive of U.S. Government securities) or purchase more than 10% of any class of securities of any one company, including more than 10% of its outstanding voting securities.
Whenever any investment restriction states a maximum percentage of a 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 a Fund's acquisition of such security or property. The investment restrictions do not preclude either Fund from purchasing the securities of any issuer pursuant to the exercise of subscription rights distributed to a Fund by the issuer, unless such purchase would result in a violation of restrictions 7 or 8.
RISK FACTORS. Income Fund has an unlimited right to purchase securities in any foreign country, developed or developing, if they are listed on an 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. Income 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 New York Stock Exchange ("NYSE") and securities of some foreign companies are less liquid and more volatile than securities of comparable United States companies. Commission rates in foreign countries, which are 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 liquidity and in greater price volatility; (iii) certain national policies which may restrict Income 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 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 Income 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, Income 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 U.S. dollars, the conversion rates may be artificial to the actual market values and may be adverse to Income 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 Income 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 Income 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 Income Fund to lose its registration through fraud, negligence or even mere oversight. While Income 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 Income 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 Income 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 Income Fund if a potential purchaser is deemed unsuitable, which may expose the Fund to potential loss on the investment.
Income Fund 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 Income 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 which could affect investments in securities of issuers in foreign nations.
Income 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 a Fund may invest may also have fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies have experienced a steady devaluation relative to the U.S. dollar. Any devaluations in the currencies in which a Fund's portfolio securities are denominated may have a detrimental impact on that Fund. Through Income 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 Income 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 Trustees consider at least annually the likelihood of the imposition by any foreign government of exchange control restrictions which would affect the liquidity of Income 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 Trustees also consider the degree of risk involved through the holding of portfolio securities in domestic and foreign securities depositories (see "Investment Management and Other
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 Income 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 Trustees' appraisal of the risks will always be correct or that such exchange control restrictions or political acts of foreign governments might not occur.
Income Fund's ability to reduce or eliminate its futures and related options positions will depend upon the liquidity of the secondary markets for such futures and options. Income Fund intends to purchase or sell futures and related options 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 futures and options for hedging may involve risks because of imperfect correlations between movements in the prices of the futures or options and movements in the prices of the securities being hedged. Successful use of futures and related options by Income 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.
Additional risks may be involved with Income Fund's special investment techniques, including loans of portfolio securities and borrowing for investment purposes. These risks are described under the heading "Investment Techniques" in the Prospectus.
TRADING POLICIES. The Investment Manager and its affiliated companies serve as investment adviser 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 in certain countries 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 Trustees and Principal Executive Officers of the Trust are as follows:
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH TRUST DURING PAST FIVE
Chairman of the Board, president and chief executive officer of 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 TRUST 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 Dillon, Read & Co. Inc. (investment banking) prior thereto. Age 65.
National Bank of Canada, Toronto. Age 85.
Farmer; and president of Clairhaven Investments, Ltd. and other private investment companies. Age 79.
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and a Corporation. Age 63.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH TRUST DURING PAST FIVE YEARS
director of Gulfwest Banks, Inc. present) and Mercantile Bank (1991- Ltd. (1986-1992); and chairman of Templeton Funds Management, Inc. (1974-1991). Age 74.
Consultant of 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 residence of Eckerd College (1991- present); and a director of Checkers Drive-In Restaurants, Inc. Age 72.
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.; 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 economic analyst, U.S. Government. Age 66.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH TRUST 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.; and formerly held the following position: 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 a director of various other business and nonprofit organizations. Age 66.
President of the Templeton Global Bond Managers Division of Templeton Investment Counsel, Inc.; president or vice president of other Templeton Funds; founder and partner of Forester, Hairston Investment Management (1989-1990); managing director (Mid-East Region) of Merrill Lynch, Pierce, Fenner & Smith Inc. (1987-1988); and an advisor for Saudi Arabian Monetary Agency (1982-1987). Age 47.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH TRUST DURING PAST FIVE YEARS
President and director of Templeton Global Advisors Limited; chief investment officer of the global equity group for Templeton Worldwide, Inc.; vice president of the Templeton Funds; formerly, investment administrator with Roy West Trust Corporation (Bahamas) Limited (1984-1985). Age 35.
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 the Templeton Funds; accountant with 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 of the Keystone Group, Inc. Age 55.
Senior vice president, Portfolio Management/Research, of the Templeton Global Bond Managers division of Templeton Investment Counsel, Inc.; formerly, portfolio manager and bond analyst for Constitutional Capital Management (1985-1987); bond trader and research analyst for Bank of New England (1982-1985). Age 38.
NAME, ADDRESS AND PRINCIPAL OCCUPATION OFFICES WITH TRUST DURING PAST FIVE YEARS
Vice president of the Templeton Global Bond Managers division of Templeton Investment Counsel, Inc.; vice president of various Templeton Funds; formerly, portfolio manager, Forester & Hairston (1988-1991); investment adviser, Merrill Lynch, Pierce, Fenner & Smith Incorporated (1981-1988). Age 35.
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.
ertified 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 with Ernst & Young (certified public accountants) (1977-1989). Age 41.
Partner, Dechert Price & Rhoads. Age 50.
* These Trustees are "interested persons" of the Trust 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, Galbraith & Hansberger, Ltd. are limited partners of Darby Emerging Markets Fund, L.P.
There are no family relationships between any of the Trustees.
All of the Trust's Officers and Trustees also hold positions with other investment companies in the Franklin Templeton Group. No compensation is paid by the Trust to any officer or Trustee 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 Trust currently pays the independent Trustees and Mr. Brady an annual retainer of $2,500 and a fee of $200 per meeting attended of the Board and its Committees. The independent Trustees 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 Trust expenses.
The following table shows the total compensation paid to the Trustees by the Trust 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 20,479,601 Shares of Income Fund outstanding, of which 1,494 Shares (0.007%) were owned beneficially by all the Trustees and officers of the Trust as a group. As of December 1, 1995, there were 179,674,450 Shares of Money Fund outstanding, of which 364,954 Shares (0.203%) were owned beneficially by all the Trustees and officers of the Trust as a group. As of December 1, 1995, to the knowledge of management, no person owned beneficially, directly or indirectly, 5% or more of either Fund's outstanding Shares, except Madhatter, c/o Security Trust, owned 19,118,387 Shares of Money Fund (10% of Money Fund's outstanding Shares).
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENTS. The Investment Manager of each Fund is the Templeton Global Bond Managers division of Templeton Investment Counsel, Inc., a Florida corporation with offices located at Broward Financial Centre, Fort Lauderdale, Florida 33394-3091. The Investment Management Agreements, dated October 30, 1992, relating to Income Fund and Money Fund were approved by the Shareholders of each Fund on October 30, 1992, were last approved by the Board of Trustees, including a majority of the Trustees who were not parties to the Agreements or interested persons of any such party, at a meeting on December 5, 1995, and will run through December 31, 1996. The Investment Management Agreements continues from year to year subject to approval annually by the Board of Trustees or by vote of a majority of the outstanding Shares of each Fund (as defined in the 1940 Act) and also, in either event, with the approval of a majority of those Trustees who are not parties to the Agreements or interested persons of any such party in person at a meeting called for the purpose of voting on such approval.
Each Investment Management Agreement requires the Investment Manager to manage the investment and reinvestment of each Fund's assets. The Investment Manager is not required to furnish any personnel, overhead items or facilities for the Funds, including daily pricing or trading desk facilities, although such expenses are paid by investment advisers of some other investment companies.
Each Investment Management Agreement provides that the Investment Manager will select brokers and dealers for execution of each Fund's portfolio transactions consistent with the Trust'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 Funds, the value of such services is indeterminable and the Investment Manager's fee is not reduced by any offset arrangement by reason thereof.
When the Investment Manager determines to buy or sell the same security for a Fund that the Investment Manager or certain of its affiliates have selected 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 Board of Trustees, to be impartial and fair, in order to seek good results for all parties. See "Investment Objectives and Policies -- Trading Policies." Records of securities transactions of persons who know when orders are placed by a Fund are available for inspection at least four times annually by the Compliance Officer of the Trust so that the non-interested Trustees (as defined in the 1940 Act) can be satisfied that the procedures are generally fair and equitable to 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 accounts, which may differ from action taken by the Investment Manager on behalf of a Fund. Similarly, with respect to a 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 or sell for its or 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 a Fund or other funds or accounts which it manages or administers. Of course, any transactions for the accounts of the Investment Manager and other access persons will be made in compliance with the Trust's Code of Ethics.
Each Investment Management Agreement provides that the Investment Manager shall have no liability to the Trust, a Fund or any Shareholder of a 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 Agreement, except liability resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part or reckless disregard of its duties under the Agreement. Each Investment Management Agreement will terminate automatically in the event of its assignment, and may be terminated by the Trust on behalf of a Fund at any time without payment of any penalty on 60 days' written notice, with the approval of a majority of the Trustees in office at the time or by vote of a majority of the outstanding voting securities of that Fund (as defined in the 1940 Act).
MANAGEMENT FEES. For its services, Income Fund pays the Investment Manager a monthly fee equal on an annual basis to 0.50% of its average daily net assets, reduced to 0.45% of such net assets in excess of $200,000,000 and further reduced to 0.40% of such net assets in excess of $1,300,000,000. Money Fund pays the Investment Manager a monthly fee equal on an annual basis to 0.35% of its average daily net assets, reduced to 0.30% of such net assets in excess of $200,000,000 and further reduced to 0.25% 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 either Fund in the event that a Fund's aggregate operating expenses, including the advisory fee, but generally excluding interest, taxes, brokerage commissions and extraordinary expenses, are in excess of specific applicable limitations. The strictest rule currently applicable to a 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 (and, prior to April 1, 1993, Templeton Global Bond Managers, Inc., the Trust's previous investment manager) received fees from Income Fund of $989,493, $1,040,324, and $950,197, and $736,511, respectively. During the fiscal years ended August 31, 1995, 1994, and 1993, the Investment Manager (and, prior to April 1, 1993, Templeton Global Bond Managers, Inc.) received fees from Money Fund of $713,915, $486,625, and $346,737, and $538,444, respectively.
THE TEMPLETON GLOBAL BOND MANAGERS DIVISION OF TEMPLETON INVESTMENT COUNSEL, INC. The Investment Manager is an indirect wholly owned subsidiary of Franklin Resources, Inc. ("Franklin"), a publicly traded company whose shares are listed on the New York Stock Exchange. Charles B. Johnson (a Trustee and Officer of the Trust) 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 Funds, including:
o providing office space, telephone, office equipment and
o paying compensation of the Trust's officers for
o authorizing expenditures and approving bills for payment on behalf of the Funds;
o supervising preparation of annual and semiannual reports to Shareholders, notices of dividends, capital gain distributions and tax credits, and attending to correspondence and other special communications with individual Shareholders;
o daily pricing of each Fund's investment portfolio and preparing and supervising publication of daily quotations of the bid and asked prices of each Fund's Shares, earnings reports and other
o monitoring relationships with organizations serving the Funds, including the custodian and printers;
o providing trading desk facilities for the Funds;
o supervising compliance by the Funds with recordkeeping requirements under the 1940 Act and regulations thereunder, with state regulatory requirements, maintaining books and records for the Funds (other than those maintained by the custodian and transfer agent), and preparing and filing tax reports other than the Funds' 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 Trust's aggregate average daily net assets (I.E., total of both Funds), reduced to 0.135% annually of the Trust's aggregate net assets in excess of $200,000,000, further reduced 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. The fee is allocated between the Funds according to their respective average daily net assets. Since the Business Manager's fee covers services often provided by investment advisors to other funds, each 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 $575,302, $499,794, and $420,292, respectively.
The Business Manager is relieved of liability to the Trust 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 reckless disregard of its duties and obligations under the Agreement. The Business Management Agreement may be terminated by a 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 Trustees of the Trust in office at the time or by vote of a majority of the outstanding voting securities of that Fund, and shall terminate automatically and immediately in the event of its assignment.
Templeton Global Investors, Inc. is a wholly owned subsidiary of Franklin.
CUSTODIAN AND TRANSFER AGENT. The Chase Manhattan Bank, N.A. serves as Custodian of the Trust'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 Trustees 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 Funds' 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 Income Fund an annual fee of $14.77 per Shareholder account plus out-of-pocket expenses and from Money Fund an annual fee of $22.91 per Shareholder account plus out-of-pocket expenses. These fees are 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 Trust.
INDEPENDENT ACCOUNTANTS. The firm of McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, serves as independent accountants for the Trust. Its audit services comprise examination of the Funds' financial statements and review of the Funds' filings with the Securities and Exchange Commission ("SEC") and the Internal Revenue Service ("IRS").
REPORTS TO SHAREHOLDERS. The Funds' fiscal years end on August 31. Shareholders are provided at least semiannually with reports showing the Funds' portfolios 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 Management Agreements provide that 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 a Fund's portfolio transactions 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" means 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 a 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 takes into account its past experience as to brokers qualified to achieve "best execution," including brokers who specialize in any foreign securities held by Income 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 a 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 to which fixed minimum commission rates are not applicable, to cause a 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 in making the selection in question 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 Funds 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 Trust's brokerage policy; that the research services provide lawful and appropriate assistance to the Investment Manager in the performance of its investment decision- making responsibilities; and that the commissions paid 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 Trust'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 a 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 Investment Manager are useful to the Investment Manager in performing its advisory services under its Investment Management Agreements with the Funds. Research services provided by brokers to the Investment Manager 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 Agreements with the Funds. Research furnished by brokers through whom a 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 that 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, including quotations outside the United States for daily pricing of foreign securities held in a Fund's portfolio.
4. Purchases and sales of portfolio securities within the United States other than on a securities exchange are 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 Funds' 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 deciding to allocate portfolio transactions (including agency transactions, principal transactions, purchases in underwritings or tenders in response to tender offers) for the account of a 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 that 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 Trustee or officer of the Trust, 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 Trust. Franklin Templeton Distributors, Inc., the Trust's Principal Underwriter, is a registered broker-dealer, but it has never executed any purchase or sale transactions for the Funds' portfolios or participated in any commissions on any such transactions, and has no intention of doing so in the future. During the fiscal years ended August 31, 1995, 1994, and 1993, Income Fund paid total brokerage commissions of $0, $32,000, and $5,363, and $16,578, respectively. Money Fund paid no brokerage commissions during those years. All portfolio transactions are allocated to broker-dealers only when their prices and execution, in the judgment of the Investment Manager, are equal to the best available within the scope of the Trust'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
Each Fund's Prospectus describes the manner in which a 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 calculated separately for each 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 Trust'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, 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 each Fund's net asset value is not calculated. Income 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 Trustees.
Money Fund uses the amortized cost method to determine the value of its portfolio securities pursuant to Rule 2a-7 under the 1940 Act. The amortized cost method involves valuing a security at its cost and amortizing any discount or premium over the period until maturity, regardless of the impact of fluctuating interest rates on the market value of the security. While this method provides certainty in valuation, it may result in periods during which the value, as determined by amortized cost, is higher or lower than the price which Money Fund would receive if the security were sold. During these periods the yield to a Shareholder may differ somewhat from that which could be obtained from a similar fund which utilizes a method of valuation based upon market prices. Thus, during periods of declining interest rates, if the use of the amortized cost method resulted in a lower value of Money Fund's portfolio on a particular day, a prospective investor in Money Fund would be able to obtain a somewhat higher yield than would result from investment in a fund utilizing solely market values, and existing Money Fund Shareholders would receive correspondingly less income. The converse would apply during periods of rising interest rates.
Rule 2a-7 provides that in order to value its portfolio using the amortized cost method, Money Fund must (i) maintain a dollar-weighted average portfolio maturity of 90 days or less; (ii) purchase securities having remaining maturities of 397 days or less; and (iii) invest only in U.S. dollar denominated securities determined in accordance with procedures established by the Board of Trustees to present minimal credit risks and which are rated in one of the two highest rating categories for debt obligations by at least two nationally recognized statistical rating organizations (or one rating organization if the instrument is rated by only one such organization, subject to ratification of the investment by the Board of Trustees). If a security is unrated, it must be of comparable quality as determined in accordance with procedures established by of Trustees, including approval or ratification of the security by the Board except in the case of U.S. Government securities.
Pursuant to Rule 2a-7, the Board is required to establish procedures designed to stabilize, to the extent reasonably possible, Money Fund's price per Share as computed for the purpose of sales and redemptions at $1.00. Such procedures will include review of Money Fund's portfolio holdings by the Board of Trustees, at such intervals as it may deem appropriate, to determine whether Money Fund's net asset value calculated by using available market quotations deviates from $1.00 per Share based on amortized cost. The extent of any deviation will be examined by the Board of Trustees. If such deviation exceeds 1/2 of 1%, the Board will promptly consider what action, if any, will be initiated. In the event the Board determines that a deviation exists which may result in material dilution or other unfair results to investors or existing Shareholders, the Board will take such corrective action as it regards as necessary and appropriate, including the sale of portfolio instruments prior to maturity to realize capital gains or losses or to shorten average portfolio maturity, withholding dividends or establishing a net asset value per Share by using available market quotations.
The Board of Trustees may establish procedures under which a 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 a Fund is not reasonably practicable or it is not reasonably practicable for a 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 a 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, each 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, a 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, the following special purchase plans also are available:
TAX-DEFERRED RETIREMENT PLANS. The Trust offers its Shareholders the opportunity to participate in the following types of retirement plans:
. For individuals whether or not covered by other
. For simplified employee pensions;
. For employees of tax-exempt organizations; and
. 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 a Fund pursuant to an IRAs. 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 a 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 a 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 a 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 $100,000 or more in Class I Shares of Templeton Income Fund or Class I Shares of 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 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 Templeton Income Fund 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 Income 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.
Except for Money Fund, 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
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 millon, 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 Funds' 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, a 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 rules of the SEC. In such circumstances, the securities distributed would be valued at the price used to compute the Fund's net asset 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.
Income Fund intends normally to pay a monthly dividend representing its net investment income and to distribute at least annually any net realized capital gain. Money Fund intends to declare dividends daily and to pay dividends monthly. By so doing and meeting certain diversification of assets and other requirements of the Code, each Fund intends to qualify as a regulated investment company under the Code. The status of a 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, a Fund generally will be relieved of liability for U.S. 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 are also subject to a nondeductible 4% excise tax. To avoid application of the excise tax, each Fund intends to distribute in accordance with the calendar year distribution requirement.
Dividends from net investment income and distributions from short-term capital gains (the excess of net short-term capital gains over net long-term capital losses) are taxable to Shareholders as ordinary income. Distributions from net investment income may be eligible for the corporate dividends received deduction to the extent attributable to Income Fund's qualifying dividend income. However, the alternative minimum tax applicable to corporations may reduce the benefit of the dividends received deduction. Distributions from net long-term capital gains (the excess of net long-term capital gains over net short-term capital losses) designated by a Fund as capital gain dividends are taxable to Shareholders as long-term capital gains, regardless of the length of time a 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 either Fund. Any distributions that are not from a 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 status of dividends and distributions they received and any tax withheld thereon.
Debt securities purchased by a Fund may be treated for federal income tax purposes as having original issue discount. Original issue discount essentially represents interest for federal tax purposes and can be defined generally as the excess of the stated redemption price at maturity over the issue price. Original issue discount, whether or not any income is actually received by a Fund, is treated for U.S. federal income tax purposes as income earned by the Fund, and therefore is subject to the distribution requirements of the Code. Generally, the amount of original issue discount included in the income of a Fund each year is determined on the basis of a constant yield to maturity which takes into account the compounding of accrued but unpaid interest.
In addition, debt securities may be purchased by a Fund at a discount which exceeds the original issue discount remaining on the securities, if any, at the time the Fund purchased the securities. This additional discount represents market discount for federal income tax purposes. In the case of any debt security having a fixed maturity date of more than one year from the date of issue and having market discount, the gain realized on disposition will be treated as interest for most purposes of the Code to the extent it does not exceed the accrued market discount on the security (unless a Fund elects for all its debt securities having a fixed maturity date of more than one year from the date of issue to include market discount in income in tax years to which it is attributable). Generally, market discount accrues on a daily basis. In the case of any debt security having a fixed maturity date of not more than one year from the date of issue, the gain realized on disposition will be treated as short-term capital gain. Market discount on securities with a fixed maturity date not exceeding one year from the date of issue generally is included in income on a ratable basis.
Income Fund may invest in shares of foreign corporations which may be classified under the Code as passive foreign investment companies ("PFICs"). In general, a foreign corporation is classified as a PFIC for a taxable year if at least one-half of its assets constitute investment-type assets or 75% or more of its gross income is investment-type income. If Income Fund receives a so-called "excess distribution" with respect to PFIC stock, Income Fund itself may be subject to a tax on a portion of the excess distribution, whether or not the corresponding income is distributed by Income Fund to Shareholders. In general, under the PFIC rules, an excess distribution is treated as having been realized ratably over the period during which Income Fund held the PFIC shares. Income Fund itself will be subject to tax on the portion, if any, of an excess distribution that is so allocated to prior Fund taxable years and an interest factor will be added to the tax, as if the tax had been payable in such prior taxable years. Certain distributions from a PFIC as well as gain from the sale of PFIC shares are treated as excess distributions. Excess distributions are characterized as ordinary income even though, absent application of the PFIC rules, certain excess distributions might have been classified as capital gain.
Income Fund may be eligible to elect alternative tax treatment with respect to PFIC shares. Under an election that currently is available in some circumstances, 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 distributions are received from the PFIC in a given year. 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 Income 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 Income Fund could, in limited circumstances, incur nondeductible interest charges. Income Fund's intention to qualify annually as a regulated investment company may limit its elections with respect to PFIC shares.
Certain of the options, futures contracts and forward contracts in which Income 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 Income Fund at the end of each taxable year (and, with certain exceptions, for purposes of the 4% excise tax, on October 31 of each year) 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 Income 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 Income Fund. In addition, losses realized by Income Fund on positions that are part of a 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 Income Fund of hedging transactions are not entirely clear. The hedging transactions may increase the amount of short-term capital gain realized by Income Fund which is taxed as ordinary income when distributed to Shareholders.
Income Fund may make one or more of the elections available under the Code which are applicable to straddles. If Income 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 elections 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 Income Fund's tax status as a regulated investment company may limit the extent to which Income Fund will be able to engage in such transactions in options, futures and forward contracts.
Under the Code, gains or losses attributable to fluctuations in exchange rates which occur between the time a Fund accrues income or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time a 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 a 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, a 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.
Income received by the Funds 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 Income Fund's total assets at the close of its taxable year consists of securities of foreign corporations, Income Fund will be eligible and intends to elect to "pass through" to Income Fund's Shareholders the amount of foreign taxes paid by Income 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 Income 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 Income Fund's taxable year whether the foreign taxes paid by Income 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 Income Fund's income flows through to its Shareholders. With respect to Income 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 Income Fund. Shareholders may be unable to claim a credit for the full amount of their proportionate share of the foreign taxes paid by Income 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 Income 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 Income Fund will be treated as United States source income.
Upon the sale or exchange of Income Fund Shares, a Shareholder will realize a taxable gain or loss depending upon his basis in the Shares. Such gain or loss generally will be treated as capital gain or loss if the Shares are capital assets in the Shareholder's hands, and 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 Income 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 Income Fund Shares held by the Shareholder for 6 months or less will be treated for federal income tax purposes as a long-term capital loss to the extent of any distributions of capital gain dividends received by the Shareholder with respect to such Shares. It is not anticipated that gain or loss will be realized from a disposition of Money Fund Shares since that Fund intends to maintain a share price of $1.
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 stock. 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 stock.
The Funds 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 (except redemptions from Money Fund), to a Shareholder if (1) the Shareholder fails to furnish a Fund with the Shareholder's correct taxpayer identification number or social security number, (2) the IRS notifies the Shareholder or a 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.
Ordinary dividends and taxable capital gain distributions declared in October, November, or December with a record date in such a month and paid during the following January will be treated as having been paid by a 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.
U.S. tax rules applicable to foreign investors may differ significantly from those outlined above. Distributions also may be subject to state, local and foreign taxes. Shareholders should consult their own tax advisers with respect to the particular tax consequences to them of an investment in a 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 each Fund's Shares. FTD is a wholly owned subsidiary of Franklin.
Each 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 Plans adopted with respect to Class I Shares (including all Shares issued by Money Fund), each Fund may reimburse FTD or others quarterly (subject to a limit of 0.15% per annum of Money Fund's average daily net assets and 0.25% per annum of Income 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 the Funds' Shares. Income Fund also has a second class of Shares, designated Class II Shares. Under the Plan adopted with respect to Class II Shares, Income Fund will pay FTD or others quarterly (subject to a limit of 0.65% per annum of the Fund's average daily assets attributable to Class II Shares of which up to 0.15% 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 each 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 the Funds' Shares exceeding $1 million (on which Income Fund imposes no initial sales charge) and interest or carrying charges in connection therewith; and (6) such other similar services as the Trust's Board of Trustees determines to be reasonably calculated to result in the sale of Shares. Under the Plans, the costs and expenses not reimbursed in any one given quarter (including costs and expenses not reimbursed because they exceed the percentage limit applicable to either class of Shares) may be reimbursed in subsequent quarters or years.
During the fiscal year ended August 31, 1995, FTD incurred costs and expenses of $447,469 in connection with distribution of Shares of Income Fund, $1,893 in connection with distribution of Class II Shares of Income Fund, and $306,623 in connection with distribution of Shares of Money Fund. During the same period, the Trust made reimbursements pursuant to the Plans in the amount of $457,562 on behalf of Income Fund and $311,237 on behalf of Money Fund. As indicated above, unreimbursed expenses, which amount to $4,614 for Class I Shares of Money Fund, may be reimbursed by the Trust during the fiscal year ending August 31, 1996 or in subsequent years. In the event that a Plan is terminated, the Trust 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 Income Fund, the following amounts on: compensation to dealers, $350,328 (Class I) and $354 (Class II); sales promotion, $1,299 (Class I); wholesale costs and expenses,$4,935 (Class I) and $1,492 (Class II); advertising, $$12,360 (Class I); and printing, $78,547 (Class I) and $47 (Class II); and, with respect to Money Fund, the following amounts on: compensation to dealers, $278,765; printing, $24,313; wholesale costs and expenses, $8,159; and advertising, $0.
The Underwriting Agreement provides that the Principal Underwriter will use its best efforts to maintain a broad and continuous distribution of each Fund's Shares among bona fide investors and may sign selling agreements with responsible dealers, as well as sell to individual investors. The Shares are sold only at the Offering Price in effect at the time of sale, and each 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 of Income Fund Shares 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 $0 , $277,670 and $326,584, or approximately 0%, 18.16% and 19.54%, of the gross commissions on sales of Income Fund Shares, respectively. The Principal Underwriter in all cases buys Shares from a Fund acting as principal for its own account. Dealers generally act as principal for their own account in buying Shares from the Principal Underwriter. No agency relationship exists between any dealer and a Fund or the Principal Underwriter.
The Underwriting Agreement provides that each 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 blue sky laws of the jurisdictions in which the Principal Underwriter desires to distribute such Shares, and for preparing, printing and distributing Prospectuses and reports to Shareholders. The Principal Underwriter pays the cost of printing additional copies of Prospectuses and reports to Shareholders used for selling purposes. (The Funds pay costs of preparation, set-up and initial supply of the Funds'
The Underwriting 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 Underwriting Agreement may be terminated without penalty by either party upon 60 days' written notice to the other, provided termination by the Trust shall be approved by the Board of Trustees 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 Underwriting Agreement, in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations.
FTD is the principal underwriter for the other Franklin Templeton Funds.
Money Fund may, from time to time, include its yield and effective yield in advertisements or reports to Shareholders or prospective investors. Current yield for Money Fund will be based on the change in the value of a hypothetical investment (exclusive of capital changes) over a particular seven-day period, less a pro-rata share of Money Fund expenses accrued over that period (the "base period"), and stated as a percentage of the investment at the start of the base period (the "base period return"). The base period return is then annualized by multiplying by 365/7, with the resulting yield figure carried to at least the nearest hundredth of one percent. "Effective Yield" for Money Fund assumes that all dividends received during an annual period have been reinvested. Calculation of "effective yield" begins with the same "base period return" used in the calculation of yield, which is then annualized to reflect weekly compounding pursuant to the following formula:
EFFECTIVE YIELD = (1 + Base Period Return)365/7 - 1
YIELD = 2[(1 + A-B)6 - 1]
where a = dividend and interest earned during the period,
b = expenses accrued for the period (net of
c = the average daily number of Shares outstanding during the period that were entitled to receive
d = the maximum offering price per Share on the last day of the period.
For the seven-day period ending August 31, 1995, the yield of Money Fund was 4.79% and the effective yield of Money Fund was 4.91%.
The Funds may, from time to time, include their total return in advertisements or reports to Shareholders or prospective investors. Quotations of average annual total return for the Funds 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 Funds over periods of one, five, or ten years (up to the life of a Fund) 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. Income Fund's average annual total return for the one- and five-year periods ended August 31, 1995 and from inception on September 24, 1986 through August 31, 1995, was 5.74%, 6.61%, and 7.48%, respectively, for Class I Shares. Money Fund's average annual total return for the one- and five-year periods ended August 31, 1995 and from inception on October 3, 1987 through August 31, 1995, was 4.72%, 3.85% and 5.21%, respectively.
Performance information for either Fund may be compared, in reports and promotional literature, to: (i) 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 a 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 a Fund reflects only the performance of a hypothetical investment in a Fund during the particular time period on which the calculations are based. Performance information should be considered in light of a 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, each 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, 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) 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:
. "Never follow the crowd. Superior performance is possible only if you invest differently from the crowd."
. "Diversify by company, by industry and by country."
. "Always maintain a long-term perspective."
. "Invest for maximum total real return."
. "Invest - don't trade or speculate."
. "Remain flexible and open-minded about types of investment." * Sir John Templeton sold the Templeton organization to Franklin Resources, Inc. in October, 1992 and resigned from the Trust's Board on April 16, 1995. He is no longer involved with the investment management process.
. "When buying stocks, search for bargains among quality stocks."
. "Buy value, not market trends or the economic outlook."
. "Diversify. In stocks and bonds, as in much else, there is safety in numbers."
. "Do your homework or hire wise experts to help you."
. "Aggressively monitor your investments."
. "Learn from your mistakes."
. "Outperforming the market is a difficult task."
. "An investor who has all the answers doesn't even understand all the questions."
. "There's no free lunch."
. "And now the last principle: Do not be fearful or negative too often."
In addition, each 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 Shares of each Fund have the same preferences, conversion and other rights, voting powers, restrictions and limitations as to dividends, qualifications and terms and conditions of redemption, except as follows: all consideration received from the sale of Shares of a Fund, together with all income, earnings, profits and proceeds thereof, belongs to that Fund and is charged with liabilities in respect to that Fund and of that Fund's part of general liabilities of the Trust in the proportion that the total net assets of the Fund bear to the total net assets of both Funds. The net asset value of a Share of a Fund is based on the assets belonging to that Fund less the liabilities charged to that Fund, and dividends are paid on
Shares of a Fund only out of lawfully available assets belonging to that Fund. In the event of liquidation or dissolution of the Trust, the Shareholders of each Fund will be entitled, out of assets of the Trust available for distribution, to the assets belonging to that particular Fund.
The Declaration of Trust provides that the holders of not less than two-thirds of the outstanding Shares of the Funds may remove a person serving as Trustee either by declaration in writing or at a meeting called for such purpose. The Trustees are required to call a meeting for the purpose of considering the removal of a person serving as Trustee if requested in writing to do so by the holders of not less than 10% of the outstanding Shares of the Trust.
Under Massachusetts law, Shareholders could, under certain circumstances, be held personally liable for the obligations of the Trust. However, the Declaration of Trust disclaims liability of the Shareholders, Trustees or officers of the Trust for acts or obligations of the Trust, which are binding only on the assets and property of the Trust. The Declaration of Trust provides for indemnification out of Trust property for all loss and expenses of any Shareholder held personally liable for the obligations of the Trust. 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 and, thus, should be considered remote.
The Shares have non-cumulative voting rights so that the holders of a plurality of the Shares voting for the election of Trustees at a meeting at which 50% of the outstanding Shares are present can elect all the Trustees and in such event, the holders of the remaining Shares voting for the election of Trustees will not be able to elect any person or persons to the Board of Trustees.
The financial statements contained in the Annual Reports to Shareholders of Templeton Income Fund and Templeton Money Fund dated August 31, 1995 are incorporated herein by reference.
CORPORATE BOND AND COMMERCIAL PAPER RATINGS
CORPORATE BONDS. Bonds rated Aa by Moody's Investors Service, Inc. ("Moody's") are judged by Moody's to be of high quality by all standards. Together with bonds rated Aaa (Moody's highest rating), they comprise what are generally known as high-grade bonds. Aa bonds are rated lower than Aaa bonds because margins of protection may not be as large as those of Aaa bonds, or fluctuations of protective elements may be of greater amplitude, or there may be other elements present which make the long-term risks appear somewhat larger than those applicable to 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.
Moody's Baa rated bonds are considered as medium-grade obligations, I.E., they are neither highly protected nor poorly secured. Interest payment 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.
Bonds which are rated Ba are judged to have speculative elements because their future cannot be considered as well assured. Uncertainty of position characterizes bonds in this class, because the protection of interest and principal payments often may be very moderate and not well safeguarded.
Bonds which are rated B generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the security over any long period of time may be small. Bonds which are rated Caa 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 which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.
Bonds rated AAA by Standard & Poor's Corporation ("S&P") are considered by S&P to be the highest grade obligations and possess the ultimate degree of protection as to principal and interest. Bonds rated AA are judged by S&P to be high-grade obligations and in the majority of instances differ only in small degree from issues rated AAA (S&P's highest rating). Bonds rated A by S&P have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions.
S&P's BBB rated bonds, or medium-grade category bonds, are between sound obligations and those where the speculative elements begin to predominate. Although these bonds have adequate asset coverage and normally are protected by satisfactory earnings, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and principal.
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and principal in accordance with the terms of the obligation. While such bonds may have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.
COMMERCIAL PAPER. The Prime rating is the highest commercial paper rating assigned by Moody's. Among the factors considered by Moody's in assigning ratings are the following: (1) evaluation of the management of the issuer; (2) economic evaluation of the issuer's industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; (3) evaluation of the issuer's products in relation to competition and customer acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over a period of ten years; (7) financial strength of a parent company and the relationships which exist with the issuer; and (8) recognition by management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations. Issuers within this Prime category may be given ratings 1, 2 or 3, depending on the relative strengths of these factors.
Commercial paper rated A by S&P has the following characteristics: (i) liquidity ratios are adequate to meet cash requirements; (ii) long-term senior debt rating should be A or better, although in some cases BBB credits may be allowed if other factors outweigh the BBB; (iii) the issuer should have access to at least two additional channels of borrowing; (iv) basic earnings and cash flow should have an upward trend with allowances made for unusual circumstances; and (v) typically the issuer's industry should be well established and the issuer should have a strong position within its industry and the reliability and quality of management should be unquestioned. Issuers rated A are further referred to by use of numbers 1, 2 and 3 to denote relative strength within this highest classification. | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T08:27:14 |
0000950168-96-000039 | 0000950168-96-000039_0002.txt | Agreement made as of this 24th day of August, 1992, between First Investors Series Fund II, Inc., a corporation organized and existing under the laws of the State of Maryland having its principal office and place of business at 95 Wall Street, New York, New York 10005 (hereinafter called the "Fund"), and THE BANK OF NEW YORK, a New York corporation authorized to do a banking business, having its principal office and place of business at 48 Wall Street, New York, New York 10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises hereinafter set forth, the Fund and the Custodian agree as follows:
Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings:
1. "Authorized Person" shall be deemed to include any person, whether or not such person is an Officer or employee of the Fund, duly authorized by the Board of Directors of the Fund to give Oral Instructions and Written Instructions on behalf of the Fund and listed in the Certificate annexed hereto as Appendix A or such other Certificate as may be received by the Custodian from time to time.
2. "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry system for United States and federal agency securities, its successor or successors and its nominee or
3. "Call Option" shall mean an exchange traded option with respect to Securities other than Stock Index Options, Futures Contracts, and Futures Contract Options entitling the holder, upon timely exercise and payment of the exercise price, as specified therein, to purchase from the writer thereof the specified underlying Securities.
4. "Certificate" shall mean any notice, instruction, or other instrument in writing, authorized or required by this Agreement to be given to the Custodian which is actually received by the Custodian and signed on behalf of the Fund by any two Officers.
any broker-dealer reasonably believed by the Custodian to be such a clearing member.
5. "Collateral Account" shall mean a segregated account so denominated which is specifically allocated to a Series and pledged to the Custodian as security for, and in consideration of, the Custodian's issuance of (a) any Put Option guarantee letter or similar document described in paragraph 8 of Article v herein, or (b) any receipt described in Article V or VIII herein.
6. "Covered Call Option" shall mean an exchange traded option entitling the holder, upon timely exercise and payment of the exercise price, as specified therein, to purchase from the writer thereof the specified underlying Securities (excluding Futures Contracts) which are owned by the writer thereof and subject to appropriate restrictions.
7. "Depository" shall mean The Depository Trust Company ("DTC"), a clearing agency registered with the Securities and Exchange Commission, its successor or successors and its nominee or nominees. The term "Depository" shall further mean and include any other person authorized to act as a depository under the Investment Company Act of 1940, its successor or successors and its nominee or nominees, specifically identified in a certified copy of a resolution of the Fund's Board of Directors specifically approving deposits therein by the Custodian.
8. "Financial Futures Contract" shall mean the firm commitment to buy or sell fixed income securities including, without limitation, U.S. Treasury Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of deposit, and Eurodollar certificates of deposit, during a specified month at an agreed upon price.
9. "Futures Contract" shall mean a Financial Futures Contract and/or Stock Index Futures Contracts.
10. "Futures Contract Option" shall mean an option with respect to a Futures Contract.
11. "Margin Account" shall mean a segregated account in the name of a broker, dealer, futures commission merchant, or a Clearing Member, or in the name of the Fund for the benefit of a broker, dealer, futures commission merchant, or Clearing Member, or otherwise, in accordance with an agreement between the Fund, the Custodian and a broker, dealer, futures commission merchant or a Clearing Member (a "Margin Account Agreement"), separate and distinct from the custody account, in which certain Securities and/or money of the Fund shall be deposited and withdrawn from time to time in connection with such transactions as the Fund may from time to time determine. Securities held or the Depository shall be deemed to have been deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting an appropriate entry in its books and records.
12. "Money Market Security" shall be deemed to include, without limitation, certain Reverse Repurchase Agreements, debt obligations issued or guaranteed as to interest and principal by the government of the United States or agencies or instrumentalities thereof, any tax, bond or revenue anticipation note issued by any state or municipal government or public authority, commercial paper, certificates of deposit and bankers' acceptances, repurchase agreements with respect to the same and bank time deposits, where the purchase and sale of such securities normally requires settlement in federal funds on the same day as such purchase or sale.
13. "O.C.C." shall mean the Options Clearing Corporation, a clearing agency registered under Section 17A of the Securities Exchange Act of 1934, its successor or successors, and its nominee or nominees.
14. "Officers" shall be deemed to include the President, any Vice President, the Secretary, the Treasurer, the Controller, any Assistant Secretary, any Assistant Treasurer, and any other person or persons, whether or not any such other person is an officer of the Fund, duly authorized by the Board of Directors of the Fund to execute any Certificate, instruction, notice or other instrument on behalf of the Fund and listed in the Certificate annexed hereto as Appendix A or such other Certificate as may be received by the Custodian from time to time.
15. "Option" shall mean a Call Option, Covered Call Option, Stock Index Option and/or a Put Option.
16. "Oral Instructions" shall mean verbal instructions actually received by the Custodian from an Officer or from a person reasonably believed by the Custodian to be an Officer.
17. "Put Option" shall mean an exchange traded option with respect to Securities other than Stock Index Options, Futures Contracts, and Futures Contract Options entitling the holder, upon timely exercise and tender of the specified underlying Securities, to sell such Securities to the writer thereof for the exercise price.
18. "Reverse Repurchase Agreement" shall mean an agreement pursuant to which the Fund sells Securities and agrees to repurchase such Securities at a described or specified date and price.
19. "Security" shall be deemed to include, without limitation, Money Market Securities, Call Options, Put Options, Stock Index Options, Stock Index Futures Contracts, Stock Index Futures Contract Options, Financial Futures Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements, common stocks and other securities having characteristics similar to common stocks, preferred stocks, debt obligations issued by state or municipal governments and by public authorities, (including, without limitation, general obligation bonds, revenue bonds, industrial bonds and industrial development bonds), bonds, debentures, notes, mortgages or other obligations, and any certificates, receipts, warrants or other instruments representing rights to receive, purchase, sell or subscribe for the same, or evidencing or representing any other rights or interest therein, or any property or assets.
20. "Segregated Account" shall mean an account maintained and specifically allocated to a Series under the terms of this Agreement as a segregated account, by recordation or otherwise, within the custody account in which certain Securities and/or other assets of the Fund specifically allocated to such Series shall be deposited and withdrawn from time to time in accordance with Certificates received by the Custodian in connection with such transactions as the Fund may from time to time determine.
21. "Series" shall mean such of the various portfolios, if any, of the Fund as described from time to time in the current and effective prospectus for the Fund for which the Custodian has been appointed custodian as specified in a Certificate received by the Custodian.
22. "Shares" shall mean the shares of capital stock of the Fund, each of which is, in the case of a Fund having Series, allocated to a particular Series.
23. "Stock Index Futures Contract" shall mean a bilateral agreement pursuant to which the parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the value of a particular stock index at the close of the last business day of the contract and the price at which the futures contract is originally struck.
24. "Stock Index Option" shall mean an exchange traded option entitling the holder, upon timely exercise, to receive an amount of cash determined by reference to the difference between the exercise price and the value of the index on the date of exercise.
25. "Terminal Link" shall mean an electronic data transmission link between the Fund and the Custodian requiring in connection with each use of the Terminal Link by or on behalf of the Fund use of an authorization code provided by the Custodian and at least two access codes established by the Fund.
1. The Fund hereby constitutes and appoints the Custodian as custodian of the Securities and moneys at any time owned by each Series of the Fund during the period of this Agreement.
2. The Custodian hereby accepts appointment as such custodian and agrees to perform the duties thereof as hereinafter set forth.
CUSTODY OF CASH AND SECURITIES
1. The Fund will deliver or cause to be delivered to the Custodian all Securities and all moneys owned by it, at any time during the period of this Agreement, and shall specify with respect to such Securities and money the Series to which the same are specifically allocated. The Custodian shall segregate, keep and maintain the assets of the Series separate and apart. The Custodian will not be responsible for any Securities and moneys not actually received by it. The Custodian will be entitled to reverse any credits made on the Fund's behalf where such credits have been previously made and moneys are not finally collected. The Fund shall deliver to the Custodian a certified resolution of the Board of Directors of the Fund, substantially in the form of Exhibit A hereto, approving, authorizing and instructing the Custodian on a continuous and on-going basis to deposit in the Book-Entry System all Securities eligible for deposit therein, regardless of the Series to which the same are specifically allocated and to utilize the Book-Entry System to the extent possible in connection with its performance hereunder, including, without limitation, in connection with settlements of purchases and sales of Securities, loans of Securities and deliveries and returns of Securities collateral. Prior to a deposit of Securities specifically allocated to a Series in the Depository, the Fund shall deliver to the Custodian a certified resolution of the Board of Directors of the Fund, substantially in the form of Exhibit B hereto, approving, authorizing and instructing the Custodian on a continuous and ongoing basis until instructed to the contrary by a Certificate actually received by the Custodian to deposit in the Depository all Securities specifically allocated to such Series eligible for deposit therein, and to utilize the Depository to the extent possible with respect to such Securities in connection with its performance hereunder, including, without limitation, in connection with settlements of purchases and sales of Securities, loans of
Securities, and deliveries and returns of Securities collateral. Securities and moneys deposited in either the Book-Entry System or
Depository will be represented in accounts which include only assets held by the Custodian for customers, including, but not limited to, accounts in which the Custodian acts in a fiduciary or representative capacity and will be specifically allocated on the Custodian's books to the separate account for the applicable Series. Prior to the Custodian's accepting, utilizing and acting with respect to Clearing Member confirmations for Options and transactions in Options for a Series as provided in this Agreement, the Custodian shall have received a certified resolution of the Fund's Board of Directors, substantially in the form of Exhibit C hereto, approving, authorizing and instructing the Custodian on a continuous and on-going basis, until instructed to the contrary by a Certificate actually received by the Custodian, to accept, utilize and act in accordance with such confirmations as provided in this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate accounts, in the name of each Series, and shall credit to the separate account for each Series all moneys received by it for the account of the Fund with respect to such Series. Money credited to a separate account for a Series shall be disbursed by the Custodian only:
(b) Pursuant to Certificates setting forth the name and address of the person to whom the payment is to be made, the Series account from which payment is to be made and the purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement of the expenses and liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian shall furnish the Fund with confirmations and a summary, on a per Series basis, of all transfers to or from the account of the Fund for a Series, either hereunder or with any co-custodian or sub-custodian appointed in accordance with this Agreement during said day. Where Securities are transferred to the account of the Fund for a Series, the Custodian shall also by book-entry or otherwise identify as belonging to such Series a quantity of Securities in a fungible bulk of Securities registered in the name of the Custodian (or its nominee) or shown on the Custodian's account on the books of the Book-Entry System or the Depository. At least monthly and from time to time, the Custodian shall furnish the Fund with a detailed statement, on a per Series basis, of the Securities and moneys held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in Article VIII, all Securities held by the Custodian hereunder, which are issued or issuable only in bearer form, except such Securities as are held in the Book-Entry System, shall be held by the Custodian in that form; all other Securities held hereunder may be registered in the name of the Fund, in the name of any duly appointed registered nominee of the Custodian as the Custodian may from time to time determine, or with respect to Securities held in the Book-Entry System or the Depository, respectively, in the name of the Book-Entry System or the Depository or their successor or successors, or their nominee or nominees. The Fund agrees to furnish to the Custodian appropriate instruments to enable the Custodian to hold or deliver in proper form for transfer, or to register in the name of its registered nominee or in the name of the Book-Entry System or the Depository any Securities which it may hold hereunder and which may from time to time be registered in the name of the Fund. The Custodian shall hold all such Securities specifically allocated to a Series which are not held in the Book-Entry System or in the Depository in a separate account in the name of such Series physically segregated at all times from those of any other person or persons.
5. Except as otherwise provided in this Agreement and unless otherwise instructed to the contrary by a Certificate, the Custodian by itself, or through the use of the Book-Entry System or the Depository with respect to Securities held hereunder and therein deposited, shall with respect to all Securities held for the Fund hereunder in accordance with preceding paragraph 4:
(a) Promptly collect all income due or payable;
(b) Promptly present for payment and collect the amount payable upon such Securities which are called, but only if either (i) the Custodian receives a written notice of such call, or (ii) notice of such call appears in one or more of the publications listed in Appendix C annexed hereto, which may be amended at any time by the Custodian without the prior notification or consent
(c) Promptly present for payment and collect the amount payable upon all Securities which mature;
(d) Promptly surrender Securities in temporary form for
(e) Promptly execute, as custodian, any necessary declarations or certificates of ownership under the Federal Income Tax Laws or the laws or regulations of any other taxing authority now or
(f) Hold directly, or through the Book-Entry System or the Depository with respect to Securities therein deposited, for the account of a Series, all rights and similar securities issued with respect to any Securities held by the Custodian for such Series hereunder
(g) Subject to paragraph 4 of Article XII, promptly deliver to the Fund all notices, proxies, proxy soliciting materials, consents and other written information (including, without limitation, notice of tender offers and exchange offers, pendency of calls, maturities of Securities and expiration of rights) relating to Securities held pursuant to this Agreement which are actually received (irrespective of constructive receipt) by the Custodian, such proxies and other similar materials to be executed by the registered holder (if Securities are registered otherwise than in the name of the Fund), but without indicating the manner in which proxies or consents are to be voted.
6. Upon receipt of a Certificate and not otherwise, the Custodian, directly or through the use of the Book-Entry System or the Depository, shall:
(a) Promptly execute and deliver to such persons as may be designated in such Certificate proxies, consents, authorizations, and any other instruments whereby the authority of the Fund as owner of any Securities held by the Custodian hereunder for the Series specified in such Certificate may be
(b) Promptly deliver any Securities held by the Custodian hereunder for the Series specified in such Certificate in exchange for other Securities or cash issued or paid in connection with the liquidation, reorganization, refinancing, merger, consolidation or recapitalization of any corporation, or the exercise of any conversion privilege and receive and hold hereunder specifically allocated to such Series any cash or other Securities received in
(c) Promptly deliver any Securities held by the Custodian hereunder for the Series specified in such Certificate to any protective committee, reorganization committee or other person in connection with the reorganization, refinancing, merger, consolidation, recapitalization or sale of assets of any corporation, and receive and hold hereunder specifically allocated to such Series such certificates of deposit, interim receipts or other instruments or documents as may be issued to it to evidence such delivery;
(d) Make such transfers or exchanges of the assets of the Series specified in such Certificate, and take such other steps as shall be stated in such Certificate to be for the purpose of effectuating any duly authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the
(e) Present for payment and collect the amount payable upon Securities not described in preceding paragraph 5(b) of this Article which may be called as specified in the Certificate.
7. The Custodian shall comply with Section 17(f) of the Investment Company Act of 1940, as amended, in connection with the purchase, sale, settlement, closing out or writing of Futures Contracts, Options, or Futures Contract Options by making payments or deliveries specified in Certificates received by the Custodian in connection with any such purchase, sale, writing, settlement or closing out upon its receipt from a broker, dealer, or futures commission merchant of a statement or confirmation reasonably believed by the Custodian to be in the form customarily used by brokers, dealers, or future commission merchants with respect to such Futures Contracts, Options, or Futures Contract Options, as the case may be, confirming that such Security is held by such broker, dealer or futures commission merchant, in book-entry form or otherwise, in the name of the Custodian (or any nominee of the Custodian) as custodian for the Fund, provided, however, that notwithstanding the foregoing, payments to or deliveries from the Margin Account, and payments with respect to Securities to which a Margin Account relates, shall be made in accordance with the terms and conditions of the Margin Account Agreement. Whenever any such instruments or certificates are available, the Custodian shall, notwithstanding any provision in this Agreement to the contrary, make payment for any Futures Contract, Option, or Futures Contract Option for which such instruments or such certificates are available only against the delivery to the Custodian of such instrument or such certificate, and deliver any Futures Contract, Option or Futures Contract Option for which such instruments or such certificates are available only against receipt by the Custodian of payment therefor. Any such instrument or certificate delivered to the Custodian shall be held by the Custodian hereunder in accordance with, and subject to, the provisions of this Agreement.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND OTHER THAN OPTIONS, FUTURES CONTRACTS AND
1. Promptly after each purchase of Securities by the Fund, other than a purchase of an Option, a Futures Contract, or a Futures Contract Option, the Fund shall deliver to the Custodian (i) with respect to each purchase of Securities which are not Money Market Securities, a Certificate, and (ii) with respect to each purchase of Money Market Securities, a Certificate or Oral Instructions, specifying with respect to each such purchase: (a) the Series to which such Securities are to be specifically allocated; (b) the name of the issuer and the title of the Securities; (c) the number of shares or the principal amount purchased and accrued interest, if any; (d) the date of purchase and settlement; (e) the purchase price per unit; (f) the total amount payable upon such purchase; (g) the name of the person from whom or the broker through whom the purchase was made, and the name of the clearing broker, if any; and (h) the name of the broker to whom payment is to be made. The Custodian shall, upon receipt of Securities purchased by or for the Fund, pay to the broker specified in the Certificate out of the moneys held for the account of such Series the total amount payable upon such purchase, provided that the same conforms to the total amount payable as set forth in such Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other than a sale of any Option, Futures Contract, Futures Contract Option, or any Reverse Repurchase Agreement, the Fund shall deliver to the Custodian (i) with respect to each sale of Securities which are not Money Market Securities, a Certificate, and (ii) with respect to each sale of Money Market Securities, a Certificate or Oral Instructions, specifying with respect to each such sale: (a) the Series to which such Securities were specifically allocated; (b) the name of the issuer and the title of the Security; (c) the number of shares or principal amount sold, and accrued interest, if any; (d) the date of sale; (e) the sale price per unit; (f) the total amount payable to the Fund upon such sale; (g) the name of the broker through whom or the person to whom the sale was made, and the name of the clearing broker, if any; and (h) the name of the broker to whom the Securities are to be delivered. The Custodian shall deliver the Securities specifically allocated to such Series to the broker specified in the Certificate against payment of the total amount payable to the Fund upon such sale, provided that the same conforms to the total amount payable as set forth in such Certificate or Oral Instructions.
1. Promptly after the purchase of any Option by the Fund, the Fund shall deliver to the Custodian a Certificate specifying with respect to each Option purchased: (a) the Series to which such Option is specifically allocated; (b) the type of Option (put or call); (c) the name of the issuer and the title and number of shares subject to such Option or, in the case of a Stock Index Option, the stock index to which such Option relates and the number of Stock Index Options purchased; (d) the expiration date; (e) the exercise price; (f) the dates of purchase and settlement; (q) the total amount payable by the Fund in connection with such purchase; (h) the name of the Clearing Member through whom such Option was purchased; and (i) the name of the broker to whom payment is to be made. The Custodian shall pay, upon receipt of a Clearing Member's statement confirming the purchase of such Option held by such Clearing Member for the account of the Custodian (or any duly appointed and registered nominee of the Custodian) as custodian for the Fund, out of moneys held for the account of the Series to which such Option is to be specifically allocated, the total amount payable upon such purchase to the Clearing Member through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate specifying with respect to each such sale: (a) the Series to which such Option was specifically allocated; (b) the type of Option (put or call); (c) the name of the issuer and the title and number of shares subject to such Option or, in the case of a Stock Index Option, the stock index to which such Option relates and the number of Stock Index Options sold; (d) the date of sale; (e) the sale price; (f) the date of settlement; (g) the total amount payable to the Fund upon such sale; and (h) the name of the Clearing Member through whom the sale was made. The Custodian shall consent to the delivery of the Option sold by the Clearing Member which previously supplied the confirmation described in preceding paragraph 1 of this Article with respect to such Option against payment to the Custodian of the total amount payable to the Fund, provided that the same conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased by the Fund pursuant to paragraph l hereof, the Fund shall deliver to the Custodian a Certificate specifying with respect to such Call Option: (a) the Series to which such Call Option was specifically allocated; (b) the name of the issuer and the title and number of shares subject to the Call Option; (c) the expiration date; (d) the date of exercise and settlement; (e) the exercise price per share; (f) the total amount to be paid by the Fund upon such exercise; and (g) the name of the Clearing Member through whom such Call Option was exercised. The Custodian shall, upon receipt of the Securities underlying the Call Option which was exercised, pay out of the moneys held for the account of the Series to which such Call Option was specifically allocated the total amount payable to the Clearing Member through whom the Call Option was exercised, provided that the same conforms to the total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate specifying with respect to such Put Option: (a) the Series to which such Put Option was specifically allocated; (b) the name of the issuer and the title and number of shares subject to the Put Option; (c) the expiration date; (d) the date of exercise and settlement; (e) the exercise price per share; (f) the total amount to be paid to the Fund upon such exercise; and (g) the name of the Clearing Member through whom such Put Option was exercised. The Custodian shall, upon receipt of the amount payable upon the exercise of the Put Option, deliver or direct the Depository to deliver the Securities specifically allocated to such Series, provided the same conforms to the amount payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option purchased by the Fund pursuant to paragraph hereof, the Fund shall deliver to the Custodian a Certificate specifying with respect to such Stock Index Option: (a) the Series to which such Stock Index Option was specifically allocated; (b) the type of Stock Index Option (put or call); (c) the number of Options being exercised; (d) the stock index to which such Option relates; (e) the expiration date; (f) the exercise price; (g) the total amount to be received by the Fund in connection with such exercise; and (h) the Clearing Member from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Covered Call Option: (a) the Series for which such Covered Call Option was written; (b) the name of the issuer and the title and number of shares for which the Covered Call Option was written and which underlie the same; (c) the expiration date; (d) the exercise price; (e) the premium to be received by the Fund; (f) the date such Covered Call Option was written; and (g) the name of the Clearing Member through whom the premium is to be received. The Custodian shall deliver or cause to be delivered, in exchange for receipt of the premium specified in the Certificate with respect to such Covered Call Option, such receipts as are required in accordance with the customs prevailing among Clearing Members dealing in Covered Call Options and shall impose, or direct the Depository to impose, upon the underlying Securities specified in the Certificate specifically allocated to such Series such restrictions as may be required by such receipts. Notwithstanding the foregoing, the Custodian has the right, upon prior written notification to the Fund, at any time to refuse to issue any receipts for Securities in the possession of the Custodian and not deposited with the Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in the preceding paragraph of this Article is exercised, the Fund shall promptly deliver to the Custodian a Certificate instructing the Custodian to deliver, or to direct the Depository to deliver, the Securities subject to such Covered Call Option and specifying: (a) the Series for which such Covered Call Option was written; (b) the name of the issuer and the title and number of shares subject to the Covered Call Option; (c) the Clearing Member to whom the underlying Securities are to be delivered; and (d) the total amount payable to the Fund upon such delivery. Upon the return and/or cancellation of any receipts delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver, or direct the Depository to deliver, the underlying Securities as specified in the Certificate against payment of the amount to be received as set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Put Option: (a) the Series for which such Put Option was written; (b) the name of the issuer and the title and number of shares for which the Put Option is written and which underlie the same; (c) the expiration date; (d) the exercise price; (e) the premium to be received by the Fund; (f) the date such Put Option is written; (g) the name of the Clearing Member through whom the premium is to be received and to whom a Put Option guarantee letter is to be delivered; (h) the amount of cash, and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in the Segregated Account for such Series; and (i) the amount of cash and/or the amount and kind of Securities specifically allocated to such Series to be deposited into the Collateral Account for such Series. The Custodian shall, after making the deposits into the Collateral Account specified in the Certificate, issue a Put Option guarantee letter substantially in the form utilized by the Custodian on the date hereof, and deliver the same to the Clearing Member specified in the Certificate against receipt of the premium specified in said Certificate. Notwithstanding the foregoing, the Custodian shall be under no obligation to issue any Put Option guarantee letter or similar document if it is unable to make any of the representations contained therein, or if it has not received an opinion of Fund counsel satisfactory to the Custodian with respect to the Custodian's first priority perfected security interest in the Collateral Account.
9. Whenever a Put Option written by the Fund and described in the preceding paragraph is exercised, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series to which such Put Option was written; (b) the name of the issuer and title and number of shares subject to the Put Option; (c) the Clearing Member from whom the underlying Securities are to be received; (d) the total amount payable by the Fund upon such delivery; (e) the amount of cash and/or the amount and kind of Securities specifically allocated to such Series to be withdrawn from the Collateral Account for such Series and (f) the amount of cash and/or the amount and kind of Securities, specifically allocated to such Series, if any, to be withdrawn from the Segregated Account. Upon the return and/or cancellation of any Put Option guarantee letter or similar document issued by the Custodian in connection with such Put Option, the Custodian shall pay out of the moneys held for the account of the Series to which such Put Option was specifically allocated the total amount payable to the Clearing Member specified in the Certificate as set forth in such Certificate against delivery of such Securities, and shall make the withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Stock Index Option: (a) the Series for which such Stock Index Option was written; (b) whether such Stock Index Option is a put or a call; (c) the number of options written; (d) the stock index to which such Option relates; (e) the expiration date; (f) the exercise price; (g) the Clearing Member through whom such Option was written; (h) the premium to be received by the Fund; (i) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in the Segregated Account for such Series; (j) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in the Collateral Account for such Series; and (k) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in a Margin Account, and the name in which such account is to be or has been established. The Custodian shall, upon receipt of the premium specified in the Certificate, make the deposits, if any, into the Segregated Account specified in the Certificate, and either (1) deliver such receipts, if any, which the Custodian has specifically agreed to issue, which are in accordance with the customs prevailing among Clearing Members in Stock Index Options and make the deposits into the Collateral Account specified in the Certificate, or (2) make the deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in the preceding paragraph of this Article is exercised, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Stock Index Option: (a) the Series for which such Stock Index Option was written; (b) such information as may be necessary to identify the Stock Index Option being exercised; (c) the Clearing Member through whom such Stock Index Option is being exercised; (d) the total amount payable upon such exercise, and whether such amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the amount of cash and/or amount and kind of Securities, if any, to be withdrawn from the Segregated Account- for such Series; and the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Collateral Account for such Series. Upon the return and/or cancellation of the receipt, if any, delivered pursuant to the preceding paragraph of this Article, the Custodian shall pay out of the moneys held for the account of the Series to which such Stock Index Option was specifically allocated to the Clearing Member specified in the Certificate the total amount payable, if any, as specified therein.
12. Whenever the Fund purchases any Option identical to a previously written Option described in paragraphs, 6, 8 or 10 of this Article in a transaction expressly designated as a "Closing Purchase Transaction" in order to liquidate its position as a writer of an Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to the Option being purchased: (a) that the transaction is a Closing Purchase Transaction; (b) the Series for which the Option was written; (c) the name of the issuer and the title and number of shares subject to the Option, or, in the case of a Stock Index Option, the stock index to which such Option relates and the number of Options held; (d) the exercise price; (e) the premium to be paid by the Fund; (f) the expiration date; (g) the type of Option (put or call); (h) the date of such purchase; (i) the name of the Clearing Member to whom the premium is to be paid; and (j) the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Collateral Account, a specified Margin Account, or the Segregated Account for such Series. Upon the Custodian's payment of the premium and the return and/or cancellation of any receipt issued pursuant to paragraphs 6, 8 or 10 of this Article with respect to the Option being liquidated through the Closing Purchase Transaction, the Custodian shall remove, or direct the Depository to remove, the previously imposed restrictions on the Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase Transaction with respect to any Option purchased or written by the Fund and described in this Article, the Custodian shall delete such Option from the statements delivered to the Fund pursuant to paragraph 3 Article III herein, and upon the return and/or cancellation of any receipts issued by the Custodian, shall make such withdrawals from the Collateral Account, and the Margin Account and/or the Segregated Account as may be specified in a
Certificate received in connection with such expiration, exercise, or consummation.
1. Whenever the Fund shall enter into a Futures Contract, the Fund shall deliver to the Custodian a Certificate specifying with respect to such Futures Contract, (or with respect to any number of identical Futures Contract(s)): (a) the Series for which the Futures Contract is being entered; (b) the category of Futures Contract (the name of the underlying stock index or financial instrument); (c) the number of identical Futures Contracts entered into; (d) the delivery or settlement date of the Futures Contract(s); (e) the date the Futures Contract(s) was (were) entered into and the maturity date; (f) whether the Fund is buying (going long) or selling (going short) on such Futures Contract(s); (g) the amount of cash and/or the amount and kind of Securities, if any, to be deposited in the Segregated Account for such Series; (h) the name of the broker, dealer, or futures commission merchant through whom the Futures Contract was entered into; and (i) the amount of fee or commission, if any, to be paid and the name of the broker, dealer, or futures commission merchant to whom such amount is to be paid. The Custodian shall make the deposits, if any, to the Margin Account in accordance with the terms and conditions of the Margin Account Agreement. The Custodian shall make payment out of the moneys specifically allocated to such Series of the fee or commission, if any, specified in the Certificate and deposit in the Segregated Account for such Series the amount of cash and/or the amount and kind of Securities specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be made by the Fund to a broker, dealer, or futures commission merchant with respect to an outstanding Futures Contract, shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker, dealer, or futures commission merchant to the Fund with respect to an outstanding Futures Contract, shall be received and dealt with by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is retained by the Fund until delivery or settlement is made on such Futures Contract, the Fund shall deliver to the Custodian a Certificate specifying: (a) the Futures Contract and the Series to which the same relates; (b) with respect to a Stock Index Futures Contract, the total cash settlement amount to be paid or received, and with respect to a Financial Futures Contract, the
Securities and/or amount of cash to be delivered or received; (c) the broker, dealer, or futures commission merchant to or from whom payment or delivery is to be made or received; and (d) the amount of cash and/or Securities to be withdrawn from the Segregated Account for such Series. The Custodian shall make the payment or delivery specified in the Certificate, and delete such Futures Contract from the statements delivered to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a Futures Contract held by the Custodian hereunder, the Fund shall deliver to the Custodian a Certificate specifying: (a) the items of information required in a Certificate described in para graph 1 of this Article, and (b) the Futures Contract being offset. The Custodian shall make payment out of the money specifi cally allocated to such Series of the fee or commission, if any, specified in the Certificate and delete the Futures Contract being offset from the statements delivered to the Fund pursuant to paragraph 3 of Article III herein, and make such withdrawals from the Segregated Account for such Series as may be specified in such Certificate. The withdrawals, if any, to be made from the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
1. Promptly after the purchase of any Futures Contract Option by the Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Futures Contract Option: (a) the Series to which such Option is specifi cally allocated; (b) the type of Futures Contract Option (put or call); (c) the type of Futures Contract and such other information as may be necessary to identify the Futures Contract underlying the Futures Contract Option purchased; (d) the expiration date; (e) the exercise price; (f) the dates of purchase and settlement; (g) the amount of premium to be paid by the Fund upon such purchase; (h) the name of the broker or futures commission merchant through whom such option was purchased; and (i) the name of the broker, or futures commission merchant, to whom payment is to be made. The Custodian shall pay out of the moneys specifically al located to such Series, the total amount to be paid upon such purchase to the broker or futures commissions merchant through whom the purchase was made, provided that the same conforms to the amount set forth in such Certificate
2. Promptly after the sale of any Futures Contract Option purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to each such sale: (a) Series to which such Futures Contract Option was specifically allocated; (b) the type of Future Contract Option (put or call); (c) the type of Futures Contract and such other information as may be necessary to identify the Futures Contract underlying the Futures Contract Option; (d) the date of sale; (e) the sale price; (f) the date of settlement; (g) the total amount payable to the Fund upon such sale; and (h) the name of the broker of futures commission merchant through whom the sale was made. The Custodian shall consent to the cancellation of the Futures Contract Option being closed-against payment to the Custodian of the total amount payable to the Fund, provided the same conforms to the total amount payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series to which such Futures Contract Option was specifically allocated; (b) the particular Futures Contract Option (put or call) being exercised; (c) the type of Futures Contract underlying the Futures Contract Option; (d) the date of exercise; (e) the name of the broker or futures commission merchant through whom the Futures Contract Option is exercised; (f) the net total amount, if any, payable by the Fund; (g) the amount, if any, to be received by the Fund; and (h) the amount of cash and/or the amount and kind of Securities to be deposited in the Segregated Account for such Series. The Custodian shall make, out of the moneys and Securities specifically allocated to such Series, the payments, if any, and the deposits, if any, into the Segregated Account as specified in the Certificate. The deposits, if any, to be made to the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to such Futures Contract Option: (a) the Series for which such Futures Contract Option was written; (b) the type of Futures Contract Option (put or call); (c) the type of Futures Contract and such other information as may be necessary to identify the Futures Contract underlying the Futures Contract Option; (d) the expiration date; (e) the exercise price; (f) the premium to be received by the Fund; (g) the name of the broker or futures commission merchant through whom the premium is to be received; and (h) the amount of cash and/or the amount and kind of Securities, if any, to be deposited in the Segregated Account for such Series. The Custodian shall, upon receipt of the premium specified in the Certificate, make out of the moneys and Securities specifically allocated to such Series the deposits into the Segregated Account, if any, as specified in the Certificate. The deposits, if any, to be made to the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a call is exercised, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series to which such Futures Contract Option was specifically allocated; (b) the particular Futures Contract Option exercised; (c) the type of Futures Contract underlying the Futures Contract Option; (d) the name of the broker or futures commission merchant through whom such Futures Contract Option was exercised; (e) the net total amount, if any, payable to the Fund upon such exercise; (f) the net total amount, if any, payable by the Fund upon such exercise; and (g) the amount of cash and/or the amount and kind of Securities to be deposited in the Segregated Account for such Series. The Custodian shall, upon its receipt of the net total amount payable to the Fund, if any, specified in such Certificate make the payments, if any, and the deposits, if any, into the Segregated Account as specified in the Certificate. The deposits, if any, to be made to the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and which is a put is exercised, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series to which such Option was specifically allocated; (b) the particular Futures Contract Option exercised; (c) the type of Futures Contract underlying such Futures Contract Option; (d) the name of the broker or futures commission merchant through whom such Futures Contract Option is exercised; (e) the net total amount, if any, payable to the Fund upon such exercise; (f) the net total amount, if any, payable by the Fund upon such exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn from or deposited in, the Segregated Account for such Series, if any. The Custodian shall, upon its receipt of the net total amount payable to the Fund, if any, specified in the Certificate, make out of the moneys and Securities specifically allocated to such Series, the payments, if any, and the deposits, if any, into the Segregated Account as specified in the Certificate. The deposits to and/or withdrawals from the Margin Account, if any, shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to a previously written Futures Contract Option described in this Article in order to liquidate its position as a writer of such Futures Contract Option, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to the Futures Contract Option being purchased: (a) the Series to which such Option is specifically allocated; (b) that the transaction is a closing transaction; (c) the type of Future Contract and such other information as may be necessary to identify the Futures Contract underlying the Futures Option Contract; (d) the exercise price; (e) the premium to be paid by the Fund; (f) the expiration date; (g) the name of the broker or futures commission merchant to whom the premium is to be paid; and (h) the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Segregated Account for such Series. The Custodian shall effect the withdrawals from the Segregated Account specified in the Certificate. The withdrawals, if any, to be made from the Margin Account shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing transaction with respect to, any Futures Contract Option written or purchased by the Fund and described in this Article, the Custodian shall (a) delete such Futures Contract Option from the statements delivered to the Fund pursuant to paragraph 3 of Article III herein and, (b) make such withdrawals from and/or in the case of an exercise such deposits into the Segregated Account as may be specified in a Certificate. The deposits to and/or withdrawals from the Margin Account, if any, shall be made by the Custodian in accordance with the terms and conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a Futures Contract Option described in this Article shall be subject to Article VI hereof.
1. Promptly after any short sales by any Series of the Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying: (a) the Series for which such short sale was made; (b) the name of the issuer and the title of the Security; (c) the number of shares or principal amount sold, and accrued interest or dividends, if any; (d) the dates of the sale and settlement; (e) the sale price per unit; (f) the total amount credited to the Fund upon such sale, if any, (g) the amount of cash and/or the amount and kind of Securities, if any, which are to be deposited in a Margin Account and the name in which such Margin Account has been or is to be established; (h) the amount of cash and/or the amount and kind of Securities, if any, to be deposited in a Segregated Account, and (i) the name of the broker through whom such short sale was made. The Custodian shall upon its receipt of a statement from such broker confirming such sale and that the total amount credited to the Fund upon such sale, if any, as specified in the Certificate is held by such broker for the account of the Custodian (or any nominee of the Custodian) as custodian of the Fund, issue a receipt or make the deposits into the Margin Account and the Segregated Account specified in such Certificate or Oral Instructions.
2. In connection with the closing-out of any short sale, the Fund shall promptly deliver to the Custodian a Certificate specifying with respect to each such closing out: (a) the Series for which such transaction is being made; (b) the name of the issuer and the title of the Security; (c) the number of shares or the principal amount, and accrued interest or dividends, if any, required to effect such closing-out to be delivered to the broker; (d) the dates of closing-out and settlement; (e) the purchase price per unit; (f) the net total amount payable to the Fund upon such closing-out; (g) the net total amount payable to the broker upon such closing-out; (h) the amount of cash and the amount and kind of Securities to be withdrawn, if any, from the Margin Account; (i) the amount of cash and/or the amount and kind of Securities, if any, to be withdrawn from the Segregated Account; and (j) the name of the broker through whom the Fund is effecting such closing-out. The Custodian shall, upon receipt of the net total amount payable to the Fund upon such closing-out, and the return and/or cancella tion of the receipts, if any, issued by the Custodian with respect to the short sale being closed-out, pay out of the moneys held for the account of the Fund to the broker the net total amount payable to the broker, and make the withdrawals from the Margin Account and the Segregated Account, as the same are specified in the Certificate.
1. Promptly after the Fund enters a Reverse Repurchase Agreement with respect to Securities and money held by the Custodian hereunder, the Fund shall deliver to the Custodian a Certificate, or in the event such Reverse Repurchase Agreement is a Money Market Security, a Certificate or Oral Instructions, specifying: (a) the Series for which the Reverse Repurchase Agreement is entered; (b) the total amount payable to the Fund in connection with such Reverse Repurchase Agreement and specifically allocated to such Series; (c) the broker or dealer through or with whom the Reverse Repurchase Agreement is entered; (d) the amount and kind of Securities to be delivered by the Fund to such broker or dealer; (e) the date of such Reverse Repurchase Agreement; and (f) the amount of cash and/or the amount and kind of Securities, if any, specifically allocated to such Series to be deposited in a Segregated Account for such Series in connection with such Reverse Repurchase Agreement. The Custodian shall, upon receipt of the total amount payable to the Fund specified in the Certificate or Oral Instructions make the delivery to the broker or the deposits, if any, to the Segregated Account, specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in preceding paragraph 1 of this Article, the Fund shall promptly deliver a Certificate or, in the event such Reverse Repurchase Agreement is a Money Market Security, a Certificate or Oral Instructions, to the Custodian specifying: (a) the Reverse Repurchase Agreement being terminated and the Series for which same was entered; (b) the total amount payable by the Fund in connection with such termination; (c) the amount and kind of Securities to be received by the Fund and specifically allocated to such Series in connection with such termination; (d) the date of termination; (e) the name of the broker or dealer with or through whom the Reverse Repurchase Agreement is to be terminated; and (f) the amount of cash and/or the amount and kind of Securities to be withdrawn from the Senior Securities Account for such Series. The Custodian shall, upon receipt of the amount and kind of Securities to be received by the Fund specified in the Certificate or Oral Instructions, make the payment to the broker or dealer, and the withdrawals, if any, from the Segregated Account, specified in such Certificate or Oral Instructions.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically allocated to a Series held by the Custodian hereunder, the Fund shall deliver or cause to be delivered to the Custodian a Certificate specifying with respect to each such loan: (a) the Series to which the loaned Securities are specifically allocated; (b) the name of the issuer and the title of the Securities, (c) the number of shares or the principal amount loaned, (d) the date of loan and delivery, (e) the total amount to be delivered to the Custodian against the loan of the Securities, including the amount of cash collateral and the premium, if any, separately identified, and (f) the name of the broker, dealer, or financial institution to which the loan was made. The Custodian shall deliver the Securities thus designated to the broker, dealer or financial institution to which the loan was made upon receipt of the total amount designated as to be delivered against the loan of Securities. The Custodian may accept payment in connection with a delivery otherwise than through the Book-Entry System or Depository only in the form of a certified or bank cashier's check payable to the order of the Fund or the Custodian drawn on New York Clearing House funds and may deliver Securities in accordance with the customs prevailing among dealers in securities.
2. Promptly after each termination of the loan of Securities by the Fund, the Fund shall deliver or cause to be delivered to the Custodian a Certificate specifying with respect to each such loan termination and return of Securities: (a) the Series to which the loaned Securities are specifically allocated; (b) the name of the issuer and the title of the Securities to be returned, (c) the number of shares or the principal amount to be returned, (d) the date of termination, (e) the total amount to be delivered by the Custodian (including the cash collateral for such Securities minus any offsetting credits as described in said Certificate), and (f) the name of the broker, dealer, or financial institution from which the Securities will be returned. The Custodian shall receive all Securities returned from the broker, dealer, or financial institu tion to which such Securities were loaned and upon receipt thereof shall pay, out of the moneys held for the account of the Fund, the total amount payable upon such return of Securities as set forth in the Certificate.
1. The Custodian shall, from time to time, make such deposits to, or withdrawals from, a Segregated Account as specified in a Certificate received by the Custodian. Such Certificate shall specify the Series for which such deposit or withdrawal is to be made and the amount of cash and/or the amount and kind of Securities specifically allocated to such Series to be deposited in, or withdrawn from, such Segregated Account for such Series. In the event that the Fund fails to specify in a Certificate the Series, the name of the issuer, the title and the number of shares or the principal amount of any particular Securities to be deposited by the Custodian into, or withdrawn from, a Senior Securities Account, the Custodian shall be under no obligation to make any such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin Account to the broker, dealer, futures commission merchant or Clearing Member in whose name, or for whose benefit, the account was established as specified in the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with respect to Securities deposited in any Margin Account shall be dealt with in accordance with the terms and conditions of the Margin Account Agreement.
4. To the extent permitted by the Fund's Article of Incorporation, investment restrictions and the Investment Company Act of 1940, as amended, the Custodian shall have a continuing lien and security interest in and to any property at any time held by the Custodian in any Collateral Account described herein. In accordance with applicable law the Custodian may enforce its lien and realize on any such property whenever the Custodian has made payment or delivery pursuant to any Put Option guarantee letter or similar document or any receipt issued hereunder by the Custodian. In the event the Custodian should realize on any such property net proceeds which are less than the Custodian's obligations under any Put Option guarantee letter or similar document or any receipt, such deficiency shall be a debt owed the Custodian by the Fund within the scope of Article XIV herein.
5. On each business day the Custodian shall furnish the Fund with a statement with respect to each Margin Account in which money or Securities are held specifying as of the close of business on the previous business day: (a) the name of the Margin Account; (b) the amount and kind of Securities held therein; and (c) the amount of money held therein. The Custodian shall make available upon request to any broker, dealer, or futures commission merchant specified in the name of a Margin Account a copy of the statement furnished the Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which cash and/or Securities are maintained in a Collateral Account for any Series, the Custodian shall furnish the Fund with a statement with respect to such Collateral Account specifying the amount of cash and/or the amount and kind of Securities held therein. No later than the close of business next succeeding the delivery to the Fund of such statement, the Fund shall furnish to the Custodian a Certificate specifying the then market value of the Securities described in such statement. In the event such then market value is indicated to be less than the Custodian's obligation with respect to any outstanding Put Option guarantee letter or similar document, the Fund shall promptly specify in a Certificate the additional cash and/or Securities to be deposited in such Collateral Account to eliminate such deficiency.
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of the resolution of the Board of Directors of the Fund, certified by the Secretary or any Assistant Secretary, either (i) setting forth with respect to the Series specified therein the date of the declaration of a dividend or distribution, the date of payment thereof, the record date as of which shareholders entitled to payment shall be determined, the amount payable per Share of such Series to the shareholders of record as of that date and the total amount payable to the Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund on the payment date, or (ii) authorizing with respect to the Series specified therein the declaration of divi dends and distributions on a daily basis and authorizing the Custodian to rely on Oral Instructions or a Certificate setting forth the date of the declaration of such dividend or distribution, the date of payment thereof, the record date as of which share holders entitled to payment shall be determined, the amount payable per Share of such Series to the shareholders of record as of that date and the total amount payable to the Dividend Agent on the payment date.
2. Upon the payment date specified in such resolution, Oral Instructions or Certificate, as the case may be, the Custodian shall pay out of the moneys held for the account of each Series the total amount payable to the Dividend Agent and any sub-dividend agent or co-dividend agent of the Fund with respect to such Series.
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver to the Custodian a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade date, and
(b) The amount of money to be received by the Custodian for the sale of such Shares and specifically allocated to the separate account in the name of such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian shall credit such money to the separate account in the name of the Series for which such money was received.
3. Upon issuance of any Shares of any Series described in the foregoing provisions of this Article, the Custodian shall pay, out of the money held for the account of such Series, all original issue or other taxes required to be paid by the Fund in connection with such issuance upon the receipt of a Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund desires the Custodian to make payment out of the money held by the Custodian hereunder in connection with a redemption of any Shares, it shall furnish to the Custodian a Certificate specifying:
(a) The number and Series of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the Series and number of Shares received by the Transfer Agent for redemption and that such Shares are in good form for redemption, the Custodian shall make payment to the Transfer Agent out of the moneys held in the separate account in the name of the Series the total amount specified in the Certificate issued pursuant to the foregoing paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the redemption of any Shares, whenever any Shares are redeemed pursuant to any check redemption privilege which may from time to time be offered by the Fund, the Custodian, unless otherwise instructed by a Certificate, shall, upon receipt of an advice from the Fund or its agent setting forth that the redemption is in good form for redemption in accordance with the check redemption procedure, honor the check presented as part of such check redemption privilege out of the moneys held in the separate account of the Series of the Shares being redeemed.
1. If the Custodian, should in its sole discretion advance funds on behalf of any Series which results in an overdraft because the moneys held by the Custodian in the separate account for such Series shall be insufficient to pay the total amount payable upon a purchase of Securities specifically allocated to such Series, as set forth in a Certificate or Oral Instructions, or which results in an overdraft in the separate account of such Series for some other reason, or if the Fund is for any other reason indebted to the Custodian with respect to a Series, including any indebtedness to The Bank of New York under the Fund's Cash Management and Related Services Agreement, (except a borrowing for investment or for temporary or emergency purposes using Securities as collateral pursuant to a separate agreement and subject to the provisions of paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to be a loan made by the Custodian to the Fund for such Series payable on demand and shall bear interest from the date incurred at a rate per annum (based on a 360-day year for the actual number of days involved) equal to 1/2% over Custodian's prime commercial lending rate in effect from time to time, such rate to be adjusted on the effective date of any change in such prime commercial lending rate but in no event to be less than 6% per annum. In addition, the Fund hereby agrees that the Custodian shall have a continuing lien and security interest in and to any property specifically allocated to such Series at any time held by it for the benefit of such Series or in which the Fund may have an interest which is then in the Custodian's possession or control or in possession or control of any third party acting in the
Custodian's behalf. The Fund authorizes the Custodian, in its sole discretion, at any time to charge any such overdraft or indebted ness together with interest due thereon against any balance of account standing to such Series' credit on the Custodian's books. In addition, the Fund hereby covenants that on each Business Day on which either it intends to enter a Reverse Repurchase Agreement and/ or otherwise borrow from a third party, or which next succeeds a Business Day on which at the close of business the Fund had outstanding a Reverse Repurchase Agreement or such a borrowing, it shall prior to 9 a.m., New York City time, advise the Custodian, in writing, of each such borrowing, shall specify the Series to which the same relates, and shall not incur any indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank (including, if the borrowing is pursuant to a separate agreement, the Custodian) from which it borrows money for invest ment or for temporary or emergency purposes using Securities held by the Custodian hereunder as collateral for such borrowings, a notice or undertaking in the form currently employed by any such bank setting forth the amount which such bank will loan to the Fund against delivery of a stated amount of collateral. The Fund shall promptly deliver to the Custodian a Certificate specifying with respect to each such borrowing: (a) the Series to which such borrowing relates; (b) the name of the bank, (c) the amount and terms of the borrowing, which may be set forth by incorporating by reference an attached promissory note, duly endorsed by the Fund, or other loan agreement, (d) the time and date, if known, on which the loan is to be entered into, (e) the date on which the loan becomes due and payable, (f) the total amount payable to the Fund on the borrowing date, (g) the market value of Securities to be delivered as collateral for such loan, including the name of the issuer, the title and the number of shares or the principal amount of any particular Securities, and (h) a statement specifying whether such loan is for investment purposes or for temporary or emergency purposes and that such loan is in conformance with the Investment Company Act of 1940 and the Fund's prospectus. The Custodian shall deliver on the borrowing date specified in a Certificate the specified collateral and the executed promissory note, if any, against delivery by the lending bank of the total amount of the loan payable, provided that the same conforms to the total amount payable as set forth in the Certificate. The Custodian may, at the option of the lending bank, keep such collateral in its possession, but such collateral shall be subject to all rights therein given the lending bank by virtue of any promissory note or loan agreement. The Custodian shall deliver such Securities as additional collateral as may be specified in a Certificate to collateralize further any transaction described in this paragraph. The Fund shall cause all Securities released from collateral status to be returned directly to the Custodian, and the Custodian shall receive from time to time such return of collateral as may be tendered to it. In the event that the Fund fails to specify in a Certificate the Series, the name of the issuer, the title and number of shares or the principal amount of any particular Securities to be delivered as collateral by the Custodian, the Custodian shall not be under any obligation to deliver any Securities.
1. At no time and under no circumstances shall the Fund be obligated to have or utilize the Terminal Link, and the provisions of this Article shall apply if, but only if, the Fund in its sole and absolute discretion elects to utilize the Terminal Link to transmit Certificates to the Custodian.
2. The Terminal Link shall be utilized by the Fund only for the purpose of the Fund providing Certificates to the Custodian with respect to transactions involving Securities or for the transfer of money to be applied to the payment of dividends, distributions or redemptions of Fund Shares, and shall be utilized by the Custodian only for the purpose of providing notices to the Fund. Such use shall commence only after the Fund shall have delivered to the Custodian a Certificate substantially in the form of Exhibit D and shall have established access codes. Each use of the Terminal Link by the Fund shall constitute a representation and warranty that the Terminal Link is being used only for the purposes permitted hereby, that at least two Officers have each utilized an access code, that such safekeeping procedures have been established by the Fund, and that such use does not contravene the Investment Company Act of 1940, as amended, or the rules or regulations thereunder.
3. The Fund shall obtain and maintain at its own cost and expense all equipment and services, including, but not limited to communications services, necessary for it to utilize the Terminal Link, and the Custodian shall not be responsible for the reliability or availability of any such equipment or services.
4. The Fund acknowledges that any data bases made available as part of, or through the Terminal Link and any proprietary data, software, processes, information and documentation (other than any such which are or become part of the public domain or are legally required to be made available to the public) (collectively, the "Information"), are the exclusive and confidential property of the Custodian. The Fund shall, and shall cause others to which it discloses the Information, to keep the Information confidential by using the same care and discretion it uses with respect to its own confidential property and trade secrets, and shall neither make nor permit any disclosure without the express prior written consent of the Custodian.
5. Upon termination of this Agreement for any reason, the Fund shall return to the Custodian any and all copies of the Information which are in the Fund's possession or under its control, or which the Fund distributed to third parties. The provisions of this Article shall not affect the copyright status of any of the Information which may be copyrighted and shall apply to all Information whether or not copyrighted.
6. The Custodian reserves the right to modify the Terminal Link from time to time without notice-to the Fund except that the Custodian shall give the Fund notice not less than 75 days in advance of any modification which would materially adversely affect the Fund's operation, and the Fund agrees that the Fund shall not modify or attempt to modify the Terminal Link without the Custodian's prior written consent. The Fund acknowledges that any software or procedures provided the Fund as part of the Terminal Link are the property of the Custodian and, accordingly, the Fund agrees that any modifications to the Terminal Link, whether by the Fund, or by the Custodian and whether with or without the Custodian's consent, shall become the property of the Custodian.
7. Neither the Custodian nor any manufacturers and suppliers it utilizes or the Fund utilizes in connection with the Terminal Link makes any warranties or representations, express or implied, in fact or in law, including but not limited to warranties of merchantability and fitness for a particular purpose.
8. The Fund will cause its Officers and employees to treat the authorization codes and the access codes applicable to Terminal Link with extreme care, and irrevocably authorizes the Custodian to act in accordance with and rely on Certificates received by it through the Terminal Link. The Fund acknowledges that it is its responsibility to assure that only its Officers use the Terminal Link on its behalf, and that a Custodian shall not be responsible nor liable for use of the Terminal Link on the Fund's behalf by persons other than such persons or Officers, or by only a single Officer, nor for any alteration, omission, or failure to promptly forward.
9. (a) Except as otherwise specifically provided in Section 9(b) of this Article, the Custodian shall have no liability for any losses, damages, injuries, claims, costs or expenses arising out of or in connection with any failure, malfunction or other problem relating to the Terminal Link except for money damages suffered as the direct result of the negligence of the Custodian in an amount not exceeding for any incident $75,000 provided, however, that the Custodian shall have no liability under this Section 9 if the Fund fails to comply with the provisions of Section 11.
(b) The Custodian's liability for its negligence in executing or failing to execute a transfer of funds in accordance with a Certificate received through Terminal Link shall arise if any such Certificate shall have been duly acknowledged by the Custodian, and shall be contingent upon the Fund complying with the provisions of Section 12 of this Article, and shall be limited to (i) restoration of the principal amount mistransferred, if and to the extent that the Custodian would be required to make such restoration under applicable law, and (ii) the lesser of (A) a Fund's actual pecuni ary loss incurred by reason of its loss of use of the mistrans ferred funds or the funds which were not transferred, as the case may be, or (B) compensation for the loss of the use of the mis transferred funds or the funds which were not transferred, as the case may be, at a rate per annum equal to the average federal funds rate as computed from the Federal Reserve Bank of New York's daily determination of the effective rate for federal funds, for the period during which a Fund has lost use of such funds. In no event shall the Custodian have any liability for failing to execute in accordance with a Certificate a transfer of funds where the Certificate is received by the Custodian through Terminal Link other than through the applicable transfer module for the particu lar instructions contained in such Certificate.
10. Without limiting the generality of the foregoing, in no event shall the Custodian or any manufacturer or supplier of its computer equipment, software or services relating to the Terminal Link be responsible for any special, indirect, incidental or con sequential damages which the Fund may incur or experience by reason of its use of the Terminal Link even if the Custodian or any manu facturer or supplier has been advised of the possibility of such damages, nor with respect to the use of the Terminal Link shall the Custodian or any such manufacturer or supplier be liable for acts of God, or with respect to the following to the extent beyond such person's reasonable control: machine or computer breakdown or malfunction, interruption or malfunction of communication facili ties, labor difficulties or any other similar or dissimilar cause.
11. The Fund shall notify the Custodian of any errors, omissions or interruptions in, or delay or unavailability of, the Terminal Link as promptly as practicable, and in any event within 24 hours after the earliest of (i) discovery thereof, (ii) the Business Day on which discovery should have occurred through the exercise of reasonable care and (iii) in the case of any error, the date of actual receipt of the earliest notice which reflects such error, it being agreed that discovery and receipt of notice may only occur on a business day. The Custodian shall promptly advise the Fund whenever the Custodian learns of any errors, omissions or interruption in, or delay or unavailability of, the Terminal Link.
12. Each party shall, as soon as practicable after its receipt of a Certificate or a notice transmitted by the Terminal Link, verify to the other party by use of the Terminal Link its receipt of such Certificate or notice, and in the absence of such verification the party to which the Certificate or notice is sent shall not be liable for any failure to act in accordance with such Certificate or notice and the sending party may not claim that such Certificate or notice was received by the other party.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as sub-custodian for each Series' Foreign Securities (as such term is defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, as amended) and other assets, the foreign banking institutions and foreign securities depositories and clearing agencies designated on Schedule I hereto ("Foreign Sub-Custodians") to carry out their respective responsibilities in accordance with the terms of the sub-custodian agreement between each such Foreign SubCustodian and the Custodian, copies of which have been previously delivered to the Fund and receipt of which is hereby acknowledged (each such agreement, a "Foreign SubCustodian Agreement"). The Custodian shall be liable for the acts and omis sions of each Foreign Sub-Custodian constituting negligence or willful misconduct in the conduct of its responsibilities under the terms of the Foreign Sub-Custodian Agreement. Upon receipt of a Certificate, together with a certified resolution substantially in the form attached as Exhibit E of the Fund's Board of Directors, the Fund may designate any additional foreign sub-custodian with which the Custodian has an agreement for such entity to act as the Custodian's agent, as its sub-custodian and any such additional foreign sub-custodian shall be deemed added to Schedule I. Upon receipt of a Certificate from the Fund, the Custodian shall cease the employment of any one or more Foreign Sub-Custodians for maintaining custody of the Fund's assets and such Foreign Sub-Custodian shall be deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be substan tially in the form previously delivered to the Fund and will not be amended in a way that materially adversely affects the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as belonging to each Series of the Fund the Foreign Securities of such Series held by each Foreign Sub-Custodian. At the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims by the Fund or any Series against a
Foreign Sub-Custodian as a consequence of any loss, damage, cost, expense, liability or claim sustained or incurred by the Fund or any Series if and to the extent that the Fund or such Series has not been made whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the terms of the applicable Foreign SubCustodian Agreement, use reasonable efforts to arrange for the independent accountants of the Fund to be afforded access to the books and records of any Foreign Sub-Custodian insofar as such books and records relate to the performance of such Foreign Sub-Custodian under its agreement with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the securities and other assets of each Series held by Foreign Sub-Custodians, including but not limited to, an identification of entities having possession of each Series' Foreign Securities and other assets, and advices or notifications of any transfers of Foreign Securities to or from each custodial account maintained by a Foreign SubCustodian for the Custodian on behalf of the Series.
6. The Custodian shall furnish annually to the Fund, as mutually agreed upon, information concerning the Foreign Sub Custodians employed by the Custodian. Such information shall be similar in kind and scope to that furnished to the Fund in connec tion with the Fund's initial approval of such Foreign Sub-Custodians and, in any event, shall include information pertaining to (i) the Foreign Custodians' financial strength, general reputation and standing in the countries in which they are located and their ability to provide the custodial services required, and (ii) whether the Foreign Sub-Custodians would provide a level of safeguards for safekeeping and custody of securities not materially different form those prevailing in the United States. The Custodian shall monitor the general operating performance of each Foreign SubCustodian, and at least annually obtain and review the annual financial report published by such Foreign Sub-Custodian to determine that it meets the financial criteria of an "Eligible Foreign Custodian" under Rule 17f-5(c)(2)(i) or (ii). The Custodian will promptly inform the Fund in the event that the Custodian learns that a Foreign Sub-Custodian no longer satisfies the financial criteria of an "Eligible Foreign Custodian" under such Rule. The Custodian agrees that it will use reasonable care in monitoring compliance by each Foreign Sub-Custodian with the terms of the relevant Foreign SubCustodian Agreement and that if it learns of any breach of such Foreign Sub-Custodian Agreement believed by the Custodian to have a material adverse effect on the Fund or any Series it will promptly notify the Fund of such breach. The Custodian also agrees to use reasonable and enforce its rights under the relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the Fund all notices, reports or other written information received pertaining to the Fund's Foreign Securities, including without limitation, notices of corporate action, proxies and proxy solicitation materials.
8. Notwithstanding any provision of this Agreement to the contrary, settlement and payment for securities received for the account of any Series and delivery of securities maintained for the account of such Series may be effected in accordance with the customary or established securities trading or securities process ing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivery of securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer.
1. Except as hereinafter provided, neither the Custodian nor its nominee shall be liable for any loss or damage, including counsel fees, resulting from its action or omission to act or otherwise, either hereunder or under any Margin Account Agreement, except for any such loss or damage arising out of its own negligence or willful misconduct. In no event shall the Custodian be liable to the Fund or any third party for special, indirect or consequential damages or lost profits or loss of business, arising under or in connection with this Agreement, even if previously informed of the possibility of such damages and regardless of the form of action. The Custodian may, with respect to questions of law arising hereunder or under any Margin Account Agreement, apply at the expense of the Fund, for and obtain the advice and opinion of counsel to the Fund or of its own counsel, at its own expense, and shall be fully protected with respect to anything done or omitted by it in good faith in conformity with such advice or opinion. The Custodian shall be liable to the Fund for any loss or damage resulting from the use of the Book-Entry System or any Depository arising by reason of any negligence or willful misconduct on the part of the Custodian or any of its employees or agents.
2. Without limiting the generality of the foregoing, the Custodian shall be under no obligation to inquire into, and shall not be liable for:
(a) The validity of the issue of any Securities purchased, sold, or written by or for the Fund, the legality of the purchase, sale or writing thereof, or the propriety of the amount paid or received therefor;
(b) The legality of the sale or redemption of any Shares, or the propriety of the amount to be received or paid therefor, as specified in a Certificate;
(c) The legality of the declaration or payment of any dividend by the Fund as specified in a resolution, Certificate or
(d) The legality of any borrowing by the Fund using
(e) The legality of any loan of portfolio Securities, nor shall the Custodian be under any duty or obligation to see to it that any cash collateral delivered to it by a broker, dealer, or financial institution or held by it at any time as a result of such loan of portfolio Securities of the Fund is adequate collateral for the Fund against any loss it might sustain as a result of such loan. The Custodian specifically, but not by way of limitation, shall not be under any duty or obligation periodically to check or notify the Fund that the amount of such cash collateral held by it for the Fund is sufficient collateral for the Fund, but such duty or obligation shall be the sole responsibility of the Fund. In addition, the Custodian shall be under no duty or obligation if any broker, dealer or financial institution to which portfolio Securities of the Fund are lent pursuant to Article XIV of this Agreement makes payment to it of any dividends or interest which are payable to or for the account of the Fund during the period of such loan or at the termination of such loan, provided, however, that the Custodian shall promptly notify the Fund in the event that such dividends or interest are not paid and
(f) The sufficiency or value of any amounts of money and/or Securities held in any Margin Account, Segregated Account or Collateral Account in connection with transactions by the Fund. In addition, the Custodian shall be under no duty or obligation if any broker, dealer, futures commission merchant or Clearing Member makes payment to the Fund of any variation margin payment or simi lar payment which the Fund may be entitled to receive from such broker, dealer, futures commission merchant or Clearing Member, to see that any payment received by the Custodian from any broker, dealer, futures commission merchant or Clearing Member is the amount the Fund is entitled to receive, or to notify the Fund of the Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the Custodian of, any money, whether or not represented by any check, draft, or other instrument for the payment of money, received by it on behalf of the Fund until the Custodian actually receives and collects such money directly or by the final crediting of the account representing the Fund's interest at the Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable for ascertaining or acting upon any calls, conversions, exchange offers, tenders, interest rate changes or similar matters relating to Securities held in the Depository, unless the Custodian shall have actually received timely notice from the Depository. In no event shall the Custodian have any responsibil ity or liability for the failure of the Depository to collect, or for the late collection or late crediting by the Depository of any amount payable upon Securities deposited in the Depository which may mature or be redeemed, retired, called or otherwise become payable. However, upon receipt of a Certificate from the Fund of an overdue amount on Securities held in the Depository the Custodian shall make a claim against the Depository on behalf of the Fund, except that the Custodian shall not be under any obliga tion to appear in, prosecute or defend any action suit or proceed ing in respect to any Securities held by the Depository which in its opinion may involve it in expense or liability, unless indem nity satisfactory to it against all expense and liability be furnished as often as may be required.
5. The Custodian shall not be under any duty or obligation to take action to effect collection of any amount due to the Fund from the Transfer Agent of the Fund nor to take any action to effect payment or distribution by the Transfer Agent of the Fund of any amount paid by the Custodian to the Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take action to effect collection of any amount, if the Securities upon which such amount is payable are in default, or if payment is refused after due demand or presentation, unless and until (i) it shall be directed to take such action by a Certificate and (ii) it shall be assured to its satisfaction of reimbursement of its costs and expenses in connection with any such action.
7. With the prior approval of the Board of Directors of the Fund, the Custodian may appoint one or more banking institutions as Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as Co-Custodian or Co-Custodians including, but not limited to, banking institutions located in foreign countries, of Securities and moneys at any time owned by the Fund, upon such terms and conditions as may be approved in a Certificate or contained in an agreement executed by the Custodian, the Fund and the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to ascertain whether any Securities at any time delivered to, or held by it,for the account of the Fund and specifically alloca ted to a Series are such as properly may be held by the Fund or such Series under the provisions of its then current prospectus, or (b) to ascertain whether any transactions by the Fund, whether or not involving the Custodian, are such transactions as may properly be engaged in by the Fund; provided, however, that appointment of any foreign banking institution or depository shall be subject to the provision of Article XVI hereof.
9. The Custodian shall be entitled to receive and the Fund agrees to pay to the Custodian all out-of-pocket expenses and such compensation as may be agreed upon in writing from time to time between the Custodian and the Fund. The Custodian may charge such compensation and any expenses with respect to a Series incurred by the Custodian in the performance of its duties pursuant to such agreement against any money specifically allocated to such Series. The Custodian shall notify the Fund in writing of the nature and amount of any loss, damage, liability or expense attributable to one or more series of the Fund. The Fund may notify the Custodian of the appropriate allocation of any such loss, damage, liability or expense. In the event the Fund fails to notify the Custodian of any allocation within five business days of receipt from the Custodian of notice or a reimbursable expense, then the Custodian shall also be entitled to charge against any money held by it to the extent otherwise provided in this Agreement for the account of a Series such Series' pro rata share (based on such Series net asset value at the time of the charge to the aggregate net asset value of all Series at that time) of the amount of any loss, damage, liability or expense, including counsel fees, for which it shall be entitled to reimbursement under the provisions of this Agreement. The expenses for which the Custodian shall be entitled to reimbursement hereunder shall include, but are not limited to, the expenses of Sub-Custodian and foreign branches of the Custodian incurred in settling outside of New York City transactions involving the purchase and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate, notice or other instrument in writing received by the Custodian and reasonably believed by the Custodian to be a Certificate. The Custodian shall be entitled to rely upon any Oral Instructions actually received by the Custodian hereinabove provided for. The Fund agrees to forward to the Custodian a Certificate or facsimile thereof confirming such Oral Instructions in such manner so that such Certificate or facsimile thereof is received by the Custodian, whether by hand delivery, telecopier or other similar device, or otherwise, by the close of business of the same day that such Oral Instructions are given to the Custodian. The Fund agrees that the fact that such confirming instructions are not received by the Custodian shall in no way affect the validity of the transactions or enforceability of the transactions hereby authorized by the Fund. The Fund agrees that the Custodian shall incur no liability to the Fund in acting upon Oral Instructions given to the Custodian hereunder concerning such transactions provided such instructions reasonably appear to have been received from an Officer.
11. The Custodian shall be entitled to rely upon any instrument, instruction or notice received by the Custodian and reasonably believed by the Custodian to be given in accordance with the terms and conditions of any Margin Account Agreement. Without limiting the generality of the foregoing, the Custodian shall be under no duty to inquire into, and shall not be liable for, the accuracy of any statements or representations contained in any such instrument or other notice including, without limitation, any specification of any amount to be paid to a broker, dealer, futures commission merchant or Clearing Member.
12. The books and records pertaining to the Fund which are in the possession of the Custodian shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the Investment Company Act of 1940, as amended, and other applicable securities laws and rules and regulations. The Fund, or the Fund's authorized representatives, shall have access to such books and records during the Custodian's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by the Custodian to the Fund or the Fund's authorized representative, and the Fund shall reimburse the Custodian its expenses of providing such copies. Upon reasonable request of the Fund, the Custodian shall provide in hard copy or on micro-film, whichever the Custodian elects, any records included in any such delivery which are maintained by the Custodian on a computer disc, or are similarly maintained, and the Fund shall reimburse the Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by the Custodian on the system of internal accounting control of the Book-Entry System, the Depository or O.C.C., and with such reports on its own systems of internal accounting control as the Fund may reasonably request from time to time.
14. The Fund agrees to indemnify the Custodian against and save the Custodian harmless from all liability, claims, losses and demands whatsoever, including reasonable attorney's fees, howsoever arising or incurred because of or in connection with this Agreement, including the Custodian's payment or non-payment of checks pursuant to paragraph 6 of Article XIII as part of any check redemption privilege program of the Fund, except for any such liability, claim, loss and demand arising out of the Custodian's own or its nominee's negligence or willful misconduct.
15. Subject to the foregoing provisions of this Agreement, the Custodian may deliver and receive Securities, and receipts with respect to such Securities, and arrange for payments to be made and received by the Custodian in accordance with the customs prevailing from time to time among brokers or dealers in such Securities. When the Custodian is instructed to deliver Securities against payment, delivery of such Securities and receipt of payment therefor may not be completed simultaneously. The Fund assumes all responsibility and liability for all credit risks involved in connection with the Custodian's delivery of Securities pursuant to instructions of the Fund, which responsibility and liability shall continue until final payment in full has been received by the Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement, and no covenant or obligation shall be implied in this Agreement against the Custodian.
17. Whenever the Custodian has the authority to deduct monies from the account for a series without a Certificate, it shall notify the Fund within one business day of such deduction and the reason for it. Whenever the Custodian has the authority to sell Securities or any other property of the Fund on behalf of any Series without a Certificate, the Custodian will notify the Fund of its intention to do so and afford the Fund the reasonable opportu nity to select which Securities or other property it wishes to sell on behalf of such Series. If the Fund does not promptly sell sufficient Securities or other property on behalf of the Series, then, after notice, the Custodian may proceed with the intended sale.
18. From time to time the Fund may advise the Custodian in writing of procedures, guidelines or restrictions ("Procedures") adopted by the Fund for particular types of investments or transactions, e.g., repurchase agreements and reverse repurchase agreements. Not more than ten days after receipt of any such Procedures, the Custodian shall advise the Fund as to whether it has determined in its absolute discretion to comply with such Procedures. The Fund agrees that the Custodian, for whatever reason, without any penalty or liability, shall have the absolute right to determine that it will not comply with any such Procedures. If the Custodian determines that it will not comply with such Procedures, the Fund shall have the right, notwithstand ing any provision to the contrary in this Agreement, to terminate this Agreement without any penalty to the Fund on 30 days written notice to the Custodian.
This Agreement shall continue in full force and effect until the first to occur of: (a) termination by the Custodian by a notice in writing delivered or mailed to the Fund, such termination to take effect not sooner than ninety (90) days after the date of such delivery; (b) termination by the Fund by a notice in writing delivered or mailed to the Custodian, such termination to take effect not sooner than sixty (60) days after the date of such delivery; or (c) termination by the Fund by written notice delivered to the Custodian, based upon the fund's determination that there is a reasonable basis to conclude that the Custodian is insolvent or that the financial condition of the Custodian is deteriorating in any material respect, in which case termination shall take effect upon the Custodian's receipt of such notice or at such later time as the Fund shall designate. In the event of ter mination pursuant to this Section, the Fund shall make payment of all accrued fees and unreimbursed expenses within a reasonable time following termination and delivery of a statement to the Fund setting forth such fees and expenses. Notwithstanding any provi sions elsewhere contained herein, the Custodian may deduct all fees, expenses and other amounts it is owed by the Fund from Securities and moneys held hereunder prior to making any delivery described in this Article. The Fund shall identify in any notice of termination a successor custodian to which the Securities, money and other assets of the Series shall, upon termination of this Agreement, be delivered. In the event that no written notice designating a successor custodian shall have been delivered to the Custodian on or before the date when termination of this Agreement shall become effective, the Custodian may deliver to a bank or trust company doing business in the City of New York, New York, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all Securities, moneys and other assets held by the Custodian and all instruments held by the Custodian relative thereto and all other property held by it under this Agreement. Thereafter, such bank or trust company shall be the successor or the Custodian under this Agreement. In the event that Securities and other assets remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to appoint a successor custodian, the Custodian shall be entitled to compensation for its services in accordance with the fee schedule most recently in effect, for such period as the Custodian retains possession of such Securities and other assets, the provisions of this Agreement relating to the duties and obligations of the Custodian and the Fund shall remain in full force and effect, and the Fund shall provide the Custodian at least ten (10) days prior notice of any delivery to be made by the Custodian. In the event of the appointment of a successor custodian, it is agreed that the
Securities, moneys and other property owned by the Fund and held by the Custodian, or nominee shall be delivered to the successor custodian; and the Custodian agrees to cooperate with the Fund at the Fund's expense in the execution of documents and performance of other actions necessary or desirable in order to substitute the successor custodian for the Custodian under this Agreement.
1. Annexed hereto as Appendix A is a Certificate signed by two of the present Officers of the Fund under its corporate seal, setting forth the names and the signatures of the present Officers of the Fund. The Fund agrees to furnish to the Custodian a new Certificate in similar form in the event any such present Officer ceases to be an Officer of the Fund, or in the event that other or additional Officers are elected or appointed. Until such new Certificate shall be received, the Custodian shall be fully protec ted in acting under the provisions of this Agreement upon the signatures of the Officers as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Custodian, shall be sufficiently given if addressed to the Custodian and mailed or delivered to it at its offices at 101 Barclay Street, New York, New York (21W) 10286, or at such other place as the Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Fund shall be sufficiently given if addressed to the Fund and mailed or delivered to it at its office at the address for the Fund first above written, or at such other place as the Fund may from time to time designate in writing.
4. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties with the same formality as this Agreement and approved by a resolution of the Board of Directors of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Fund without the written consent of the Custodian, or by the Custodian without the written consent of the Fund, authorized or approved by a resolution of the Fund's Board of Directors.
6. This Agreement shall be construed in accordance with the laws of the State of New York without giving effect to conflict of laws principles thereof. Each party hereby consents to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counter parts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument.
8. With respect to any obligations of the Fund on behalf of the Series arising out of this Agreement, the Custodian shall look for payment or satisfaction of any obligation solely to the assets and property of the Series to which such obligation relates as though the Fund had separately contacted with the Custodian by separate written instrument with respect to each Series.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective corporate Officers, thereunto duly authorized and their respective corporate seals to be hereunto affixed, as of the day and year first have written
FIRST INVESTORS SERIES FUND II, INC.
[SEAL] By:/s/ David D. Grayson
THE BANK OF NEW YORK
The undersigned, C. Durso, hereby certifies that she is the duly elected and acting Vice President and Secretary of First Investors Series Fund II, Inc., a Maryland corporation (the "Fund"), and further certifies that the following resolution was adopted by the Board of Directors of the Fund at a meeting duly held on May 26, 1992, at which a quorum was at all times present and that such resolution has not been modified or rescinded and is in full force and effect as of the date thereof.
RESOLVED, that pursuant to the terms of its Custodian Agreement with the Fund, [The Bank of New York] be, and it hereby is, authorized to deposit, directly or through a qualified sub-custodian acting as its agent, any or all of the securities of the Fund in a clearing agency registered with the Securities and Exchange Commission as a securities depository or in the book entry system as provided in applicable federal regulations as such regulations may be amended from time to time.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of First Investors Series Fund II, Inc. as of the 24th day of August , 1992.
I, David D. Grayson, President, and I, Concetta Durso, Secretary of the following First Investors Fund/Series:
First Investor Cash Management Fund, Inc. First Investors Fund For Income, Inc. First Investor Global Fund, Inc. First Investors Government Fund, Inc. First Investor High Yield Fund, Inc. First Investor Insured Tax Exempt Fund, Inc. First Investors Life Series Fund First Investors Multi-State Insured Tax Free Fund (Arizona, California, Colorado, Connecticut, Florida, Georgia, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania and Virginia Series) First Investors New York Insured Tax Free Fund, Inc. First Investors Blue Chip Series First Investors Investment Grade Series First Investors Special Situation Series First Investors Total Return Series First Investors Special Bond Fund, Inc. First Investors Tax-Exempt Money Market Fund, Inc. First Investors U.S. Government Plus Fund lst, 2nd & 3rd Series Executive Investors Blue Chip Fund Executive Investors Insured Tax Exempt Fund
do hereby certify that the following individual serves in the following position with each Fund/Series and she has been duly elected or appointed to such position and qualified therefor in conformity with the Fund/Series Articles of Incorporation and By-Laws or Declaration of Trust and that the signature set forth opposite her respective name is her true and correct signature:
I, Concetta Durso, Secretary of the above First Investors Funds/Series hereby certify that the above named individual has been duly elected and appointed to such position and qualified therefor in conformity with the Funds/Series Articles of Incorporation and By-Laws or Declaration of Trust and that the signature set forth opposite her respective name is her true and correct signature.
I, David D. Grayson, in my official capacity as President of the above First Investors Funds/Series, hereby certify that Concetta Durso is currently the duly elected and appointed Secretary of these Funds/Series and that the above named individual has been duly appointed to such position and that the signature appearing opposite her name is her true and correct signature.
/s/ David D. Grayson 7/20/92 David. D. Grayson, President Dated
I, David D. Grayson, President, and I, Concetta Durso, Secretary of each Fund, Series in the First Investors Family of Funds, do hereby certify that:
The following individuals are duly authorized to execute any certificate, instruction, notice or other instrument or to give oral instructions on behalf of each Fund/Series, and the signatures set forth opposite their respective names are their true and correct signatures:
I, David D. Grayson, in my official capacity as President of each Fund/Series in the First Investors Family of Funds, hereby certify that Concetta Durso is currently the duly elected and appointed Secretary of all Fund/Series in the First Investors Family of Funds and that the above named individuals have been duly authorized to execute any certificate, instruction, notice, or other instrument or to give oral instructions on behalf of each Fund/Series and the signatures set forth opposite their names are their true and correct signatures.
I, Concetta Durso, Secretary of each Fund/Series in the First Investors Family of Funds, hereby certify that the above named individuals have been duly authorized to execute any certificate, instruction, notice, or other instrument or to give oral instructions on behalf of each Fund/Series and the signatures set forth opposite their names are their true and correct signatures.
I, David D. Grayson, President, and I, Concetta Durso, Secretary of Investors Series Fund, a Massachusetts Business Trust, do hereby certify that:
The following individuals are duly authorized to execute any certificate, instruction, notice or other instrument or to give oral instructions on behalf of the Fund, and the signatures set forth opposite their respective names are their true and correct signatures:
I, David D. Grayson, in my official capacity as President of First Investors Series Fund, hereby certify that Concetta Durso is currently the duly elected and appointed Secretary of First Investors Series Fund and that the above named individuals have been duly authorized to execute any certificate, instruction, notice, or other instrument or to give oral instructions on behalf of Fund and the signatures set forth opposite their names are their true and correct signatures.
I, Concetta Durso, Secretary of First Investors Series Fund, hereby certify that the above named individuals have been duly authorized to execute any certificate, instruction, notice, or other instrument or to give oral instructions on behalf of the Fund and the signatures set forth opposite their names are their true and correct signatures.
FIRST INVESTORS MANAGEMENT COMPANY, INC. New York, New York 10005-4297
Mr. Octavio Cabrera, Assistant Treasurer The Bank of New York New York, New York 10286
In accordance with your telephone request to Mr. Joseph I. Benedek, this is to confirm that the authorized signers on the attached Appendixes (see copies attached) are also the authorized signers for the First Investors Made In The U.S.A. Fund (A Series of First Investors Series Fund II, Inc.).
cc: Mr. Joseph I. Benedek - FIMCO/N.J. Mr. Robert Orson - The Bank of New York
I, Jorge Ramos, a Vice President with THE BANK OF NEW YORK do hereby designate the following publications:
The Bond Buyer Depository Trust Company Notices Financial Daily Card Service JJ Kenney Municipal Bond Service London Financial Times New York Times Standard & Poor's Called Bond Record Wall Street Journal
Bank of New York Branches | 485BPOS | EX-99.B8 | 1996-01-12T00:00:00 | 1996-01-12T09:22:27 |
0000950134-96-000104 | 0000950134-96-000104_0002.txt | PARTNERSHIP HUD PROJECT NO. 054-35130
We hereby certify that we have examined the accompanying financial statements and supplementary information of WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP, EIN 59-2445708 and, to the best of our knowledge and belief, the same is complete and accurate.
/s/ MARK A. WERNER 2/23/95 REALTY MANAGEMENT GROUP, INC., DATE
We hereby certify that we have examined the accompanying financial statements and supplemental data of WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP, EIN 59-2445708 and, to the best of our knowledge and belief, the same is complete and accurate.
Mark A. Werner, President February 20, 1995 Realty Management Group, Inc.
9250 Cypress Green Drive, Suite 104 - Jacksonville, Florida 32256 FAX: (904) 731-4369 OFFICE: (904) 731-4366
The Independent Auditor, James E. Bullard, CPA, 9471-308 Baymeadows Road, Jacksonville, Florida 32256, whose Federal Employer Identification Number is 59-1321288, is a duly licensed Certified Public Accountant in the State of Florida, Florida Certification Number 2572 dated October 8, 1969, such licensure being consistent with HUD's requirement that the Independent Auditor be a licensed Certified Public Accountant in his state of domicile. Since all of the auditing services rendered in connection with examination of the accompanying financial statements were rendered in Florida, the permanent office of the Partnership, there is no requirement for the Independent Auditor to be licensed by the State of South Carolina.
Willow Wick Associates Limited Partnership
I have audited the accompanying balance sheet of Willow Wick Associates Limited Partnership, HUD Project No. 054-35130 as of December 31, 1994, and the related statement of operations and partners' capital, and of cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. My responsibility is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards and Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that I 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. I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Willow Wick Associates Limited Partnership, HUD Project No. 054-35130, as of December 31, 1994, and the results of its operations and changes in partners' capital and cash flows for the year then ended in conformity with generally accepted accounting principles.
My audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The supporting information included in the report (shown on pages 16 to 25) are presented for the purposes of additional analysis and are not a required part of the basic financial statements of Willow Wick Associates Limited Partnership, HUD Project NO. 054-35130. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in my opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.
/s/ JAMES E. BULLARD, CPA
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP
The Notes to Financial Statements are an integral part of these statements.
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP FORM HUD-92410 - ACCOUNT DETAIL
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL YEAR ENDED DECEMBER 31, 1994
The Notes to Financial Statements are an integral part of these statements.
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP YEAR ENDED DECEMBER 31, 1994
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS (CONTINUED) YEAR ENDED DECEMBER 31, 1994
The Notes To Financial Statements are an integral part of these statements.
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Willow Wick Associates Limited Partnership was formed in October 1984 to acquire and operate a 104-unit rental complex (The Project) located in North Augusta, South Carolina. This project is security for a mortgage insured by HUD under Section 221(d)(4) of the National Housing Act, and operating methods and partners' annual distributions are regulated by HUD pursuant to a regulatory agreement. The agreement limits annual distributions to "surplus cash" available at the end of each year.
Assets, liabilities, revenues and expenses are recognized on the accrual basis of accounting.
Property and equipment are recorded at cost. Depreciation provided in the financial statements is computed by both accelerated and straight-line methods applied to individual property items based on estimated useful lives ranging from five to forty years. For Federal income tax purposes, depreciation for buildings is calculated over an eighteen-year recovery period.
Certain costs and fees associated with the organization and promotion of the Partnership are non-deductible expenditures and have been capitalized as syndication costs.
No income tax provision has been included in the financial statements since income or loss of the Partnership is required to be reported by the respective partners on their individual income tax returns.
Pursuant to a regulatory agreement, The Project is required to deposit monies monthly with the mortgagor to be used for replacements of property and equipment approved by HUD.
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP
a) The Partnership assumed an existing mortgage note payable on December 14, 1984, in the amount of $1,141,892 bearing an interest rate of 7% per annum on the unpaid balance. The note calls for equal monthly payments in the amount of $7,753 including interest, through January 1, 2013. The note is insured by FHA under the FHA 221(d)(4) program. The partnership was required to enter into a regulatory agreement with the U.S. Department of Housing and Urban Development. The Regulatory Agreement does not require HUD approval of rent levels.
b) The Partnership executed a promissory note on December 14, 1984 in the amount of $300,608 bearing an interest rate of 12% per annum. Interest is payable annually until December 14, 1994 when the principal amount and the remaining accrued interest became due; the maturity date of the note was extended to April 15, 1995 by agreement of the parties. The promissory note is subordinate to the first mortgage insured by the U.S. Department of Housing and Urban Development and payments of interest and principal from project income can only be paid from surplus cash as defined by the Regulatory Agreement.
Maturities of long-term debt by year are as follows:
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP
NOTE 3: IDENTITIES OF INTEREST
During 1994, the Partnership had certain transactions with third parties who constituted Identities of Interest, including those parties reflected in Compensation of Partners (Page 23), and the following additional transactions:
1) The Partnership reimbursed its General Partner, Realty Management Group, Inc. for the Apartment Project's payroll and payroll-related items during 1994.
2) The Partnership reimbursed Realty Management Group, Inc. for certain repair and replacement items paid on behalf of the Apartment Project by Realty Management Group, Inc.
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP
Accounts and Notes Receivable (other than from regular tenants):
There are no known receivables from other than regular tenants at December 31, 1994.
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP
As of December 31, 1994, the estimated amounts needed for future payment of insurance and taxes are as follows:
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP
Tenant security deposits are held in a separate bank account in the name of the project.
SCHEDULE OF FUNDS IN FINANCIAL INSTITUTIONS AS OF DECEMBER 31, 1994
[1] Balances confirmed by First Union National Bank of Florida, 1/10/95 [2] Balances confirmed by Nation's Bank of Florida, 1/04/95 [3] Balances confirmed by Greystone Servicing Corporation, Inc., 1/23/95
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT HOUSING - FEDERAL HOUSING COMMISSIONER OFFICE OF MULTIFAMILY HOUSING MANAGEMENT AND OCCUPANCY
COMPUTATION OF SURPLUS CASH, DISTRIBUTIONS AND
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP ANALYSIS OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts Payable (other than trade creditors):
There are no known accounts payable to other than trade creditors as of December 31, 1994.
There are no known taxes to be accrued as of December 31, 1994.
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP CHANGES IN FIXED ASSET ACCOUNTS YEAR ENDED DECEMBER 31, 1994
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP
The General Partner, Realty Management Group, Inc., earned management fees of $27,353, representing six (6) per cent of project income (as defined), and General Partner fees of $6,610 for the year ended December 31, 1994.
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP SCHEDULE OF UNAUTHORIZED DISTRIBUTIONS OF PROJECT INCOME
Schedule of Unauthorized Distributions of Project Income
During 1994, the Partnership made periodic payments (without prior approval of HUD), of the following items [all classified as entity expenses on Form 92410 (Page 8)]:
All of the payments listed above are considered "entity" expenses, and are payable only out of Surplus Cash as defined in the Regulatory Agreement. Semi-annual and annual disbursements of Surplus Cash are allowable with prior approval of HUD.
It is noted that Surplus Cash was $41,299 at December 31, 1993, all of which could have been distributed (or used to pay entity expenses) during 1994 with the approval of HUD.
Other than the amounts reflected above, no other unauthorized distributions of project income were noted during the audit of the accompanying financial statements.
WILLOW WICK ASSOCIATES LIMITED PARTNERSHIP
1] During 1994, the Partnership made periodic payments (without the prior approval) of certain entity expenses (See Page 24 for details).
2] The Apartment Project continued to experience substantial vacancies during 1994, resulting in a deteriorating financial position of the Project at December 31, 1994.
3] Accounts payable - trade of $63,583 at December 31, 1994 represented an increase from $18,736 at December 31, 1993.
4] The second mortgage note of $300,608 (Note 2: Long-term debt) and interest accrued thereon matured on December 14, 1994; the maturity date of the note was extended to April 15, 1995, by agreement of the parties. Payment of, or a satisfactory restructuring of this obligation is imperative for the successful continuation of the Partnership.
INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL STRUCTURE
Willow Wick Associates Limited Partnership
I have audited the financial statements of Willow Wick Associates Limited Partnership, as of and for the year ended December 31, 1994, and have issued my report thereon dated February 20, 1995. I have also audited the partnership's compliance with requirements applicable to HUD-assisted programs and have issued my report thereon dated February 20, 1995.
I conducted my audit in accordance with generally accepted auditing standards, Government Auditing Standards issued by the Comptroller General of the United States, and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U.S. Department of Housing and Urban Development, Office of the Inspector General in July 1993. Those standards and the Guide require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and about whether the Partnership complied with laws and regulations, noncompliance with which would be material to a HUD-assisted program.
In planning and performing my audit for the year ended December 31, 1994, I considered the Partnership's internal control structure in order to determine my auditing procedures for the purpose of expressing my opinion on the Partnership's basic financial statements and on its compliance with specific requirements applicable to its HUD-assisted program and not to provide assurance on the internal control structure.
The management of the Partnership is responsible for establishing and maintaining an internal control structure. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of internal control structure policies and procedures. The objectives of an internal control structure are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles and that HUD assisted programs are managed in compliance with applicable laws and regulations. Because of inherent limitations in any internal control structure, errors, irregularities, or instances of noncompliance may nevertheless occur and not be detected. Also, projection of any evaluation of the structure to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate.
Willow Wick Associates Limited Partnership
For the purpose of this report, I have classified the significant internal control structure policies and procedures in the following categories:
The Partnership's Regulatory Agreement (with HUD)
For all of the internal control structure categories listed above, I obtained an understanding of the design of relevant policies and procedures and determined whether they have been placed in operation, and I assessed control risk.
I performed tests of controls, as required by the Guide, to evaluate the effectiveness of the design and operation of internal control structure policies and procedures that I considered relevant to preventing or detecting material noncompliance with specific requirements applicable to the Partnership's HUD-assisted program. My procedures were less in scope than would be necessary to render an opinion on internal control structure policy and procedures. Accordingly, I do not express such an opinion.
I noted no matters involving the internal control structure and its operation that I consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to my attention relating to significant deficiencies in the design or operation of the internal control structure that, in my judgment, could adversely affect the organization's ability to record, process, summarize, and report financial data consistent with management's assertions in the financial statements or to administer HUD assisted programs in accordance with applicable laws and regulations.
Willow Wick Associates Limited Partnership
A material weakness is a reportable condition in which the design or operation of one or more of the internal control structure elements does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited or that noncompliance with laws and regulations that would be material to a HUD-assisted program may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. My consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be reportable conditions and, accordingly, would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above.
This report is intended for the information of the Partnership's management, and the Department of Housing and Urban Development. However, this report is a matter of public record and its distribution is not limited.
/s/ JAMES E. BULLARD, CPA
INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO MAJOR HUD PROGRAMS
Willow Wick Associates Limited Partnership
I have audited the financial statements of Willow Wick Associates Limited Partnership, as of and for the year ended December 31, 1994 and have issued my report thereon dated February 20, 1995. In addition, I have audited the Partnership's compliance with the specific program requirements governing:
* the Partnership's Regulatory Agreement (with HUD) * its accounting for security deposits, and * its cash receipts and disbursements, that are applicable to its only Major HUD-assisted program (Operation of an Apartment Project which receives no rental assistance)
for the year ended December 31, 1994. The management of the Partnership is responsible for compliance with those requirements. My responsibility is to express an opinion on compliance with those requirements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards, Government Auditing Standards, issued by the Comptroller General of the United States, and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U.S. Department of Housing and Urban Development, Office of Inspector General in July 1993. Those standards and the Guide require that I plan and perform the audit to obtain reasonable assurance about whether material noncompliance with the requirements referred to above occurred. An audit includes examining, on a test basis, evidence about the Partnership's compliance with those requirements I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the Partnership complied, in all material respects, with the requirements described above that are applicable to its sole major HUD assisted program for the year ended December 31, 1994.
This report is intended for the information of the Partnership's management, and the Department of Housing and Urban Development. However, this report is a matter of public record and its distribution is not limited.
/s/ JAMES E. BULLARD, CPA
INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO AFFIRMATIVE FAIR HOUSING
Willow Wick Associates Limited Partnership
I have audited the financial statements of Willow Wick Associates Limited Partnership, as of and for the year ended December 31, 1994, and have issued my report thereon dated February 20, 1995.
I have applied procedures to test the Partnership's compliance with the Affirmative Fair Housing requirements applicable to its HUD-assisted programs, for the year ended December 31, 1994.
My procedures were limited to the applicable compliance requirement described in the Consolidated Audit Guide for Audits of HUD Programs issued by the U.S. Department of Housing and Urban Development, Office of Inspector General in July 1993. My procedures were substantially less in scope than an audit, the objective of which would be the expression of an opinion on the Partnership's compliance with the Affirmative Fair Housing requirements. Accordingly, I do not express such an opinion.
With respect to the items tested, the results of those procedures disclosed no material instances of noncompliance with the Affirmative Fair Housing requirements. With respect to items not tested, nothing came to my attention that caused me to believe that the Partnership had not complied, in all material respects, with those requirements.
This report is intended for the information of Partnership's management and the Department of Housing and Urban Development However, this report is a matter of public record and its distribution is not limited. | 8-K/A | EX-99.1 | 1996-01-12T00:00:00 | 1996-01-12T16:31:53 |
0000950109-96-000200 | 0000950109-96-000200_0007.txt | ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
THIS AGREEMENT is made as of _____________, 1995 by and between WEISS TREASURY FUND, a Massachusetts business trust (the "Fund") and PFPC INC., a Delaware corporation ("PFPC"), which is an indirect wholly owned subsidiary of PNC Bank Corp.
W I T N E S S E T H :
WHEREAS, the Fund is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund wishes to retain PFPC to provide administration and accounting services to its investment portfolios listed on Exhibit A attached hereto and made a part hereof, as such Exhibit A may be amended from time to time (each a "Portfolio"), and PFPC wishes to furnish such services.
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby the parties hereto agree as follows:
1. DEFINITIONS. AS USED IN THIS AGREEMENT:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of
(c) "Authorized Person" means any officer of the Fund and any other person duly authorized by the Fund's Board of Trustees to give Oral and Written Instructions on behalf of the Fund and listed on the Authorized Persons Appendix attached hereto and made a part hereof or any amendment thereto as may be received by PFPC. An Authorized Person's scope of authority may be limited by the Fund by setting forth such limitation in the Authorized Persons Appendix.
(d) "CEA" means the Commodities Exchange Act, as amended.
(e) "Oral Instructions" mean oral instructions received by PFPC from an Authorized Person or from a person reasonably believed by PFPC to be an Authorized Person.
(f) "SEC" means the Securities and Exchange Commission.
(g) "Securities Laws" means the 1933 Act, the 1934 Act, the 1940 Act and the CEA.
(h) "Shares" mean the shares of beneficial interest of any series or class of the Fund.
(i) "Written Instructions" mean written instructions signed by an Authorized Person and received by PFPC. The instructions may be delivered by hand, mail, tested telegram, cable, telex
2. APPOINTMENT. The Fund hereby appoints PFPC to provide administration and accounting services to each of the Portfolios, in accordance with the terms set forth in this Agreement. PFPC accepts such appointment and agrees to furnish such services.
3. DELIVERY OF DOCUMENTS. The Fund has provided or, where applicable, will provide PFPC with the following:
(a) certified or authenticated copies of the resolutions of the Fund's Board of Trustees, approving the appointment of PFPC or its affiliates to provide services to each Portfolio and
(b) a copy of Fund's most recent effective registration statement;
(c) a copy of each Portfolio's advisory agreement or agreements;
(d) a copy of the distribution agreement with respect to each class of Shares representing an interest in a Portfolio;
(e) a copy of any additional administration agreement with respect to
(f) a copy of any shareholder servicing agreement made in respect of the Fund or a Portfolio; and
(f) copies (certified or authenticated, where applicable) of any and all amendments or supplements to the foregoing.
4. COMPLIANCE WITH RULES AND REGULATIONS.
PFPC undertakes to comply with all applicable requirements of the Securities Laws, and any laws, rules and regulations of governmental authorities having jurisdiction with respect to the duties to be performed by PFPC hereunder. Except as specifically set forth herein, PFPC assumes no responsibility for such compliance by the Fund or any Portfolio.
(a) Unless otherwise provided in this Agreement, PFPC shall act only upon Oral and Written Instructions.
(b) PFPC shall be entitled to rely upon any Oral and Written Instructions it receives from an Authorized Person (or from a person reasonably believed by PFPC to be an Authorized Person) pursuant to this Agreement. PFPC may assume that any Oral or Written Instruction received hereunder is not in any way inconsistent with the provisions of organizational documents or this Agreement or of any vote, resolution or proceeding of the Fund's Board of Trustees or of the Fund's shareholders, unless and until PFPC receives Written Instructions to the contrary.
(c) The Fund agrees to forward to PFPC Written Instructions confirming Oral Instructions (except where such Oral Instructions are given by PFPC or its affiliates) so that PFPC receives the Written Instructions by the close of business on the next day that such Oral Instructions are received. The such confirming Written Instructions are not received by PFPC shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions. Where Oral or Written Instructions reasonably appear to have been received from an Authorized Person, PFPC shall incur no liability to the Fund in acting upon such Oral or Written Instructions provided that PFPC's actions comply with the other provisions of this Agreement.
6. RIGHT TO RECEIVE ADVICE.
(a) Advice of the Fund. If PFPC is in doubt as to any action it should or should not take, PFPC may request directions or advice, including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PFPC shall be in doubt as to any question of law pertaining to any action it should or should not take, PFPC may request advice at its own cost from such counsel of its own choosing (who may be counsel for the Fund, the Fund's investment adviser or PFPC, at the option of PFPC).
(c) Conflicting Advice. In the event of a conflict between directions, advice or Oral or Written Instructions PFPC receives from the Fund and the advice PFPC receives from counsel, PFPC may rely upon and follow the advice of counsel. In the event PFPC so relies on the advice of counsel, PFPC any action or omission on the part of PFPC which constitutes willful misfeasance, bad faith, gross negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement.
(d) Protection of PFPC. PFPC shall be protected in any action it takes or does not take in reliance upon directions, advice or Oral or Written Instructions it receives from the Fund or from counsel and which PFPC believes, in good faith, to be consistent with those directions, advice and Oral or Written Instructions. Nothing in this section shall be construed so as to impose an obligation upon PFPC (i) to seek such directions, advice or Oral or Written Instructions, or (ii) to act in accordance with such directions, advice or Oral or Written Instructions unless, under the terms of other provisions of this Agreement, the same is a condition of PFPC's properly taking or not taking such action. Nothing in this subsection shall excuse PFPC when an action or omission on the part of PFPC constitutes willful misfeasance, bad faith, gross negligence or reckless disregard by PFPC of any duties, obligations or responsibilities set forth in this Agreement.
(a) The books and records pertaining to the Fund and the Portfolios which are in the possession or under the control of PFPC shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and other applicable securities laws, rules and regulations. The Fund and Authorized Persons shall have access to such books and records at all times during PFPC's normal business hours. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by PFPC to the Fund or to an Authorized Person, at the Fund's expense.
(b) PFPC shall keep the following records:
(i) all books and records with respect to each Portfolio's books (ii) records of each Portfolio's securities transactions; (iii) all other books and records as PFPC is required to maintain pursuant to Rule 31a-1 of the 1940 Act in connection with the services provided hereunder.
8. CONFIDENTIALITY. PFPC agrees on its own behalf and that of its employees to keep confidential all records of the Fund and information relating to the Fund and its shareholders (past, present and future), unless the release of such records or information is otherwise consented to, in writing, by the Fund. The Fund agrees that such consent shall not be unreasonably withheld and may not be withheld where PFPC may be exposed to civil or criminal contempt proceedings or when required to divulge such information or records to duly constituted authorities.
9. LIAISON WITH ACCOUNTANTS. PFPC shall act as liaison with the Fund's independent public accountants and shall provide account analyses, fiscal year summaries, and other audit-related schedules with respect to each Portfolio. PFPC shall take all reasonable action in the performance of its duties under this Agreement to assure that the necessary information is made available to such accountants for the expression of their opinion, as required by the Fund.
10. DISASTER RECOVERY. PFPC shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment. In the event of equipment failures, PFPC shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions. PFPC shall have no liability with respect to the loss of data or service interruptions caused by equipment failure, provided such loss or interruption is not caused by PFPC's own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties or
11. COMPENSATION. As compensation for services rendered by PFPC during the term of this Agreement, the Fund, on behalf of each Portfolio, will pay to PFPC a fee or fees as may be agreed to in writing by the Fund and PFPC.
12. INDEMNIFICATION. The Fund, on behalf of each Portfolio, agrees to indemnify and hold harmless PFPC and its affiliates from all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, liabilities arising under the Securities Laws and any state or foreign securities and blue sky laws, and amendments thereto), and expenses, including (without limitation) attorneys' fees and disbursements arising directly or indirectly from any action or omission to act which PFPC takes (i) at the request or on the direction of or in reliance on the advice of the Fund or (ii) upon Oral or Written Instructions. Neither PFPC, nor any of its affiliates', shall be indemnified against any liability (or any expenses incident to such liability) arising out of PFPC's or its affiliates' own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties and obligations under this Agreement. Any amounts payable by the Fund hereunder shall be satisfied only against the relevant Portfolio's assets and not against the assets of any other investment portfolio
(a) PFPC shall be under no duty to take any action on behalf of the Fund or any Portfolio except as specifically set forth herein or as may be specifically agreed to by PFPC in writing. PFPC shall be obligated to exercise care and diligence in the performance of its duties hereunder, to act in good faith and to use its best efforts, within reasonable limits, in performing services provided for under this Agreement. PFPC shall be liable for any damages arising out of PFPC's performance of or failure to perform its duties under this Agreement to the extent such damages arise out of PFPC's willful misfeasance, bad faith, gross negligence or reckless disregard of such duties.
(b) Without limiting the generality of the foregoing or of any other provision of this Agreement, (i) PFPC shall not be liable for losses beyond its control, provided that PFPC has acted in accordance with the standard of care set forth above; and (ii) PFPC shall not be liable for (A) the validity or invalidity or authority or lack thereof of any Oral or Written Instruction, notice or other instrument which conforms to the applicable requirements of this Agreement, and which PFPC reasonably believes to be genuine; or (B) subject to Section 10, delays or errors or loss of data occurring by reason of circumstances beyond PFPC's control, including acts of civil or military authority, national emergencies, labor difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or failure of the mails, transportation, communication or power supply.
(c) Notwithstanding anything in this Agreement to the contrary, neither PFPC nor its affiliates shall be liable to the Fund or to any Portfolio for any consequential, special or indirect losses or damages which the Fund or any Portfolio may incur or suffer by or as a consequence of PFPC's or any affiliate's performance of the services provided hereunder, whether or not the likelihood of such losses or damages was known by PFPC or its affiliates.
14. DESCRIPTION OF ACCOUNTING SERVICES ON A CONTINUOUS BASIS.
PFPC will perform the following accounting services with respect to each Portfolio:
(i) Journalize investment, capital share and income and expense
(ii) Verify investment buy/sell trade tickets when received from the investment adviser for a Portfolio (the "Adviser") and transmit trades to the Fund's custodian (the "Custodian")
(iii) Maintain individual ledgers for investment securities;
(iv) Maintain historical tax lots for each security;
(v) Reconcile cash and investment balances of the Fund with the Custodian, and provide the Adviser with the beginning cash balance available for investment purposes;
(vi) Update the cash availability throughout the day as required
(vii) Post to and prepare the Statement of Assets and Liabilities and the Statement of Operations;
(viii) Calculate various contractual expenses (e.g., advisory and
(ix) Monitor the expense accruals and notify an officer of the Fund of any proposed adjustments;
(x) Control all disbursements and authorize such disbursements
(xi) Calculate capital gains and losses;
(xiii) Obtain security market quotes from independent pricing services approved by the Adviser, or if such quotes are unavailable, then obtain such prices from the Adviser, and in either case calculate the market value of each
(xiv) Transmit or mail a copy of the daily portfolio valuation to
(xv) Compute net asset value per share;
(xvi) As appropriate, compute yields, total
return, expense ratios, portfolio turnover rate, and, if required, portfolio average dollar-weighted maturity; and
(xvii) Prepare a monthly financial statement, which will include the following items:
Statement of Assets and Liabilities Statement of Changes in Net Assets Schedule of Capital Gains and Losses.
15. DESCRIPTION OF ADMINISTRATION SERVICES ON A CONTINUOUS BASIS.
PFPC will perform the following administration services with respect to each Portfolio:
(i) Prepare quarterly broker security transactions summaries;
(ii) Prepare monthly security transaction listings;
(iii) Supply various normal and customary Portfolio and Fund statistical data as requested on an ongoing basis;
(iv) Prepare for execution and file the Fund's Federal and state
(v) Prepare and file the Fund's Semi-Annual Reports with the
(vi) Prepare and file with the SEC the Fund's annual, semi- annual, and quarterly shareholder reports;
(vii) Provide persons who may be appointed as certain officers of the Fund by the Fund's Board
(viii) Assist in the preparation of registration statements and other filings relating to the registration of Shares;
(ix) Monitor each Portfolio's status as a regulated investment company under Sub-chapter M of the Internal Revenue Code of
(x) Coordinate contractual relationships and communications between the Fund and its contractual service providers; and
(xi) Monitor the Fund's compliance with the amounts and conditions of each state registration or qualification.
(xii) Prepare such other reports relating to the business of the Fund and each series (not otherwise prepared by others) as the officers and trustees of the Fund may from time to time reasonably request in connection with the performance of their duties.
16. DURATION AND TERMINATION. This Agreement shall continue until terminated by either party on sixty (60) days' prior written notice to the other party.
17. NOTICES. All notices and other communications, including Written Instructions, shall be in writing or by confirming telegram, cable, telex or facsimile sending device. If notice is sent during regular business hours, by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it be deemed to have been given three days after it has been mailed. If notice is sent by messenger or overnight mail, it shall be deemed to have been given on the day it is delivered. Notices shall be addressed (a) if to PFPC, at 400 Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at 4176 Burns Road, Palm Beach Gardens, FL 33410, Attn:__________________; or (c) if to neither of the foregoing, at such other address as shall have been provided by like notice to the sender of any such notice or other communication by the other party.
18. AMENDMENTS. This Agreement, or any term thereof, may be changed or waived only by written amendment, signed by the party against whom enforcement of such change or waiver is sought.
19. DELEGATION; ASSIGNMENT. PFPC may at its own expense assign its rights and delegate its duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank, National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund thirty (30) days' prior written notice; (ii) the delegate (or assignee) agrees with PFPC and the Fund to comply with all relevant provisions of the 1940 Act; and (iii) PFPC and such delegate (or assignee) promptly provide such information as the Fund may request, and respond to such questions as the Fund may ask, relative to the delegation (or assignment), limitation) the capabilities of the delegate (or assignee).
20. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
21. FURTHER ACTIONS. Each party agrees to perform such further acts and execute such further documents as are necessary to effectuate the purposes hereof.
(a) Entire Agreement. This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties and Oral Instructions.
(b) Captions. 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.
(c) Governing Law. This Agreement shall be deemed to be a contract made in Delaware and governed by Delaware law, without regard to principles of conflicts of law.
(d) Partial Invalidity. 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.
(e) Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns.
(f) Facsimile Signatures. The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.
(g) Massachusetts Business Trust Disclaimer. The Fund is organized as a Massachusetts business trust, and references in this Agreement to the Fund mean and refer to the Trustees from time to time serving under its Declaration of Trust on file with the Secretary of State of the Commonwealth of Massachusetts, as the same may be amended from time to time, pursuant to which the Fund conducts its business. It is expressly agreed that the obligations of the Fund hereunder shall not be binding upon any of the Trustees, shareholders, nominees, officers, agents or employees of the Fund, as provided in said Declaration of Trust. Moreover, if the Fund has more than one series, no series of the Fund other than the series on whose behalf a specified transaction shall have been undertaken shall be responsible for the obligations of the Fund, and persons engaging in transactions with the Fund shall look only to the assets of that series to satisfy those obligations. The execution and delivery of this Agreement has been authorized by the Trustees and signed by an authorized officer of the Fund, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by and of them but shall bind only the trust property of the Fund as provided in such Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.
THIS EXHIBIT A, dated as of ____________________, 1995, is Exhibit A to that certain Administration and Accounting Services Agreement dated as of _____________________, 1995 between PFPC Inc. and Weiss Treasury Fund.
Weiss Treasury Only Money Market Fund | N-1/A | EX-99.1 | 1996-01-12T00:00:00 | 1996-01-11T17:32:37 |
0000102710-96-000002 | 0000102710-96-000002_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 No.)
Cumberland, Rhode Island (Zip Code) (Address of principal executive offices)
(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 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. 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.
Class of Common Stock Nov. 30, 1995
Consolidated Condensed Statements of Operations--for the three-months ended November 30, 1995 and
Consolidated Condensed Balance Sheets--November 30, 1995 and August 31, 1995...................................... 4 & 5
Consolidated Condensed Statements of Cash Flows--for the three-months ended November 30, 1995 and 1994................. 6
Notes to Consolidated Condensed Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 8
Item 4. Submission of Matters to a Vote of Security Holders............... 9
Item 6. Exhibits and Reports on Form 8-K.................................. 9
ITEM 1 - FINANCIAL STATEMENTS
VALLEY RESOURCES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
VALLEY RESOURCES, INC. AND SUBSIDIARIES
VALLEY RESOURCES, INC. AND SUBSIDIARIES
VALLEY RESOURCES, INC. AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (Unaudited)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Corporation computes its loss per average common share based on the weighted average number of shares outstanding during the period.
In the opinion of the Corporation, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals and matters discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations") necessary to present fairly the financial position at November 30, 1995, the results of operations for the three-months ended November 30, 1995 and 1994 and Statements of Cash Flows for the three-months ended November 30, 1995 and 1994.
The results of operations for the three-month periods ended November 30, 1995 and 1994 are not necessarily indicative of the results to be expected for the full year.
Pursuant to the dividend reinvestment plan, stockholders can reinvest dividends and make limited additional investments in shares of Common Stock. Shares issued through dividend reinvestment can be acquired on the open market or original issue.
PART I - ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations
Utility gas revenues for the three months ended November 30, 1995, totaled $9,398,500, a 6 percent decrease when compared to the same period in fiscal 1995. The revenue decrease is the result of increased gas sales offset by a reduction in Purchased Gas Price Adjustment (PGPA) revenues and seasonal revenues.
Base revenues from firm customers, exclusive of the PGPA, increased 4 percent over the prior year as a result of increased gas sales. Sales to firm customers totaled 1,180,500 Mcf, an increase of 5 percent when compared to fiscal 1995. The primary contributors to this increase are colder weather and increased customers. Weather, as measured by degree days, was 6 percent colder than the prior year. At November 30, 1995, there were 60,919 utility customers versus 60,240 at November 30, 1994.
Seasonal and dual-fuel gas sales decreased 13 percent for the three months ended November 30, 1995 when compared to the prior year. Seasonal sales increase and decrease depending on availability of gas and the price of competitive fuels. The margin on seasonal sales are passed through to firm customers through the PGPA.
Valley Gas also transports natural gas owned by customers on their behalf. The revenues generated from the transportation of natural gas for others increased $13,400 for the three-months ended November 30, 1995, when compared with the results from the prior year.
Nonutility revenues totaled $4,696,600 for the three months ended November 30, 1995, a decrease of 2 percent when compared to the prior year. Revenues from retail sales decreased 13 percent and wholesale revenues decreased 1 percent which were partially offset by a 4 percent increase in service contract and rental revenues when compared to the corresponding fiscal 1995 period. Retail sales volume decreased while improvements in service contract and rental revenues were the result of price increases. Propane revenues decreased 4 percent, despite increased gallons sold, when compared with the prior year as a result of price competition.
Operating expenses for the three-month period were affected primarily by the cost of gas sold and operation expenses. The cost of gas sold decreased 11 percent when compared with the results of the prior year as a result of the flow through of the prior years over collection of gas cost. Other operation expenses remained flat as a result of cost control efforts when compared to fiscal 1995.
Interest expense totaled $819,600 for the three-months ended November 30, 1995, an increase of 9 percent over the prior year. The increase in interest expense was the result of increases in short-term borrowing rates and loan balances.
Operations during the first quarter typically do not generate sufficient cash to meet gas costs and construction requirements. Management believes the available financings are sufficient to meet cash requirements. The available borrowings under lines of credit at November 30, 1995 were $11,000,000.
On November 20, 1995, the Rhode Island Public Utilities Commission ("RIPUC") authorized the Utilities to adjust its tariffs to collect an additional $1.2 million. This rate increase should favorably impact liquidity in fiscal 1996.
A receivable lag that is generally experienced during the first fiscal quarter should be reversed in the second fiscal quarter and revenues should increase as a result of colder weather. Also, construction expenditures should be reduced during the second fiscal quarter due to restraints caused by weather having a favorable effect upon cash flow.
PART I - ITEM 6(a)
Item 6 (a) - Exhibits
Item 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Valley Resources, Inc. was held on December 12, 1995, for the purpose of electing a board of directors. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitations.
All of management's nominees for directors were elected by the following vote:
Item 6 - Exhibits and Reports on Form 8-K
(b) The Company did not file a 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.
VALLEY RESOURCES, INC. AND SUBSIDIARIES
Senior Vice President, Chief Financial Officer and | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T10:48:11 |
0000948630-96-000002 | 0000948630-96-000002_0001.txt | <DESCRIPTION>AMENDMENT TO THE DECLARATION OF TRUST
Amendment No. 3 to the Declaration of Trust and Amended and Restated Establishment and Designation of Series of Shares of Beneficial Interest (par value $0.00001 per share) Dated as of January 11, 1996
The undersigned, being the Trustees of BT Global Investors, a Massachusetts business trust (the "Trust"), acting pursuant to Article IX, Sections 9.3(a) and 9.3(f) of the Trust's Declaration of Trust, dated as of July 24, 1995 (the "Declaration"), hereby amend and restate the first sentence of Section 1.1. of the Declaration to read in its entirety "The name of the trust is "BT Advisor Funds"."
Pursuant to Article VI, Section 6.9 of the Declaration, the Trustees of the Trust hereby amend and restate the Establishment and Designation of Series appended to the Declaration to change the names of the eight initial series of Shares (as defined in the Declaration) (each a "Fund" and collectively the "Funds") of the Trust.
1. The Funds shall be redesignated, respectively, as follows:
Global High Yield Securities Fund Equity 500 Equal Weighted Index Fund - Advisor Class Shares Equity 500 Equal Weighted Index Fund - Institutional Class U.S. Bond Index Fund - Advisor Class Shares U.S. Bond Index Fund - Institutional Class Shares EAFE Equity Index Fund - Advisor Class Shares EAFE Equity Index Fund - Institutional Class Shares Small Cap Index Fund - Advisor Class Shares Small Cap Index Fund - Institutional Class Shares
and shall have the following special and relative rights:
2. Each Fund shall be authorized to hold cash, invest in securities, instruments and other properties and use investment techniques as from time to time described in the Trust's then currently effective registration statement under the Securities Act of 1933, as amended, to the extent pertaining to the offering of Shares of such Fund. Each Share of a Fund shall be redeemable, shall be entitled to one vote (or fraction thereof in respect of a fractional share) on matters on which Shares of the Fund shall be entitled to vote, shall represent a pro rata beneficial interest in the assets allocated or belonging to the Fund, and shall be entitled to receive its pro rata share of the net assets of the Fund upon liquidation of the Fund, all as provided in Section 6.9 of the Declaration.
The proceeds of sales of Shares of a Fund, together with any income and gain thereon, less any diminution or expenses thereof, shall irrevocably belong to that Fund, unless otherwise required by law.
3. Shareholders of each Fund shall vote separately as a class on any matter to the extent required by, and any matter shall be deemed to have been effectively acted upon with respect to the Fund as provided in, Rule 18f-2, as from time to time in effect, under the Investment Company Act of 1940, as amended, or any successor rule, and by the Declaration.
4. The assets and liabilities of the Trust shall be allocated among the Funds as set forth in Section 6.9 of the Declaration.
5. Subject to the provisions of Section 6.9 and Article IX of the Declaration, the Trustees (including any successor Trustees) shall have the right at any time and from time to time to reallocate assets and expenses, to change the designation of any Fund or any other series hereafter created, or otherwise to change the special and relative rights of any Fund or any such other series.
IN WITNESS WHEREOF, the undersigned have signed this instrument as of January 11, 1996. This instrument may be executed by the Trustees on separate counterparts but shall be effective only when signed by a majority of the Trustees.
As Trustee and not Individually
As Trustee and not Individually
As Trustee and not Individually
Richard J. Herring Harry Van Benschoten As Trustee and not Individually As Trustee and not Individually | N-1A EL/A | EX-99.B1 | 1996-01-12T00:00:00 | 1996-01-12T16:13:30 |
0000945228-96-000001 | 0000945228-96-000001_0000.txt | SMALL CAP ASIA GROWTH FUND, Inc.
P.O. Box 1515/Park 80 West Plaza Two, Saddle Brook, New Jersey 07663 Toll Free: Shareholder Services -1-800-526-0056 24 Hour Account Information -1-800-526-0052
A NO-LOAD MUTUAL FUND WHOSE INVESTMENT OBJECTIVE IS LONG-TERM CAPITAL APPRECIATION THROUGH INVESTMENT IN COMPANIES DOMICILED IN THE ASIA REGION WITH A MARKET CAPITALIZATION OF LESS THAN $1 BILLION.
Lexington Crosby Small Cap Asia Growth Fund (the "Fund") is a no-load open-end diversified management investment company. The Fund's investment objective is to seek long-term capital appreciation through investment in common stocks and equivalents of companies domiciled in the Asia Region with a market capitalization of less than $1 billion.
Shareholders may invest, reinvest, or redeem shares at any time without charge or penalty.
Lexington Management Corporation ("LMC") is the Fund's investment adviser. Crosby Asset Management (US) Inc. ("CROSBY") is the sub-adviser of the Fund. Lexington Funds Distributor, Inc. ("LFD") is the distributor of Fund shares.
This Prospectus sets forth information about the Fund you should know before investing. It should be read and retained for future reference.
A Statement of Additional Information dated December 19, 1995, which provides a further discussion of certain matters in this Prospectus and other matters that may be of interest to some investors, has been filed with the Securities and Exchange Commission and is incorporated herein by reference. For a free copy, call the appropriate telephone number above or write to the address listed above.
Mutual fund shares are not deposits or obligations of (or endorsed or guaranteed by) any bank, nor are they federally insured or otherwise protected by the Federal Deposit Insurance Corporation ("FDIC"), the Federal Reserve Board or any other agency. Investing in mutual funds involves investment risks, including the possible loss of principal, and their value and return will fluctuate.
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 and Retain this Prospectus for Future Reference
(as a percentage of average net assets) (net of reimbursement)*: Total Fund Operating Expenses .................................. 1.75%
The purpose of the foregoing table is to assist an investor in understanding the various costs and expenses that an investor in the Fund will bear directly and indirectly. Shareholder Servicing Agents acting as agents for their customers may provide administrative and recordkeeping services on behalf of the Fund. For these services, each Shareholder Servicing Agent receives fees, which may be paid periodically, provided that such fees will not exceed, on an annual basis, 0.25% of the average daily net assets of the Fund represented by shares owned during the period for which payment is made. Each Shareholder Servicing Agent may, from time to time, voluntarily waive all or a portion of the fees payable to it. LMC has agreed to voluntarily limit the total expenses of the Fund (excluding interest, taxes, brokerage, and extraordinary expenses but including management fee and operating expenses) to an annual rate of 1.75% of the Fund's average net assets through April 30, 1996 or such later date to be determined by LMC. (For more complete descriptions of the various costs and expenses, see "Investment Adviser, Sub-Adviser & Distributor" below.) The Expenses and Example appearing in the table above are based on the Fund's estimated expenses for the current fiscal year. The Example shown in the table above should not be considered a representation of the past or future expenses and actual expenses may be greater or less than those shown.
*The percentages stated in this Fee Table are net of reimbursement. Total Operating Expenses absent expense reimbursements are predicted to be 3.00%; 2.00% and 1.75% of the Fund's average net assets, respectively, for the first, second and third years of operations.
Lexington Crosby Small Cap Asia Growth Fund (the "Fund"), a series of Lexington Crosby Small Cap Asia Growth Fund, Inc. (the "Company"), is an open-end, diversified management investment company. The Fund's investment objective is to seek long-term capital appreciation through investment in common stocks and equivalents of companies domiciled in the Asia Region with a market capitalization of less than $1 billion which the investment adviser or sub-adviser believes offer exceptional growth opportunities at attractive relative prices. The Fund's portfolio will be invested primarily in equities listed on stock exchanges in the Asia Region consisting of Bangladesh, China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand, and Vietnam ("the Asia Region"). The Fund also intends to invest in Australia and New Zealand. The Fund may also invest in unlisted securities.
The Fund will seek to achieve its objective through investment in a diversified portfolio of securities that will consist of all types of common stocks and equivalents (the following constitute equivalents: convertible debt securities, warrants and options). The Fund may also invest in preferred stocks, bonds and other debt obligations and money market instruments, including cash and cash deposits, which will be denominated in U.S. Dollars or currencies related thereto. There is no assurance that the Fund will be able to achieve its investment objective.
Under normal market conditions, the Fund will invest substantially all of its assets in three or more countries in the Asia Region. The Fund seeks to provide investors with the opportunity to invest in a portfolio of securities of and governments located in the Asia Region. In making the allocation of assets among the various countries the adviser and sub-adviser ordinarily consider such factors as: prospects for relative economic growth; expected levels of inflation and interest rates; government policies influencing business conditions; the range of investment opportunities available to international investors; and other pertinent financial, tax, social, political and national factors-all in relation to the prevailing prices of the securities in the Asia Region.
The Fund will invest at least 65% of its assets in securities of issuers which are organized under the laws of countries located in the Asia Region, for which the principal securities trading market is in the Asia Region and the securities of issuers which derive at least 50% of their revenues or profits from the Asia Region.
The Fund will invest at least 65% of its assets in small capitalization growth companies in the Asia Region which have a market capitalization of less than $1 billion. Approximately 13,000 companies are listed on recognized exchanges in the Asia Region. Only some 300 companies are capitalized over $1 billion. These companies form the principal components of their respective market indices and consequently attract the majority of foreign investment in the region. Approximately 3,000 companies which have a market capitalization between $100 million and $1 billion will be the primary focus for the Fund's investments. These companies are frequently under-researched by international investors and undervalued by their markets. The companies in which the Fund intends to invest will generally have the following characteristics:
*have a market capitalization of less than $1 billion
*are within industry sectors with particularly strong growth prospects
*are under-researched by the investment community
By following these criteria, the Fund intends to select securities which can have enhanced growth prospects and may provide investment returns superior to the market as a whole. However, the market value of these companies securities tends to be volatile and in the past have offered greater potential for gain as well as loss than securities of companies traded in developed countries. While the Fund invests only in countries that it considers as having governments which favor foreign investment, it is possible that certain Fund investments could be subject to foreign expropriation or exchange control restrictions. See "Risk Considerations".
If the Fund invests in debt obligations the Fund intends to invest in debt obligations which, on the date of investment, are within the four highest ratings of Moody's Investors Service (Aaa, Aa, A, Baa for bonds; and within the three highest ratings, MIG 1, MIG 2, MIG 3 for notes; P-1 for commercial paper; VMIG 1, VMIG 2 for variable rate securities) or Standard & Poor's Corporation (AM, M, A, BBB for bonds; A-1 for commercial paper). The Fund may invest in bonds which are not rated if, based upon credit analysis by LMC or Crosby, it is believed that such bonds are of comparable quality to investment grade bonds. Bonds rated Baa or BBB while considered investment grade may have speculative characteristics as well.
The Fund may temporarily invest up to 100% of its assets in debt obligations, which consist of repurchase agreements, money market instruments of foreign or domestic companies and U.S. Government and foreign governments, governmental and international organizations when, in the judgement of the adviser or sub-adviser, conditions in the securities market would make pursuing the Fund's basic investment strategy inconsistent with the best interest of the shareholders.
Although the Fund does not generally intend to invest for the purpose of seeking short-term profits, the Fund's investments may be changed when circumstances warrant, without regard to the length of time a particular been held. It is expected that the Fund will have an annual portfolio turnover rate that will generally not exceed 150%. A 100% turnover rate would occur if all the Fund's portfolio investments were sold and either repurchased or replaced within a year. A high turnover rate (100% or more) results in correspondingly greater brokerage commissions and other transactional expenses which are borne by the Fund. High portfolio turnover may result in the realization of net short-term capital gains by the Fund which, when distributed to shareholders, will be taxable as ordinary income. See "Tax Matters."
Certain Investment Methods: The Fund may from time to time engage in the following investment practices:
Settlement Transactions-The Fund will attempt to insulate itself against possible losses and gains resulting from a change in the relationship between the United States dollar and the foreign currency during the period between the date a security is purchased or sold and the date on which payment is made or received. To do so, the Fund may, for a fixed amount of United States dollars, enter into a forward foreign exchange contract for the purchase or sale of the amount of foreign currency involved in the underlying securities transaction. This process is known as "transaction hedging".
To effect the exchange of the amount of foreign currencies involved in the purchase and sale of foreign securities and to effect the "transaction hedging" described above, the Fund may purchase or sell foreign currencies on a "spot" (i.e. cash) basis or on a forward basis whereby the Fund purchases or sells a specific amount of foreign currency, at a price set at the time of the contract, for receipt or delivery at a specified date which may be any fixed number of days in the future.
Such spot and forward foreign exchange transactions may also be utilized to reduce the risk inherent in fluctuations in the exchange rate between the United States dollar and the relevant foreign currency when foreign securities are purchased or sold for settlement beyond customary settlement time (as described below). Neither type of foreign currency transaction will eliminate fluctuations in the prices of the Fund's portfolio or securities or prevent loss if the price of such securities should decline.
Portfolio Hedging-When, in the opinion of LMC or Crosby it is desirable to limit or reduce exposure in a foreign currency in order to moderate potential changes in the United States dollar value of the portfolio, the Fund may enter into a forward foreign currency exchange contract by which the United States dollar value of the underlying foreign portfolio securities can be approximately matched by an equivalent United States dollar liability. The Fund, for hedging purposes only, may also enter into forward currency exchange contracts to increase its exposure to a foreign currency that LMC or Crosby expects to increase in value relative to the United States dollar. The Fund will not attempt to hedge all of its portfolio positions and will enter into such transactions only to the extent, if any, deemed appropriate by the investment adviser or sub-adviser. Hedging against a decline in the value of currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. The Fund will not enter into forward foreign currency exchange transactions for speculative purposes. The Fund intends to limit such transactions as described in this paragraph to not more than 70% of total Fund assets.
Forward Commitments-The Fund may make contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments") because new issues of securities are typically offered to investors, such as the Fund, on that basis. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. This risk is in addition to the risk of decline in value of the Fund's other assets. Although the Fund will enter into such contracts with the intention of acquiring the securities, the Fund may dispose of a commitment prior to settlement if the investment adviser or sub-adviser deems it appropriate to do so. The Fund may realize short-term profits or losses upon the sale of forward commitments.
Covered Call Options-The Fund may seek to preserve capital by writing covered call options on securities which it owns. Such an option on an underlying security would obligate the Fund to sell, and give the purchaser of the option the right to buy that security at a stated exercise price at anytime until a stated expiration date of the option. The premium paid by the purchaser of an option will be income to the Fund. The Fund will cause its custodian to segregate cash, U.S. Government Securities or other high grade liquid debt obligations having a value sufficient to meet the Fund's obligations under the call options. By writing covered call options, the Fund could lose the potential for appreciation or gain with respect to the securities underlying the call options.
Repurchase Agreements-A repurchase agreement is a contract under which the Fund would acquire a security for a relatively short period (usually not more than 7 days) subject to the obligations of the seller to repurchase and the Fund to resell such security at a fixed time and price (representing the Fund's cost plus interest). Although the Fund may enter into repurchase agreements with respect to any portfolio securities which it may acquire consistent with its investment policies and restrictions, it is the Fund's present intention to enter into repurchase agreements only with respect to obligations of the United States government or its agencies or instrumentalities to meet anticipated redemptions or pending investments or reinvestment of Fund assets in portfolio securities. The Fund will enter into repurchase agreements only with member banks of the Federal Reserve System and with "primary dealers" in United States government securities. Repurchase agreements are considered to be loans which must be fully collateralized including interest earned thereon during the entire term of the agreement. If the institution defaults on the repurchase agreement, the Fund will retain possession of the underlying securities. In addition, if bankruptcy proceedings are commenced with respect to the seller, realization on the collateral by the Fund may be delayed or limited and the Fund may incur additional costs. In such case, the Fund will be subject to risks associated with changes in market value of the collateral securities. The Fund intends to limit repurchase agreements to institutions believed by LMC or Crosby to present minimal credit risk. The Fund will not enter into repurchase agreements maturing in more than 7 days if the aggregate of such repurchase agreements and all other illiquid securities when taken together would exceed 15% of the total assets of the Fund.
Except as otherwise specifically noted, the Fund's investment objective and its investment restrictions are fundamental and may not be changed without the approval of a majority of the outstanding voting securities of the Fund. The Statement of Additional Information contains a complete description of the Fund's restrictions and additional information on policies relating to the investment of its assets and its activities.
The primary consideration in placing security transactions is execution at the most favorable prices, consistent with best execution. See the Statement of Additional Information for a further discussion of brokerage allocation.
Investors should recognize that investing in securities of foreign companies and in particular securities of companies domiciled in or doing business in Asian markets and countries involves certain risk considerations, including those set forth below, which are not typically associated with investing in securities of U.S. companies.
Many companies traded on securities markets in many foreign countries are smaller, newer and less seasoned than companies whose securities are traded on securities markets in the United States. Investments in smaller companies involve greater risk than is customarily associated with investing in larger companies. Smaller companies may have limited product lines, markets or financial or managerial resources and may be more susceptible to losses and risks of bankruptcy. Additionally, market making and arbitrage activities are generally less extensive in such markets and with respect to such companies, which may contribute to increased volatility and reduced liquidity of such markets or such securities. Accordingly, each of these markets and companies may be subject to greater influence by adverse events generally affecting the market, and by large investors trading significant blocks of securities, than is usual in the United States. To the extent that any of these countries experiences rapid increases in its money supply and investment in equity securities for speculative purposes, the equity securities traded in any such country may trade at price-earning multiples higher than those of comparable companies trading on securities markets in the United States, which may not be sustainable. In addition, risks due to the lack of modern technology, the lack of a sufficient capital base to expand business operations, the possibility of permanent or temporary termination of trading, and greater spreads between bid and ask prices may exist in such markets.
The Fund's assets will be invested in securities of foreign companies and substantially all income will be received by the Fund in foreign currencies. However, the Fund will compute and distribute its income in U.S. dollars, and the computation of income will be made on the date of its receipt by the Fund at the foreign exchange rate in effect on that date. Therefore, if the value of the foreign currencies in which the Fund receives its income falls relative to the dollar between receipt of the income and the making of Fund distributions, the Fund will be required to liquidate securities in order to make distributions if the Fund has insufficient cash in dollars to meet distribution requirements.
The value of the assets of the Fund as measured in dollars also may be affected favorably or unfavorably by fluctuations in currency rates and exchange control regulations. Further, the Fund may incur costs in connection with conversions between various currencies. Foreign exchange dealers realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer normally will offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire immediately to resell that currency to the dealer. The Fund will conduct its 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 entering into forward or futures contracts to purchase or sell foreign currencies.
Risks Associated With Hedging Transactions
Hedging transactions have special risks associated with them, including possible default by the Counterparty to the transaction, illiquidity and, to the extent LMC's or Crosby's view as to certain market movements is incorrect, the risk that the use of a hedging transaction could result in losses greater than if it had not been used. Use of call options could result in losses to the Fund, force the sale or purchase of portfolio securities at inopportune times or for prices lower than current market values, or cause the Fund to hold a security it might otherwise sell.
Currency hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. Further, the risk exists that the perceived linkage between various currencies may not be present or may not be present during the particular time that the Fund is engaging in portfolio hedging. Currency transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be adversely affected by government exchange controls, limitations or restrictions on repatriation of currency, and manipulations or exchange restrictions imposed by governments. These forms of governmental actions can result in losses to the Fund if it is unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs.
Losses resulting from the use of hedging transactions will reduce the Fund's net asset value, and possibly income, and the losses can be greater than if hedging transactions had not been used.
Restrictions Some foreign countries have laws and regulations which currently preclude direct foreign investment in the securities of their companies. However, indirect foreign investment in the securities of companies the stock exchanges in these countries is permitted by certain foreign countries through investment funds which have been specifically authorized. The Fund may invest in these investment funds subject to the provisions of the Investment Company Act of 1940, as amended (the "1940 Act") as discussed under "Investment Restrictions" in the Statement of Additional Information. If the Fund invests in such investment funds, the Fund's shareholders will bear not only their proportionate share of the expenses of the Fund (including operating expenses and the advisory fees), but also will bear indirectly similar expenses of the underlying investment funds.
In addition to the foregoing investment restrictions, prior governmental approval for foreign investments may be required under certain circumstances in some foreign countries, while the extent of foreign investment in domestic companies may be subject to limitation in other foreign countries. Foreign ownership limitations also may be imposed by the charters of individual companies in foreign countries to prevent, among other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by foreign investors may require governmental registration and/or approval in some foreign countries. The Fund could be adversely affected Tby delays in or a refusal to grant any required governmental approval for such repatriation.
Trading volume on foreign stock exchanges is substantially less than that on the New York Stock Exchange. Further, securities of some foreign companies are less liquid and more volatile than securities of comparable U.S. companies. Similarly, volume and liquidity in most foreign bond markets is substantially less than in the U.S. and, consequently, volatility of price can be greater than in the U.S. Fixed commissions on foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges, although the Fund endeavors to achieve the most favorable net results on its portfolio transactions and may be able to purchase the securities in which the Fund may invest on other stock exchanges where commissions are negotiable.
Trading practices in certain foreign securities markets are also significantly different from those in the U.S. Brokerage commissions and other transaction costs on the securities exchanges in many countries are generally higher than in the United States. In addition, securities settlements and clearance procedures in certain countries, and, in particular, in emerging market countries, are less developed and less reliable than those in the United States and the Fund may be subject to delays or other material difficulties and could experience a loss if a counterparty defaults. Delays in settlement could result in temporary periods when assets of the Fund are uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. The inability to dispose of a portfolio security due to settlement problems could result either in losses to the Fund due to subsequent declines in the value of such portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser.
Companies in foreign countries are not generally subject to uniform accounting, auditing and financial reporting standards, practices and disclosure requirements comparable to those applicable to U.S. companies. Consequently, there may be less publicly available information about a foreign company than about a U.S. company. Further, there is generally less governmental supervision and regulation of foreign stock exchanges, brokers and listed companies than in the U.S. Brokers in some countries may not be as well capitalized as those in the U.S., so that they may be more susceptible to financial failure in times of market, political, or economic stress, exposing the Fund to a risk of loss. Further, the Fund may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts.
The economies of individual foreign countries in which the Fund invests may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self sufficiency and balance of payments position. Further, the economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be adversely affected by economic conditions in the countries with which they trade. The export-driven nature of Asian economies is often dependent on the strength of their trading partners in the United States and Europe, although growing intra-regional trade may mitigate some of this external dependence.
With respect to any foreign country, there is the possibility of nationalization, expropriation or confiscatory taxation, political changes, government regulation, social instability or diplomatic developments (including war) which could affect adversely the economies of such countries or the Fund's investments in those countries. In addition, it may be more difficult to obtain a judgement in a court outside of the United States.
Many countries have experienced substantial, and in some periods extremely high and volatile, rates of inflation. Inflation and rapid fluctuations in inflation rates have had and may continue to have very negative effects on the economies and securities markets of these countries and emerging market countries in particular. In an attempt to control inflation, wage and price controls have been imposed at times in certain countries.
The Fund's investment program is subject to a number of investment restrictions which reflect self-imposed standards as well as federal and state regulatory limitations. These restrictions are designed to minimize certain risks associated with investing in certain types of securities or engaging in certain transactions. The most significant of these restrictions provide that:
(1) The Fund will not borrow money, except that (a) the Fund may enter into certain futures contracts and options related thereto; (b) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including delayed delivery and when-issued securities and reverse repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow money in amounts not exceeding 5% of the value of its total assets at the time when the loan is made; (d) The Fund may pledge its portfolio securities or receivables or transfer or assign or otherwise encumber them in an amount not exceeding one-third of the value of its total assets; and (e) for purposes of leveraging, the Fund may borrow money from banks (including its custodian bank), only if, immediately after such borrowing, the value of the Fund's assets, including the amount borrowed, less its liabilities, is equal to at least 300% of the amount borrowed, plus all outstanding borrowings. If at any time, the value of the Fund's assets fails to meet the 300% asset coverage requirement relative only to leveraging, the Fund will, within three days (not including Sundays and holidays), reduce its borrowings to the extent necessary to meet the 300% test. The Fund only will invest up to 5% of its total assets in reverse repurchase agreements.
(2) The Fund will not make loans, except that, to the extent appropriate under its investment program, the Fund may (a) purchase bonds, debentures or other debt securities, including short-term obligations, (b) enter into repurchase transactions and (c) lend portfolio securities provided that the value of such loaned securities does not exceed one-third of the Fund's total assets.
(3) The Fund will not concentrate its investments in any one industry, except that the Fund may invest up to 25% of its total assets in securities issued by companies principally engaged in any one industry.
foreign government securities and supra national organizations to be industries. This limitation, however, will not apply to securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities.
(4) The Fund will not purchase securities of an issuer, if (a) more than 5% of the Fund's total assets taken at market value would at the time be invested in the securities of such issuer, except that such restriction shall not apply to securities issued or guaranteed by the United States government or its agencies or instrumentalities or, with respect to 25% of the Fund's total assets, to securities issued or guaranteed by the government of any country other than the United States which is a member of the Organization for Economic Cooperation and Development ("OECD"). The member countries of OECD are at present: Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States; or (b) such purchases would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund.
The forgoing investment restrictions (as well as certain others set forth in the Statement of Additional Information) are matters of fundamental policy which may not be changed without the affirmative vote of the majority of the shareholders of the Fund.
The investment policies described below are non-fundamental, therefore, changes to such policies may be made in the future by the Board of Directors without the approval of the shareholders of the Fund:
(1) The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts.
(2) The Fund will not invest more than 15% of its total assets in illiquid securities. Illiquid securities are securities that are not readily marketable or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Such securities include, but are not limited to, time deposits and repurchase agreements with maturities longer than 7 days. Securities that may be resold under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended, shall not be deemed illiquid solely by reason of being unregistered. The Investment Adviser or Sub-Adviser shall determine whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors.
The Statement Information contains a complete description of the Fund's restrictions and any additional information on policies relating to the investment of its assets and its activities.
The Fund has a Board of Directors which establishes the Fund's policies and supervises and reviews the operations and management of the Fund. There are currently nine directors (of whom six are non-interested persons as defined under the Investment Company Act of 1940) who meet four times each year. The Statement of Additional Information contains more data regarding the Directors and Officers of the Fund.
The Fund is managed by a portfolio management team. The lead managers are Christina Lam and Nigel Webber of Crosby Asset Management (US) Inc.
Nigel Webber is Vice President and Portfolio Manager of the Fund. Mr. Webber is responsible for the Fund's overall investment strategy. Mr. Webber was appointed a Managing Director of Crosby Asset Management in October 1993 with primary responsibility for business development. He joined Crosby Asset Management after being a partner in Causeway Capital Limited, a leading independent U.K. investment management firm specializing in private equity investment and smaller listed companies.
He started his career at KPMG Peat Marwick, followed by five years at Citicorp International Bank Limited in London and New York and three years with Mercantile House Holdings PLC a leading financial services group. In 1987, he joined as Managing Director, an investment company specializing in the financial sector where he first became associated with the Crosby Group. He was a Director and member of the investment committee of The Thai Development Capital Fund Limited and The China Investment Company Ltd., two funds managed by Crosby Asset Management from their launch until September 1993.
Christina Lam is Vice President and Portfolio Manager of the Fund. Ms. Lam joined Crosby Asset Management in 1991. She is responsible for the investment management of the listed equity portfolios under the management of Crosby Asset Management which include a major Asian small capitalization account.
After graduating with a Law Degree with Honors from Warwick University, she qualified as a Barrister from Lincoln's Inn in London. She moved to Hong Kong in 1987 where she joined Schroder Securities Limited in Hong Kong as an investment analyst, where her coverage included the utilities, industrials and retail sectors and conglomerates.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
The Fund has entered into an investment advisory contract with Lexington Management Corporation (LMC), P.O. Box 1515/Park 80 West Plaza Two, Saddle Brook, New Jersey 07663. LMC provides investment advice and in general conducts the management and investment program of the Fund under the supervision and control of the Directors of the Fund. LMC has entered into a sub-advisory contract with Crosby Asset Management (US) Inc. ("Crosby"), 25/F Inchcape Insurance Tower, 3 Lockhart Road, Wan Chai, Hong Kong, under which Crosby will provide the Fund with investment advice and management of the Fund's investment program.
Lexington Funds Distributor, Inc. ("LFD"), a registered broker dealer, is the Fund's distributor.
LMC, established in 1938, currently manages over $3.5 billion in assets. LMC serves as investment adviser to other investment companies and private and institutional investment accounts. Included among these clients are persons and organizations which own significant amounts of capital stock of LMC's parent. The clients pay fees which LMC considers comparable to the fees paid by similarly served clients.
LMC also acts as administrator to the Fund and performs certain administrative and accounting services, including but not limited to, maintaining general ledger accounts, regulatory compliance, preparation of financial information for semiannual and annual reports, preparing registration statements, calculating net asset values, shareholder communications and supervision of the custodian, transfer agent and provides facilities for such services. The Fund shall reimburses LMC for its actual cost in providing such services, facilities and expenses.
LMC and LFD are wholly-owned subsidiaries of Lexington Global Asset Managers, Inc., a Delaware corporation with offices at Park 80 West Plaza Two, Saddle Brook, New Jersey 07663. Descendants of Lunsford Richardson, Sr. and their spouses, trusts and other related entities have a majority voting control of outstanding shares of Lexington Global Asset Managers, Inc. common stock.
Crosby Asset Management (US) Inc. was established on October 4, 1990 in the British Virgin Islands. Crosby manages assets and provides investment advice for investment company and institutional private accounts around the world including the United States. It is a subsidiary of the Crosby group.
The Crosby group was founded in 1984 and is a leading independent merchant bank in Asia, providing services including investment management, research and stockbrokerage and corporate finance. The Crosby group is headquartered in Hong Kong with 18 offices located in 11 countries throughout the region, and in London and New York.
The Crosby group employs over 500 people worldwide, over 400 of whom are resident in the Asia region. Research is undertaken by over 65 professionals the majority of whom are nationals of the countries in which they are located. The Crosby group provides services to its international investment clients from offices in New York and London, as well as its Asian locations. The Crosby group conducts regular business with over 300 institutions worldwide and had a transaction volume in excess of US $12 billion in the 12 months to March 31, 1995. Crosby Securities was one of the first international securities firm to have research offices in all of the major stockmarkets in the region (namely Thailand, Malaysia, Singapore, Indonesia and Hong Kong) and also to establish an office in China where it has seats on the Shanghai and Shenzhen Stock Exchanges.
LMC, as owner of the registered service mark "Lexington," will sublicense to the Fund to include the word "Lexington" as part of its corporate name subject to revocation by LMC in the event that the Fund ceases to engage LMC or its affiliate as investment advisor or distributor. Crosby Asset Management (US) Inc. has authorized the Fund to include the word "Crosby" as part of its corporate name subject to revocation by Crosby in the event the Fund ceases to engage Crosby as sub-adviser. In that event the Fund will be required upon the demand of LMC or Crosby to change its name to delete the word "Lexington" or "Crosby" therefrom.
As compensation for its services, the Fund pays LMC a monthly management fee at the annual rate of 1.25% of the average daily net assets. This fee is higher than that paid by most other investment companies. However, it is not necessarily greater than the management fee of other investment companies with objectives and policies similar to this Fund. LMC will pay Crosby an annual sub-advisory fee of 0.625% of the Fund's average daily net assets. The sub-advisory fee will be paid by LMC, not the Fund. See "Investment Adviser and Distributor" in the Statement of Additional Information. LMC has agreed to voluntarily limit the total expenses of the Fund (excluding interest, taxes, brokerage, and extraordinary expenses but including management fee and operating expenses) to an annual rate of 1.75% of the Fund's average net assets through April 30, 1996 or such later date to be determined by LMC.
Initial Investments: Minimum $1,000. By Wire: (1) Telephone the Fund at the applicable toll free telephone number on the front cover and provide the account registration, address, and social security or tax identification number, the amount being wired, the name of the wiring bank, and the name and telephone number of the person to be contacted in connection with the order. You will then be provided with an account number. (2) Instruct your bank to wire the specified amount, along with the account number and registration to State Street Bank and Trust Company ("Agent") Attn: Mutual Funds Depart., (re: Lexington Crosby Small Cap Asia Growth Fund, Account No. 99043713. (3) A completed New Account Application must then be forwarded to the Fund at the address on the Application.
By Mail: Send a check payable to Lexington Crosby Small Cap Asia Growth Fund, Inc. along with a completed New Account Application, to the Agent at the address on the Application.
Subsequent Investments - By Wire: Instruct your bank to wire the specified amount and appropriate information to State Street Bank and Trust Company (see "Initial Investments - By Wire"-(2), above).
By Mail - Minimum $50: Send a check payable to Lexington Crosby Small Cap Asia Growth Fund, Inc. to the Agent (see back cover of this prospectus for address), accompanied by either (a) the detachable form which accompanies the Agent's confirmation of a prior transaction, or (b) a letter indicating the dollar amount of the shares to be purchased and identifying the Fund, the account number and registration.
The Open Account: By investing in the Fund, a shareholder appoints the Agent, as his agent, to establish an open account to which all shares purchased will be credited, together with any dividends and capital gain distributions which are paid in additional shares. Stock certificates will be issued for full shares only when requested in writing. Unless payment for shares is made by certified or cashier's check or federal funds wire, certificates will not be issued for 30 days. In order to facilitate redemptions and transfers, most shareholders elect not to receive certificates.
Broker-Dealers: You may invest in shares of the Fund through broker-dealers who are members of the National Association of Securities Dealers, Inc., and other financial institutions and who have selling agreements with LFD. Banks and other financial institutions may be required to register as dealers pursuant to state law. Broker-dealers and financial institutions who process such orders for their customers may charge a fee for these services. The fee may be avoided by purchasing shares directly from the Fund.
Automatic Investing Plan with "Lex-O-Matic": A shareholder may arrange to make additional purchases of shares automatically on a monthly or quarterly basis. The investments of $50 or more are automatically deducted from a checking account on or about the 15th day of each month. The institution must be an Automated Clearing House (ACH) member. Should an order to purchase shares of a fund be cancelled because your automated transfer does not clear, you will be responsible for any resulting loss incurred by that fund. The shareholder reserves the right to discontinue the Lex-O-Matic program provided written notice is given ten days prior to the scheduled investment date. Further information regarding this service can be obtained from Lexington by calling 1-800-526-0056.
On payroll deduction accounts administered by an employer and on payments into qualified pension or profit sharing plans and other continuing purchase programs, there are no minimum purchase requirements.
Purchase Price: The purchase price will be the net asset value per share of the Fund next determined after receipt by the Agent of a completed New Account Application in proper form.
Determination of Net Asset Value: The net asset value of the shares of the Fund is computed as of the close of trading on each day the New York Stock Exchange is open, by dividing the value of the Fund's securities plus any cash and other assets (including accrued dividends and interest) less all liabilities (including accrued expenses) by the number of shares outstanding, the result being adjusted to the nearest whole cent. A security listed or traded on a recognized stock exchange is valued at its last sale price prior to the time when assets are valued on the principal exchange on which the security is traded. If no sale is reported at that time, the mean between the current bid and asked price will be used. All other securities for which the over-the-counter market quotations are readily available are valued at the mean between the last current bid and asked price. Short-term securities having maturity of 60 days or less are valued at cost when it is determined by the Fund's Board of Directors that amortized cost reflects the fair value of such securities. Securities for which market quotations are not readily available and other assets are valued at fair value as determined by the management and approved in good faith by the Board of Directors.
Generally, trading in foreign securities markets is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of foreign securities used in computing the net asset value of the shares of the Fund are determined as of the earlier of such market close or the closing time of the New York Stock Exchange (the "Exchange"). Foreign currency exchange rates are also generally determined prior to the close of the Exchange. Occasionally, events affecting the value of such securities and such exchange rates may occur between the times at which they are determined and the close of the Exchange, which will not be reflected in the computation of net asset value. If during such periods, events occur which materially affect the value of such securities, the securities will be valued at their fair market value as determined by LMC and approved in good faith by the Directors.
For purposes of determining the net asset value per share of the Fund all assets and liabilities initially expressed in foreign currencies will be converted into United States dollars at the mean between the bid and offer prices of such currencies against United States dollars quoted by any major bank.
Terms of Offering: If an order to purchase shares is cancelled because the investor's check does not clear, the purchaser will be responsible for any loss incurred by the Fund. To recover any such loss the Fund reserves the right to redeem shares owned by the purchaser, seek reimbursement directly from the purchaser and may prohibit or restrict the purchaser in placing future orders in any of the Lexington Funds.
The Fund reserves the right to reject any order, and to waive or lower the investment minimums with respect to any person or class of persons, including shareholders of the Fund's special investment programs. An order to purchase shares is not binding on the Fund until it has been confirmed by the Agent.
Shareholder Servicing Agents: The Fund may enter into Shareholder Servicing Agreements with one or more Shareholder Servicing Agents. The Shareholder Servicing Agent may, as agent for its customers, among other things: answer customer inquiries regarding account status, account history and purchase and redemption procedures; 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 and redemption transactions; arrange for the wiring of funds; transmit and receive funds in connection with customer orders to purchase or redeem shares; verify and guarantee shareholder signatures in connection with redemption orders and transfers and changes in shareholder-designated accounts; furnish monthly and year-end statements and confirmations of purchases and redemptions; transmit, on behalf of the Fund, proxy statements, annual reports, updated prospectuses and other communications to shareholders of the Fund; receive, tabulate and transmit to the Fund proxies executed by shareholders with respect to meetings of shareholders of the Fund; and provide such other related services as the Fund or a shareholder may request. For these services, each Shareholder Servicing Agent receives fees, which may be paid periodically, provided that such fees will not exceed, on an annual basis, 0.25% of the average daily net assets of the Fund represented by shares owned during the period for which payment is made. LMC, at no additional cost to the Fund may pay to Shareholder Servicing Agents additional amounts from its past profits. Each Shareholder Servicing Agent may, from time to time, voluntarily waive all or a portion of the fees payable to it.
Account Statements: The Agent will send shareholders either purchasing or redeeming shares of the Fund, a confirmation of the transaction indicating the date the purchase or redemption was accepted, the number of shares purchased or redeemed, the purchase or redemption price per share, and the amount purchased or redemption proceeds. A statement is also sent to shareholders whenever a distribution is paid, or when a change in the registration, address, or dividend option occurs. Shareholders are urged to retain their account statements for tax purposes.
By Mail: Send to the Agent: (1) a written request for redemption, signed by each registered owner exactly as the shares are registered including the name of the Fund, account number and exact registration; (2) stock certificates for any shares to be redeemed which are held by the shareholder; (3) signature guarantees, when required, and (4) the additional documents required for redemptions by corporations, executors, administrators, trustees, and guardians. Redemptions by mail will not become effective until all documents in proper form have been received by the Agent. If a shareholder has any questions regarding the requirements for redeeming shares, he should call the Fund at the toll free number on the back cover prior to submitting a redemption request. If a redemption request is sent to the Fund in New Jersey, it will be forwarded to the Agent and the effective date of redemption will be the date received by the Agent.
Checks for redemption proceeds will normally be mailed within seven days. However, the Fund will only mail redemption checks upon clearance of the purchase payment.
Signature Guarantee: Signature guarantees are required in connection with (a) redemptions by mail involving $10,000 or more; (b) all redemptions by mail, regardless of the amount involved, when the proceeds are to be paid to someone other than the registered owners; (c) changes in instructions as to where the proceeds of redemptions are to be sent, and (d) share transfer requests.
The Agent requires that the guarantor be either a commercial bank which is a member of the Federal Deposit Insurance Corporation, a trust company, a savings and loan association, a savings bank, a credit union, a member firm of a domestic stock exchange, or a foreign branch of any of the foregoing. A notary public is not an acceptable guarantor.
With respect to redemption requests submitted by mail, the signature guarantees must appear either: (a) on the written request for redemption, (b) on a separate instrument of assignment ("stock power") specifying the total number of shares to be redeemed, or (c) on all stock certificates tendered for redemption and, if shares held by the Agent are also being redeemed, on the letter or stock power.
Redemption Price: The redemption price will be the net asset value per share of the Fund next determined after receipt by the Agent of a redemption request in proper form (see "Determination of Net Asset Value" in the Statement of Additional Information).
The right of redemption may be suspended (a) for any period during which the New York Stock Exchange is closed or the Securities and Exchange Commission ("SEC") determines that trading on the Exchange is restricted, (b) when there is an emergency as determined by the SEC as a result of which it is not reasonably practicable for the Fund to dispose of securities owned by it or to determine fairly the value of its net assets, or (c) for such other periods as the SEC may by order permit for the protection of shareholders of the Fund. Due to the proportionately high cost of maintaining smaller accounts, the Fund reserves the right to involuntarily redeem all shares in an account with a value of less than $500 (except retirement plan accounts) for reasons other than market fluctuations and mail the proceeds to the shareholder. Shareholders will be notified before these redemptions are to be made and will have 30 days to make an additional investment to bring their accounts up to the required minimum.
Transfer: Shares of the Fund may be transferred to another owner. A signature guarantee of the registered owner is required on the letter of instruction or accompanying stock power.
Systematic Withdrawal Plan: Shareholders may elect to withdraw cash in fixed amounts from their accounts at regular intervals. The minimum investment to establish a Systematic Withdrawal Plan is $10,000. If the proceeds are to be mailed to someone other than the registered owner, a signature guarantee is required.
Group Sub-Accounting: To minimize recordkeeping by fiduciaries, corporations and certain other investors, the minimum initial investment may be waived.
Shares of the Fund may be exchanged for shares of the following Lexington Funds on the basis of relative net asset value per share, next determined at the time of the exchange. In the event shares of one or more of these funds being exchanged by a single investor have a value in excess of $500,000, the shares of the Fund will not be purchased until the fifth business day following the redemption of the shares being exchanged in order to enable the redeeming fund to utilize normal securities settlement procedures in transferring the proceeds of the redemption to the Fund. Exchanges may not be made until all checks in payment for the shares to be exchanged have been cleared.
The Lexington Funds currently available for exchange are:
LEXINGTON GLOBAL FUND, INC. (NASDAQ Symbol: LXGLX)/Seeks long-term growth of capital primarily through investment in common stocks of companies domiciled in foreign countries and the United States.
LEXINGTON WORLDWIDE EMERGING MARKETS FUND, INC. (NASDAQ Symbol: LEXGX)/Seeks long-term growth of capital/primarily through investment in equity securities of companies domiciled in, or doing business in, emerging countries.
LEXINGTON INTERNATIONAL FUND, INC. (NASDAQ Symbol: LEXIX)/Seeks long-term growth of capital through investment in common stocks and equivalents of companies domiciled in foreign countries.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. /Seeks long-term capital appreciation through investment in companies domiciled in the Asia Region with a market capitalization of less than $1 billion.
LEXINGTON RAMIREZ GLOBAL INCOME FUND (NASDAQ Symbol: LEBDX)/Seeks high current income by investing in a combination of foreign and domestic high-yield, lower rated debt securities. Capital appreciation is a secondary objective.
LEXINGTON CORPORATE LEADERS TRUST FUND (NASDAQ Symbol: LEXCX)/Seeks long-term capital growth and income through investment in an equal number of shares of the common stocks of a fixed list of American blue chip corporations.
LEXINGTON GROWTH AND INCOME FUND, INC. (NASDAQ Symbol: LEXRX)/Seeks long-term capital appreciation through investments in stocks of large, ably managed and well financed companies. Income is a secondary objective.
LEXINGTON SMALLCAP VALUE FUND, INC./Seeks long-term capital appreciation through investment in common stocks and equivalents primarily of companies domiciled in the United States with a marked capitalization of less than $1 billion.
LEXINGTON GOLDFUND, INC. (NASDAQ Symbol: LEXMX)/Seeks capital appreciation and such hedge against loss of buying power as may be obtained through investment in gold bullion and equity securities of companies engaged in mining or processing gold throughout the world.
LEXINGTON CONVERTIBLE SECURITIES FUND (NASDAQ Symbol: CNCVX)/Seeks total return by providing capital appreciation, current income and conservation of capital through investments in a diversified portfolio of securities convertible into shares of common stock. Shares are not presently available for sale in Vermont.
LEXINGTON GNMA INCOME FUND, INC. (NASDAQ Symbol: LEXNX)/Seeks a high level of current income, consistent with liquidity and safety of principal, through investment primarily in mortgage-backed GNMA Certificates.
LEXINGTON MONEY MARKET TRUST (NASDAQ Symbol: LMMXX)/Seeks a high level of current income consistent with preservation of capital and liquidity through investments in interest bearing short term money market instruments.
LEXINGTON TAX FREE MONEY FUND, INC. (NASDAQ Symbol: LTFXX)/Seeks current income exempt from Federal income taxes while maintaining liquidity and stability of principal through investment in short term municipal securities.
Shareholders in any of these funds may exchange all or part of their shares for shares of one or more of the other funds, subject to the conditions described herein. The Exchange Privilege enables a shareholder in any of these funds to acquire shares in a fund with a different investment objective when the shareholder believes that a shift between funds is an appropriate investment decision. Shareholders contemplating an exchange should obtain and review the prospectus of the fund to be acquired. If an exchange involves investing in a Lexington Fund not already owned and a new account has to be established, the dollar amount exchanged must meet the minimum initial investment of the fund being purchased. If, however, an account already exists in the fund being bought, there is a $500 minimum exchange required. Shareholders must provide the account number of the existing account. Any exchange between mutual funds is, in effect, a redemption of shares in one fund and a purchase in the other fund. Shareholders should consider the possible tax effects of an exchange.
TELEPHONE EXCHANGE PROVISIONS-Exchange instructions may be given in writing or by telephone. Telephone exchanges may only be made if a Telephone Authorization form has been previously executed and filed with LFD.
Telephone exchanges are permitted only after a minimum of 7 days have elapsed from the date of a previous exchange. Exchanges may not be made until all checks in payment for the shares to be exchanged have been cleared.
Telephonic exchanges can only involve shares held on deposit at the Agent; shares held in certificate form by the shareholder cannot be included. However, outstanding certificates can be returned to the Agent and qualify for these services. Any new account established with the same registration will also have the privilege of exchange by telephone in the Lexington Funds. All accounts involved in a telephone exchange must have the same registration and dividend as the account from which the shares were transferred and will also have the privilege of exchange by telephone in the Lexington Funds in which these services are available.
By checking the box on the New Account Application authorizing telephone exchange services, a shareholder constitutes and appoints LFD, distributor of the Lexington Group of Mutual Funds, as the true and lawful attorney to surrender for redemption or exchange any and all non-certificate shares held by the Agent in account(s) designated, or in any other account with the Lexington Funds, present or future which has the identical registration, with full power of substitution in the premises, authorizes and directs LFD to act upon any instruction from any person by telephone for exchange of shares held in any of these accounts, to purchase shares of any other Lexington Fund that is available, provided the registration and mailing address of the shares to be purchased are identical to the registration of the shares being redeemed, and agrees that neither LFD, the Agent or the Fund(s) will be liable for any loss, expense or cost arising out of any requests effected in accordance with this authorization which would include requests effected by imposters or persons otherwise unauthorized to act on behalf of the account. LFD, the Agent and the Fund, will employ reasonable procedures to confirm that instructions communicated by telephone are genuine and if they do not employ reasonable procedures they may be liable for any losses due to unauthorized or fraudulent instructions. The following identification procedures may include, but are not limited to, the following: account number, registration and address, taxpayer identification number and other information particular to the account. In addition, all exchange transactions will take place on recorded telephone lines and each transaction will be confirmed in writing by the Fund. LFD reserves the right to cease to act as agent subject to the above appointment upon thirty (30) days written notice to the address of record. If the shareholder is an entity other than an individual, such entity may be required to certify that certain persons have been duly elected and are now legally holding the titles given and that the said corporation, trust, unincorporated association, etc. is duly organized and existing and has the power to take action called for by this continuing authorization.
Exchange Authorization forms, Telephone Authorization forms and prospectuses of the other funds may be obtained from LFD.
This exchange offer is available only in states where shares of the Fund being acquired may legally be sold and may be modified or terminated at any time by the Fund. Broker-dealers who process exchange orders on behalf of their customers may charge a fee for their services. Such fee may be avoided by making requests for exchange directly to the Fund or Agent.
The Fund offers a Prototype Pension and Profit Sharing Plan, including a Keogh Plan, IRA's, SEP-IRA's and IRA Rollover Accounts, 401(k) Salary Reduction Plans, Section 457 Deferred Compensation Plans and 403(b)(7) Plans. Plan support services are available through the Shareholder Services Department of LMC. For further information call 1-800-526-0056. (See "Tax Sheltered Retirement Plans" in the Statement of Additional Information.)
The Fund will calculate performance on a total return basis for various periods. The total return basis combines changes in principal and dividends for the periods shown. Principal changes are based on the difference between the beginning and closing net asset value for the period and assumes reinvestment of dividends paid by the Fund. Dividends are comprised of net investment income and net realized capital gains, respectively.
Performance will vary from time to time and past results are not necessarily representative of future results. A shareholder should remember that performance is a function of portfolio management in selecting the type and quality of portfolio securities and is affected by operating expenses.
Comparative performance information may be used from time to time in advertising or marketing of the Fund's shares, including data from Lipper Analytical Services, Inc. or major market indices such as the Dow Jones Industrial Average Index, Standard & Poor's 500 Composite Stock Price Index and Morgan Stanley Capital International World Index. Such comparative performance information will be stated in the same terms in which the comparative data and indices are stated. Further information about the Fund's performance is contained in the annual report, which may be obtained without charge.
DIVIDEND, DISTRIBUTION AND REINVESTMENT POLICY
The Fund intends to declare or distribute a dividend from its net investment income and/or net capital gain income to shareholders annually or more frequently if necessary in order to comply with distribution requirements of the Code to avoid the imposition of regular Federal income tax, and if applicable, a 4% excise tax.
Any dividends and distribution payments will be reinvested at net asset value, without sales charge, in additional full and fractional shares of the Fund unless and until the shareholder notifies the Agent in writing that he wants to receive his payments in cash. This request must be received by the Agent at least seven days before the dividend record date. Upon receipt by the Agent of such written notice, all further payments will be made in cash until written notice to the contrary is received. An account of such shares owned by each shareholder will be maintained by the Agent. Shareholders whose accounts are maintained by the Agent will have the same rights as other shareholders with respect to shares so registered (see "How to Purchase Shares-The Open Account").
The Fund intends to qualify as a regulated investment company by satisfying the requirements under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), including requirements with respect to diversification of assets, distribution of income and sources of income. It is the Fund's policy to distribute to shareholders all of its investment income (net of expenses) and any capital gains (net of capital losses) so that, in addition to satisfying the distribution requirement of Subchapter M, the Fund will not be subject to federal income tax or the 4% excise tax.
Distributions by the Fund of its net investment income (which includes certain foreign currency gains and losses) and the excess, if any, of its net short-term capital gain over its net long-term capital loss are taxable to shareholders as ordinary income. These distributions are treated as dividends for federal income tax purposes, but in any year only a portion thereof (which cannot exceed the aggregate amount of qualifying dividends from domestic corporations received by the Fund during the year) may qualify for the 70% dividends-received deduction for corporate shareholders. Because the Fund's investment income will include almost entirely dividends from foreign corporations and the Fund may have interest income and short-term capital gains, substantially all of the ordinary income dividends paid by the Fund should not qualify for the dividends-received deduction. Distributions by the Fund of the excess, if any, of its net long-term capital gain over its net short-term capital loss are designated as capital gain dividends and are taxable to shareholders as long-term capital gains, regardless of the length of time the shareholder held his shares.
A portion of the income earned by the Fund may be subject to foreign withholding taxes. The economic effect of such withholding taxes upon the return earned by the Fund cannot be predicted. Under certain circumstances, the Fund may elect to "pass-through" to its shareholders the income or other taxes paid by the Fund to foreign governments during a year. Each shareholder will be required to include his pro rata portion of these foreign taxes in his gross income, but will be able to deduct or (subject to various limitations) claim a foreign tax credit for such amount.
Distributions to shareholders will be treated in the same manner for federal income tax purposes whether received in cash or reinvested in additional shares of the Fund. In general, distributions by the Fund are taken into account by the shareholders in the year in which they are made. However, certain distributions made during January will be treated as having been paid by the Fund and received by the shareholders on December 31 of the preceding year. A statement setting forth the federal income tax status of all distributions made or deemed made during the year, including any amount of foreign taxes "passed-through", will be sent to shareholders promptly after the end of each year.
Investors should be careful to consider the tax implications of purchasing shares just prior to the record date of any ordinary income dividend or capital gain dividend. Those investors purchasing shares just prior to an ordinary income or capital gain dividend will be taxed on the entire amount of the dividend received, even though the net asset value per share on the date of such purchase reflected the amount of such dividend.
A shareholder will recognize gain or loss upon the sale or redemption of shares of the Fund in an amount equal to the difference between the proceeds of the sale or redemption and the shareholder's adjusted tax basis in the shares. Any loss realized upon a taxable disposition of shares within six months from the date of their purchase will be treated as a long-term capital loss to the extent of any capital gain dividends received on such shares. All or a portion of any loss realized upon a taxable disposition of shares of the Fund may be disallowed if other shares of the Fund are purchased within 30 days before or after such disposition.
Under the back-up withholding rules of the Code, certain shareholders may be subject to 31% withholding of federal income tax on ordinary income dividends, capital gain dividends and redemption payments made by the Fund. In order to avoid this back-up withholding, a shareholder must provide the Fund with a correct taxpayer identification number (which for most individuals is their Social Security number) or certify that it is a corporation or otherwise exempt from or not subject to back-up withholding. The new account application included with this Prospectus provides for shareholder compliance with these certification requirements.
The foregoing discussion of federal income tax consequences is based on tax laws and regulations in effect on the date of this Prospectus, and is subject to change by legislative or administrative action. As the foregoing discussion is for general information only, a prospective shareholder should also review the more detailed discussion of federal income tax considerations relevant to the Fund that is contained in the Statement of Additional Information. In addition, each prospective shareholder should consult with his own tax adviser as to the tax consequences of investments in the Fund, including the application of state and local taxes which may differ from the federal income tax consequences described above.
ORGANIZATION AND DESCRIPTION OF COMMON STOCK
The Company is an open-end, diversified management investment company organized as a corporation under the laws of the State of Maryland on April 19, 1995, and has authorized capital of 1,000,000,000 shares of common stock, par value $.001 of which 500,000,000 have been designated the Lexington Crosby Small Cap Asia Growth Fund Series. Each share of common stock has one vote and shares equally with other shares of the same series in dividends and distributions when and if declared by the Company and in the Company's net assets belonging to such series upon liquidation. All shares, when issued, are fully paid and non-assessable. There are no preemptive, conversion or exchange rights. Fund shares do not have cumulative voting rights and, as such, holders of at least 50% of the shares voting for Directors can elect all Directors and the remaining shareholders would not be able to elect any Directors.
The Company will not normally hold annual shareholder meetings except as required by Maryland General Corporation Law or the Investment Company Act of 1940. However, meetings of shareholders may be called at any time by the Secretary upon the written request of shareholders holding in the aggregate not less than 25% of the outstanding shares, such request specifying the purposes for which such meeting is to be called. In addition, the Directors will promptly call a meeting of shareholders for the purpose of voting upon the question of removal of any Director when requested to do so in writing by the recordholders of not less than 10% of the Fund's outstanding shares. The Fund will assist shareholders in any such communication between shareholders and Directors.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Chase Manhattan Bank, N.A., 1211 Avenue of the Americas, New York, New York 10036 has been retained to act as custodian for the Fund's portfolio securities including those to be held by foreign banks and foreign securities depositories that qualify as eligible foreign custodians under the rules adopted by the SEC and for the Fund's domestic securities and other assets. State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, has been retained to act as the transfer agent and dividend disbursing agent for the Fund. Neither Chase Manhattan Bank, N.A. nor State Street Bank and Trust Company have any part in determining the investment policies of the Fund or in determining which portfolio securities are to be purchased or sold by the Fund or in the declaration of dividends and distributions.
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New York, New York 10022 will pass upon legal matters for the Fund in connection with the shares offered by this Prospectus. KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has been selected as independent auditors for the Fund for the fiscal period ending December 31, 1996.
This prospectus omits certain information contained in the registration statement filed with the SEC. Copies of the registration statement, including items omitted herein, may be obtained from the SEC by paying the charges prescribed under its rules and regulations. The Statement of Additional Information included in such registration statement may be obtained without charge from the Fund.
The Code of Ethics adopted by each of the Adviser, Sub-Adviser and the Fund prohibits all affiliated personnel from engaging in personal investment activities which compete with or attempt to take advantage of the Fund's planned portfolio transactions. The objective of each Code of Ethics is that the operations of the Adviser, Sub-Adviser and Fund be carried out for the exclusive benefit of the Fund's shareholders. All organizations maintain careful monitoring of compliance with the Code of Ethics.
Additional portfolios may be created from time to time with investment objectives and policies different from those of the Fund. In addition, the Directors may, subject to any necessary regulatory approvals, create more than one class of shares in the Fund, with the classes being subject to different charges and expenses and having such other different rights as the Directors may prescribe.
No person has been authorized to give any information or to make any representation other than those contained in this Prospectus, and information or representations not herein contained, if given or made, must not be relied upon as having been authorized by the Fund . This Prospectus does not constitute an offer or solicitation in any jurisdiction in which such offering may not lawfully be made.
L E X I N G T O N
[ ] No sales charge
[ ] No redemption fee
P R O S P E C T U S
P.O. Box 1515/Park 80 West Plaza Two
CROSBY ASSET MANAGEMENT (US) INC. c/o Crosby Asset Management (Hong Kong) Limited
P.O. Box 1515/Park 80 West Plaza Two
All shareholder requests for services of any kind should be sent to:
STATE STREET BANK AND TRUST COMPANY c/o National Financial Data Services
24 Hour Account Information: 1-800-526-0052
Investment Objective and Policies ........................ 2 Management of the Fund ................................... 9 How to Purchase Shares ................................... 11 How to Redeem Shares ..................................... 13 Tax-Sheltered Retirement Plans ........................... 16 Dividend, Distribution and Reinvestment Policy ........... 17 Organization and Description of Common Stock ............. 18 Custodian, Transfer Agent and Dividend Disbursing Agent .. 19 Counsel and Independent Auditors ......................... 19
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
This Statement of Additional Information, which is not a prospectus, should be read in conjunction with the current prospectus of Lexington Crosby Small Cap Asia Growth Fund (the "Fund"), dated December 19, 1995, and as it may be revised from time to time. To obtain a copy of the Fund's prospectus at no charge, please write to the Fund at P.O. Box 1515/Park 80 West - Plaza Two, Saddle Brook, New Jersey 07663 or call the following toll-free numbers:
24 Hour Account Information: -1-800-526-0052
Lexington Management Corporation ("LMC") is the Fund's investment adviser. Crosby Asset Management (US) Inc. ("Crosby") is the Fund's sub-adviser. Lexington Funds Distributor, Inc. is the Fund's distributor.
Investment Objective and Policies .......................................... 2
Management of the Fund ..................................................... 5
Investment Adviser, Sub-Adviser, Distributor and Administrator ............. 8
Portfolio Transactions and Brokerage Commissions ........................... 9
Determination of Net Asset Value ........................................... 10
Telephone Exchange Provisions .............................................. 10
Tax-Sheltered Retirement Plans ............................................. 11
For a full description of the Fund's investment objective and policies, see the Prospectus under "Investment Objective and Policies".
Settlement Transactions- When the Fund enters into contracts for purchase or sale of a portfolio security denominated in a foreign currency, it may be required to settle a purchase transaction in the relevant foreign currency or receive the proceeds of a sale in that currency. In either event, the Fund will be obligated to acquire or dispose of such foreign currency as is represented by the transaction by selling or buying an equivalent amount of United States dollars. Furthermore, the Fund may wish to "lock in" the United States dollar value of the transaction at or near the time of a purchase or sale of portfolio securities at the exchange rate or rates then prevailing between the United States dollar and the currency in which the foreign security is denominated. Therefore, the Fund may, for a fixed amount of United States dollars, enter into a forward foreign exchange contract for the purchase or sale of the amount of foreign currency involved in the underlying securities transaction. In so doing, the Fund will attempt to insulate itself against possible losses and gains resulting from a change in the relationship between the United States dollar and the foreign currency during the period between the date a security is purchased or sold and the date on which payment is made or received. This process is known as "transaction hedging".
To effect the translation of the amount of foreign currencies involved in the purchase and sale of foreign securities and to effect the "transaction hedging" described above, the Fund may purchase or sell foreign currencies on a "spot" (i.e. cash) basis or on a forward basis whereby the Fund purchases or sells a specific amount of foreign currency, at a price set at the time of the contract, for receipt of delivery at a specified date which may be any fixed number of days in the future.
Such spot and forward foreign exchange transactions may also be utilized to reduce the risk inherent in fluctuations in the exchange rate between the United States dollar and the relevant foreign dollar and the relevant foreign currency when foreign securities are purchased or sold for settlement beyond customary settlement time (as described below). Neither type of foreign currency transaction will eliminate fluctuations in the prices of the Fund's portfolio or securities or prevent loss if the price of such securities should decline.
Portfolio Hedging- Some or all of the Fund's portfolio will be denominated in foreign currencies. As a result, in addition to the risk of change in the market value of portfolio securities, the value of the portfolio in United States dollars is subject to fluctuations in the exchange rate between such foreign currencies and the United States dollar. When, in the opinion of LMC or Crosby it is desirable to limit or reduce exposure in a foreign currency in order to moderate potential changes in the United States dollar value of the portfolio, the Fund may enter into a forward foreign currency exchange contract by which the United States dollar value of the underlying foreign portfolio securities can be approximately matched by an equivalent United States dollar liability. This technique is known as "portfolio hedging" and moderates or reduces the risk of change in the United States dollar value of the Fund's portfolio only during the period before the maturity of the forward contract (which will not be in excess of one year). The Fund, for hedging purposes only, may also enter into forward foreign currency exchange contracts to increase its exposure to a foreign currency that the Fund's investment adviser or sub-adviser expects to increase in value relative to the United States dollar. The Fund will not attempt to hedge all of its foreign portfolio positions and will enter into such transactions only to the extent, if any deemed appropriate by the investment adviser or sub-adviser. Hedging against a decline in the value of currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. The Fund will not enter into forward foreign currency exchange transactions for speculative purposes. The Fund intends to limit transactions as described in this paragraph to not more than 70% of the total Fund assets.
Forward Commitments-The Fund may make contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments") because new issues of securities are typically offered to investors, such as the Fund, on that basis. Forward commitments involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. This risk is in addition to the risk of decline in value of the Fund's other assets. Although the Fund will enter into such contracts with the intention of acquiring the securities, the Fund may dispose of a commitment prior to settlement if the investment adviser deems it appropriate to do so. The Fund may realize short-term profits or losses upon the sale of forward commitments.
Covered Call Options-Call options may also be used as a means of participating in an anticipated price increase of a security on a more limited basis than would be possible if the security itself were purchased. The Fund may write only covered call options. Since it can be expected that a call option will be exercised if the market value of the underlying security increases to a level greater than the exercise price, this strategy will generally be used when the investment adviser believes that the call premium received by the Fund plus anticipated appreciation in the price of the underlying security, up to the exercise price of the call, will be greater than the appreciation in the price of the security. The Fund intends to limit transactions as described in this paragraph to less than 5% of total Fund assets. The Fund will not purchase put and call options written by others. Also, the Fund will not write any put options. The Fund will cause its custodian to segregate cash, U.S. Government Securities or other high grade liquid debt obligations having a value sufficient to meet the Fund's obligations under the call options.
Repurchase Agreements-A repurchase agreement is a contract under which the Fund would acquire a security for a relatively short period (usually not more than 7 days) subject to the obligations of the seller to repurchase and the Fund to resell such security at a fixed time and price (representing the Fund's cost plus interest). Although the Fund may enter into repurchase agreements with respect to any portfolio securities which it may acquire consistent with its investment policies and restrictions, it is the Fund's present intention to enter into repurchase agreements only with respect to obligations of the United States government or its agencies or instrumentalities to meet anticipated redemptions or pending investments or reinvestment of Fund assets in portfolio securities. The Fund will enter into repurchase agreements only with member banks of the Federal Reserve System and with "primary dealers" in United States government securities. In addition if bankruptcy proceedings are commenced with respect to the seller, be subject to risks associated with changes in market value of the collateral securities. The Fund intends to limit repurchase agreements to institutions believed by LMC or Crosby to present minimal credit risk. The Fund will not enter into repurchase agreements maturing in more than seven days if the aggregate of such repurchase agreements and all other illiquid securities when taken together would exceed 15% of the total assets of the Fund.
Except as otherwise specifically noted, the Fund's investment objective and its investment restrictions are fundamental and may not be changed without the approval of a majority of the outstanding voting securities of the Fund.
Investors should recognize that investing in securities of foreign companies and in particular securities of companies domiciled in or doing business in emerging markets and emerging countries involves certain risk considerations, including those set forth below, which are not typically associated with investing in securities of U.S. companies.
The Fund's assets will be invested in securities of foreign companies and substantially all income will be received by the Fund in foreign currencies. However, the Fund will compute and distribute its income in dollars, and the computation of income will be made on the date of its receipt by the Fund at the foreign exchange rate in effect on that date. Therefore, if the value of the foreign currencies in which the Fund receives its income falls relative to the dollar between receipt of the income and the making of Fund distributions, the Fund will be required to liquidate securities in order to make distributions if the Fund has insufficient cash in dollars to meet distribution requirements.
The value of the assets of the Fund as measured in dollars also may be affected favorably or unfavorably by fluctuations in currency rates and exchange control regulations. Further, the Fund may incur costs in connection with conversions between various currencies. Foreign exchange dealers realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer normally will offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire immediately to resell that currency to the dealer. The Fund will conduct its 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 entering into forward or futures contracts to purchase or sell foreign currencies.
Risks Associated With Hedging Transactions
Hedging transactions have special risks associated with them, including possible default by the Counterparty to the transaction, illiquidity and, to the extent the Adviser's view as to certain market movements is incorrect, the risk that the use of a hedging transaction could result in losses greater than if it had not been used. Use of call options could result in losses to the Fund, force the sale or purchase of portfolio securities at inopportune times or for prices lower than current market values, or cause the Fund to hold a security it might otherwise sell.
Currency hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. Further, the risk exists that the perceived linkage between various currencies may not be present or may not be present during the particular time that the Fund is engaging in portfolio hedging. Currency transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be adversely affected by limitations or restrictions on repatriation of currency, and manipulations or exchange restrictions imposed by governments. These forms of governmental actions can result in losses to the Fund if it is unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs.
Losses resulting from the use of hedging transactions will reduce the Fund's net asset value, and possibly income, and the losses can be greater than if hedging transactions had not been used.
Risks of Hedging Transactions Outside the United States
When conducted outside the U.S., hedging transactions may not be regulated as rigorously as in the U.S., may not involve a clearing mechanism and related guarantees, and will be subject to the risk of government actions affecting trading in, or the price of, foreign securities, currencies and other instruments. The value of positions taken as part of non-U.S. hedging transactions also could be adversely affected by: (1) other complex foreign political, legal and economic factors, (2) lesser availability of data on which to make trading decisions than in the U.S., (3) delays in the Fund's ability to act upon economic events occurring in foreign markets during non-business hours in the U.S., (4) the imposition of different exercise and settlement terms and procedures and margin requirements than in the U.S. and (5) lower trading volume and liquidity.
Some foreign countries may have laws and regulations which currently preclude direct foreign investment in the securities of their companies. However, indirect foreign investment in the securities of companies listed and traded on the stock exchanges in these countries is permitted by certain foreign countries through investment funds which have been specifically authorized. The Fund may invest in these investment funds subject to the provisions of the 1940 Act as discussed below under "Investment Restrictions". If the Fund invests in such investment funds, the Fund's shareholders will bear not only their proportionate share of the expenses of the Fund (including operating expenses and the fees of the Investment Manager), but also will bear indirectly similar expenses of the underlying investment funds.
In addition to the foregoing investment restrictions, prior governmental approval for foreign investments may be required under certain circumstances in some foreign countries, while the extent of foreign investment in domestic companies may be subject to limitation in other foreign countries. Foreign ownership limitations also may be imposed by the charters of individual companies in foreign countries to prevent, among other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by foreign investors may require governmental registration and/or approval in some foreign countries. The Fund could be adversely affected by delays in or a refusal to grant any required governmental approval for such repatriation.
Trading volume on foreign country stock exchanges is substantially less than that on the New York Stock Exchange. Further, securities of some foreign companies are less liquid and more volatile than securities of comparable U.S. companies. Similarly, volume and liquidity in most foreign bond markets is substantially less than in the U.S. and, consequently, volatility of price can be greater than in the U.S. Fixed commissions on foreign exchanges are generally higher than negotiated commissions on U.S. exchanges, although the Fund endeavors to achieve the most favorable net results on its portfolio transactions and may be able to purchase the securities in which the Fund may invest on other stock exchanges where commissions are negotiable.
Companies in foreign countries are not generally subject to uniform accounting, auditing and financial reporting standards, practices and disclosure requirements comparable to those applicable to U.S. companies. Consequently, there may be less publicly available information about a foreign company than about a U.S. company. Further, there is generally less governmental supervision and regulation of foreign stock exchanges, brokers and listed companies than in the U.S. Further, these Funds may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts.
The economies of individual foreign countries in which the Fund invests may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payments position. Further, the economies of foreign countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be adversely affected by economic conditions in the countries with which they trade. The export driven nature of Asian economies is often dependent on the strength of their trading partners in the United States and Europe, although growing intra-regional trade is seen mitigating some of this external dependence.
With respect to any foreign country, there is the possibility of nationalization, expropriation or confiscatory taxation, political changes, government regulation, social instability or diplomatic developments (including war) which could affect adversely the economies of such countries or the Fund's investments in those countries. In addition, it may be more difficult to obtain a judgement in a court outside of the United States.
The Directors and executive officers of the Fund and their principal occupations are set forth below:
*+ROBERT M. DEMICHELE, President and Director. P.O. Box 1515, Saddle Brook, N.J. 07663. Chairman and Chief Executive Officer, Lexington Management Corporation; Chairman and Chief Executive Officer, Lexington Funds Distributor, Inc.; President and Director, Lexington Global Asset Managers, Inc.; Director, Unione Italiana Reinsurance; Vice Chairman of the Board of Trustees, Union College; Director, Continental National Corporation; Director, The Navigator's Group, Inc.; Chairman, Lexington Capital Management, Inc.; Chairman, LCM Financial Services, Inc.; Director, Vanguard Cellular Systems Inc.; Chairman of the Board, Market System Research, Inc. and Market Systems Research Advisors, Inc. (registered investment advisers): Trustee, Smith Richardson Foundation.
+BEVERLEY C. DUER, Director, 340 East 72nd Street, News York, N.Y. 10021. Private Investor. Formerly, Manager of Operations Research Department-CPC International, Inc.
*+BARBARA R. EVANS, Director, 5 Fernwood Road, Summit, N.J. 07901. Private Investor. Prior to May, 1989, Assistant Vice President and Securities Analyst, Lexington Management Corporation; prior to March 1987, Vice President-Institutional Equity Sales, L.F. Rothschild, Unterberg, Towbin.
*+LAWRENCE KANTOR, Vice President and Director. P.O. Box 1515, Saddle Brook, N.J 07663. Managing Director, General Manager and Director, Lexington Management Corporation; Executive Vice President and Director, Lexington Funds Distributor, Inc.; Executive Vice President and General Manager-Mutual Funds, Lexington Global Asset Managers, Inc.
+DONALD B. MILLER, Director. 10725 Quail Covey Road, Boynton Beach, FL 33436. Chairman, Horizon Media, Inc.; Trustee, Galaxy Funds; Director, Maquire Group of Connecticut; prior to January 1989, President, Director and C.E.O., Media General Broadcast Services (advertising firm).
+JOHN G. PRESTON, Director. 3 Woodfield Road, Wellesley, Massachusetts 02181. Associate Professor of Finance, Boston College, Boston, Massachusetts.
+MARGARET W. RUSSELL. Director. 55 North Mountain Avenue, Montclair, N.J. 07042. Private Investor. Formerly, Community Affairs Director, Union Camp Corporation.
+PHILIP C. SMITH, Director. 87 Lord's Highway, Weston, Connecticut 06883. Private Investor; Director, Southwest Investors Income Fund, Inc., Government Income Fund, Inc., U.S. Trend Fund, Inc., Investors Cash Reserve and Plimony Fund, Inc.
+FRANCIS A. SUNDERLAND, Director. 309 Quito Place, Castle Pines, Castle Rock, Colorado 80104. Private Investor.
*CHRISTINA LAM, Vice President and Portfolio Manager. 25/F 3 Lockhart Road, Wan Chai, Hong Kong. Vice President, Crosby Asset Management.
*NIGEL WEBBER, Vice President and Portfolio Manager. 25/F 3 Lockhart Road, Wan Chai, Hong Kong. Managing Director, Crosby Asset Management.
*+LISA CURCIO, Vice President and Secretary. P.O. Box 1515, Saddle Brook, N.J. 07663. Senior Vice President and Secretary, Lexington Management Corporation; Vice President and Secretary, Lexington Funds Distributor, Inc.; Secretary, Lexington Global Asset Managers, Inc.
*+RICHARD M. HISEY, Vice President and Treasurer. P. O. Box 1515, Saddle Brook, N.J. 07663. Managing Director, Director and Chief Financial Officer, Lexington Management Corporation; Chief Financial Officer, Vice President and Director, Lexington Funds Distributor, Inc.; Director, Lexington Capital Management, Inc.; Director, LCM Financial Services, Inc.; Chief Financial Officer, Market Systems Research Advisors, Inc.; Executive Vice President & Chief Financial Officer, Lexington Global Asset Managers, Inc.
*+RICHARD LAVERY, CLU ChFC, Vice President. P.O. Box 1515, Saddle Brook, N.J. 07663. Senior Vice President, Lexington Management Corporation; Vice President, Lexington Funds Distributor, Inc.
*+JANICE CARNICELLI, Vice President. P.O. Box 1515, Saddle Brook, N.J. 07663.
*+CHRISTIE CARR, Assistant Treasurer P.O. Box 1515, Saddle Brook, N.J. 07663. Prior to October 1992, Senior Accountant. KPMG Peat Marwick LLP.
*+SIOBHAN GILFILLAN, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
*+THOMAS LUEHS, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663. Prior to November 1993, Supervisor of Investment Accounting, Alliance Capital Management.
*+SHERI MOSCA, Assistant Treasurer. P.O. Box 1515, Saddle Brook, N.J. 07663.
*+ANDREW PETRUSKI, Assistant Treasurer. P.O. Box 1515, Saddle Brook, 07663. Prior to May 1994, Supervising Senior Accountant, NY Life Securities. Prior to December 1990, Senior Accountant Dreyfus Corporation.
*+PETER CORNIOTES, Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J. 07663. Assistant Vice President, Lexington Management Corporation. Assistant Secretary, Lexington Funds Distributor, Inc.
*+ENRIQUE J. FAUST, Assistant Secretary. P.O. Box 1515, Saddle Brook, N.J. 07663. Prior to March 1994, Blue Sky Compliance Coordinator, Lexington Management Corporation.
* "Interested person" and/or "Affiliated person" of LMC or Crosby as defined in the Investment Company Act of 1940, as amended.
+Messrs. Corniotes, DeMichele, Duer, Faust, Hisey, Kantor, Lavery, Luehs, Miller, Petruski, Preston, Smith and Sunderland and Mmes. Carnicelli, Carr, Curcio, Evans, Gilfillan, Mosca. and Russell hold similar officers with some or all of the other investment companies advised and/or distributed by LMC and LFD.
Directors not employed by the Fund or its affiliates receive an annual fee of $600 and a fee of $150 for each meeting attended plus reimbursement of expenses for attendance at regular meetings. The Board does not have any audit, nominating or compensation committees.
As of December 31, 1994, the aggregate remuneration paid to the directors was as follows:
Aggregate Total Compensation Number of Compensation from From Fund and Directorships in Name of Director Fund Fund Complex Fund Complex Robert M. DeMichele $0 $ 0 16
Beverley C. Duer 0 $20,250 16
Barbara R. Evans 0 0 15
Lawrence Kantor 0 0 15
Donald B. Miller 0 $20,250 15
John G. Preston 0 $20,250 15
Margaret Russell 0 $18,900 14
Philip C. Smith 0 $20,250 15
Francis A. Sunderland 0 $16,800 14
The Fund's investment objective, as described under "Investment Objective and Policies" and the following investment restrictions are matters of fundamental policy which may not be changed without the affirmative vote of the lesser of (a) 67% or more of the shares of the Fund 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. Under these investment restrictions:
(1)the Fund will not issue any senior security (as defined in the 1940 Act), except that (a) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including reverse repurchase agreements, foreign exchange contracts, delayed delivery and when-issued securities, which may be considered the issuance of senior securities; (b) the Fund may engage in transactions that may result in the issuance of a senior security to the extent permitted under applicable regulations, interpretation of the 1940 Act or an exemptive order; (c) the Fund may engage in short sales of securities to the extent permitted in its investment program and other restrictions; (d) the purchase or sale of futures contracts and related options shall not be considered to involve the issuance of senior securities; and (e) subject to fundamental restrictions, the Fund may borrow money as authorized by the 1940 Act.
(2)The Fund will not borrow money, except that (a) the Fund may enter into certain futures contracts and options related thereto; (b) the Fund may enter into commitments to purchase securities in accordance with the Fund's investment program, including delayed delivery and when-issued securities and reverse repurchase agreements; (c) for temporary emergency purposes, the Fund may borrow money in amounts not exceeding 5% of the value of its total assets at the time when the loan is made; (d) The Fund may pledge its portfolio securities or receivables or transfer or assign or otherwise encumber them in an amount not exceeding one-third of the value of its total assets; and (e) for purposes of leveraging, the Fund may borrow money from banks (including its custodian bank), only if, immediately after such borrowing, the value of the Fund's assets, including the amount borrowed, less its liabilities, is equal to at least 300% of the amount borrowed, plus all outstanding borrowings. If at any time, the value of the Fund's assets fails to meet the 300% asset coverage requirement relative only to leveraging, the Fund will, within three days (not including Sundays and holidays), reduce its borrowings to the extent necessary to meet the 300% test.
(3)The Fund will not act as an underwriter of securities except to the extent that, in connection with the disposition of portfolio securities by the Fund, the Fund may be deemed to be an underwriter under the provisions of the 1933 Act.
(4)The Fund will not purchase real estate, interests in real estate or real estate limited partnership interests except that, to the extent appropriate under its investment program, the Fund may invest in securities secured by real estate or interests therein or issued by companies, including real estate investment trusts, which deal in real estate or interests therein.
(5)The Fund will not make loans, except that, to the extent appropriate under its investment program, the Fund may (a) purchase bonds, debentures or other debt securities, including short-term obligations, (b) enter into repurchase transactions and (c) lend portfolio securities provided that the value of such loaned securities does not exceed one-third of the Fund's total assets.
(6)The Fund will not invest in commodity contracts, except that the Fund may, to the extent appropriate under its investment program, purchase securities of companies engaged in such activities, may enter into transactions in financial and index futures contracts and related options, may engage in transactions on a when-issued or forward commitment basis, and may enter into forward currency contracts.
(7)The Fund will not concentrate its investments in any one industry, except that the Fund may invest up to 25% of its total assets in securities issued by companies principally engaged in any one industry. The Fund considers foreign government securities and supranational organizations to be industries. This limitation, however, will not apply to securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities.
(8)The Fund will not purchase securities of an issuer, if (a) more than 5% of the Fund's total assets taken at market value would at the time be invested in the securities of such issuer, except that such restriction shall not apply to securities issued or guaranteed by the United States government or its agencies or instrumentalities or, with respect to 25% of the Fund's total assets, to securities issued or guaranteed by the government of any country other than the United States which is a member of the Organization for Economic Cooperation and Development ("OECD"). The member countries of OECD are at present: Australia, Austria, Belgium, Canada, Denmark, Germany, Finland, France, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States; or (b) such purchases would at the time result in more than 10% of the outstanding voting securities of such issuer being held by the Fund.
In addition to the above fundamental restrictions, the Fund has undertaken the following non-fundamental restrictions, which may be changed in the future by the Board of Directors, without a vote of the shareholders of the Fund:
(1)The Fund will not participate on a joint or joint-and-several basis in any securities trading account. The "bunching" of orders for the sale or purchase of marketable portfolio securities with other accounts under the management of the investment adviser or sub-adviser to save commissions or to average prices among them is not deemed to result in a securities trading account.
(2)The Fund may purchase and sell futures contracts and related options under the following conditions: (a) the then-current aggregate futures market prices of financial instruments required to be delivered and purchased under open futures contracts shall not exceed 30% of the Fund's total assets, at market value; and (b) no more than 5% of the assets, at market value at the time of entering into a contract, shall be committed to margin deposits in relation to futures contracts.
(3)The Fund will not make short sales of securities, other than short sales "against the box," or purchase securities on margin except for short-term credits necessary for clearance of portfolio transactions, provided that
restriction will not be applied to limit the use of options, futures contracts and related options, in the manner otherwise permitted by the investment restrictions, policies and investment programs of the Fund.
(4)The Fund will not purchase securities of an issuer if to the Fund's knowledge, one or more of the Directors or officers of the Fund or LMC individually owns beneficially more than 0.5% and together own beneficially more than 5% of the securities of such issuer nor will the Fund hold the securities of such issuer.
(5)The Fund will not purchase the securities of any other investment company, except as permitted under the 1940 Act.
(6)The Fund will not, except for investments which, in the aggregate, do not exceed 5% of the Fund's total assets taken at market value, purchase securities unless the issuer thereof or any company on whose credit the purchase was based has a record of at least three years continuous operations prior to the purchase.
(7)The Fund will not invest for the purpose of exercising control over or management of any company.
(8)The Fund will not purchase warrants except in units with other securities in original issuance thereof or attached to other securities, if at the time of the purchase, the Fund's investment in warrants, valued at the lower of cost or market, would exceed 5% of the Fund's total assets. Warrants which are not listed on a United States securities exchange shall not exceed 2% of the Fund's net assets. For these purposes, warrants attached to units or other securities shall be deemed to be without value.
(9)The Fund will not invest more than 15% of its total assets in illiquid securities. Illiquid securities are securities that are not readily marketable or cannot be disposed of promptly within seven days and in the usual course of business without taking a materially reduced price. Such securities include, but are not limited to, time deposits and repurchase agreements with maturities longer than seven days. Securities that may be resold under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended, shall not be deemed illiquid solely by reason of being unregistered. The Investment Adviser shall determine whether a particular security is deemed to be liquid based on the trading markets for the specific security and other factors.
(10)The Fund will not purchase interests in oil, gas, mineral leases or other exploration programs; however, this policy will not prohibit the acquisition of securities of companies engaged in the production or transmission of oil, gas or other materials.
The percentage restrictions referred to above are to be adhered to at the time of investment and are not applicable to a later increase or decrease in percentage beyond the specified limit resulting from change in values or net assets.
INVESTMENT ADVISER, SUB-ADVISER, DISTRIBUTOR AND ADMINISTRATOR
Lexington Management Corporation ("LMC"), P.O. Box 1515, Saddle Brook, New Jersey 07663 is the investment adviser to the Fund pursuant to an Investment Management Agreement dated May 16, 1995, (the "Advisory Agreement"). Lexington Funds Distributor, Inc. ("LFD") is the distributor of Fund shares pursuant to a Distribution Agreement dated May 16, 1995, (the "Distribution Agreement"). LMC has entered into a sub-adviser contract with Crosby Asset Management (US) Inc. under which Crosby will provide the Fund with investment advice and management of the Fund's investment program. LMC makes recommendations to the Fund with respect to its investments and investment policies. These agreements were approved by the Fund's Board of Directors (including a majority of the Directors who were not parties to either the Advisory Agreement, Sub-Advisory Agreement or the Distribution Agreement or "interested persons" of any such party) on May 16, 1995.
LMC also acts as administrator to the Fund and performs certain administrative and accounting services, including but not limited to, maintaining general ledger accounts, regulatory compliance, preparation of financial information for semiannual and annual reports, preparing registration statements, calculating net asset values, shareholder communications and supervision of the custodian, transfer agent and provides facilities for such services. The Fund shall reimburse LMC for its actual cost in providing such services, facilities and expenses.
LMC's investment advisory fee will be reduced for any fiscal year by any amount necessary to prevent Fund expenses from exceeding the most restrictive expense limitations imposed by the securities laws or regulations of those states or jurisdictions in which the Fund's shares are registered or qualified for sale. Currently, the most restrictive of such expense limitation would require LMC to reduce its fee so that ordinary expenses (excluding interest, taxes, brokerage commissions and extraordinary expenses) for any fiscal year do not exceed 2.5% of the first $30 million of the Fund's average daily net assets, plus 2.0% of the next $70 million, plus 1.5% of the Fund's average daily net excess of $100 million. LMC has agreed to voluntarily limit the total expenses of the Fund (excluding interest, taxes, brokerage, and extraordinary expenses but including management fee and operating expenses) to an annual rate of 1.75% of the Fund's average net assets through April 30, 1996 or such later date to be determined by LMC. LFD pays the advertising and sales expenses related to the continuous offering of Fund shares, including the cost of printing prospectuses, proxies and shareholder reports for persons other than existing shareholders. The Fund furnishes LFD, at printer's overrun cost paid by LFD, such copies of its prospectus and annual, semi-annual and other reports and shareholder communications as may reasonably be required for sales purposes.
The Advisory Agreement, Sub-Advisory Agreement, the Distribution Agreement and the Administrative Services Agreement are subject to annual approval by the Fund's Board of Directors and by the affirmative vote, cast in person at a meeting called for such purpose, of a majority of the Directors who are not parties either to the Advisory Agreement, Sub-Advisory Agreement of the Distribution Agreement, as the case may be, or "interested persons" of any such party. Either the Fund or LMC may terminate the Advisory Agreement and the Fund or LFD may terminate the Distribution Agreement on 60 days' written notice without penalty. The Advisory Agreement terminates automatically in the event of assignment, as defined in the Investment Company Act of 1940. As compensation for its services, the Fund pays LMC a monthly management fee at the annual rate of 1.25% of the average daily net assets. This fee is higher than that paid by most other investment companies. However, it is not necessarily greater than the management fee of other investment companies with objectives and policies similar to this Fund. LMC will pay Crosby an annual sub-advisory fee of 0.625% of the Fund's average daily net assets. The sub-advisory fee will be paid by LMC, not the Fund. See "Investment Adviser and Distributor" in the Statement of Additional Information.
LMC as owner of the registered service mark "Lexington" will sublicense to the Fund to include the word "Lexington" as part of its corporate name subject to revocation by LMC in the event that the Fund ceases to engage LMC or its affiliate as investment adviser or distributor. Crosby Asset Management (US) Inc. has authorized the Fund to include the word "Crosby" as part of it's corporate name subject to revocation by Crosby in the event the Fund ceases to engage Crosby as Sub-adviser. In that event the Fund will be required upon demand of LMC or Crosby to change its name to delete the word "Lexington" or "Crosby" therefrom.
LMC shall not be liable to the Fund or its shareholders for any act or omission by LMC, its officers, directors or employees or any loss sustained by the Fund or its shareholders except in the case of willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
LMC and LFD are wholly owned subsidiaries of Lexington Global Asset Managers, Inc., a publicly traded corporation. Descendants of Lunsford Richardson, Sr., their spouses, trusts and other related entities have a majority voting control of outstanding shares of Lexington Global Asset Managers, Inc.
Crosby Asset Management (US) Inc. (25/F 3 Lockhart Road, Wan Chai, Hong Kong) was established on October 4, 1990 in the British Virgin Islands. Crosby manages assets and provides investment advice for investment companies and institutional private accounts around the world including the United States. It is a wholly owned subsidiary of the Crosby Group and its holding company, Crosby group.
The Crosby group was founded in 1984 and is a leading independent merchant bank in Asia, providing services including investment management, stockbrokerage and research and corporate finance. The Crosby group is headquartered in Hong Kong with 18 offices located in 11 countries throughout the region, and in London and New York.
Of the directors, officers or employees ("affiliated persons") of the Fund, Messrs. Corniotes, DeMichele, Faust, Hisey, Kantor, Lavery, Luehs, and Petruski and Mmes. Carnicelli, Carr, Curcio, Gilfillan and Mosca (see "Management of the Fund"), may also be deemed affiliates of LMC and LFD by virtue of being officers, directors or employees thereof.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
The Fund's primary policy is to execute all purchases and sales of portfolio instruments at the most favorable prices consistent with best execution, considering all of the costs of the transaction including brokerage commissions. This policy governs the selection of brokers and dealers and the market in which a transaction is executed. Consistent with this policy, the Rules of Fair Practice of the National Association of Securities Dealers, Inc., and such other policies as the Directors may determine, LMC and Crosby may consider sales of shares of the Fund and of the other Lexington Funds as a factor in the selection of brokers and dealers and the market in which a transaction is executed. Consistent with this policy, the Rules of Fair Practice of the National Association of Securities Dealers, Inc., and such other policies as the Directors may determine, LMC and Crosby may consider sales of shares of the Fund and of the other Lexington Funds as a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. However, pursuant to the Fund's investment management agreement, management consideration may be given in the selection of broker-dealers to research provided and payment may be made of a commission higher than that charged by another broker-dealer which does not furnish research services or which furnishes research services deemed to be a lesser value, so long as the criteria of Section 28(e) of the Securities Exchange Act of 1934 are met. Section 28(e) of the Securities Exchange Act of 1934 was adopted in 1975 and specifies that a person with investment discretion shall not be "deemed to have acted unlawfully or to have breached a fiduciary duty" solely because such person has caused the account to pay higher commission than the lowest available under certain circumstances, provided that the person so exercising investment discretion makes a good faith determination that the person so commissions paid are "reasonable in the relation to the value of the brokerage and research services provided . . . viewed in terms of either that particular transaction or his overall responsibilities with respect to the accounts as to which he exercises investment discretion."
Currently, it is not possible to determine the extent to which commissions that reflect an element of value for research services might exceed commissions that would be payable for executions services alone. Nor generally can the value of research services to the Fund be measured. Research services furnished might be useful and of value to LMC and Crosby and its affiliates, in serving other clients as well as the Fund. On the other hand, any research services obtained by LMC and Crosby or its affiliates from the placement of portfolio brokerage of other clients might be useful and of value to LMC and Crosby in carrying out its obligations to the Fund.
The Fund anticipates that its brokerage transactions involving securities of companies domiciled in countries other than the United States will normally be conducted on the principal stock exchanges of those countries. Fixed commissions of foreign stock exchange transactions are generally higher than the negotiated commission rates available in the United States. There is generally less government supervision and regulation of foreign stock exchanges and broker-dealers than in the United States.
The Directors have adopted certain procedures incorporating the standards of Rule 17e-1 under the Investment Company Act of 1940, as amended, which require that the commissions paid to LFD or to broker-dealers affiliated with LFD must be "reasonable and fair compared to the commission, fee or other remuneration comparable transactions involving similar transactions and similar securities . . . being purchased or sold on a securities . . . exchange during a comparable period of time". Rule 17e-1 and the procedures require the Directors to periodically review the transactions with affiliated broker-dealers and the procedures themselves. The procedures also require LMC and Crosby to furnish reports to the Directors and to maintain records in connection with commissions paid to affiliated broker-dealers.
DETERMINATION OF NET ASSET VALUE
The Fund calculates net asset value as of the close of normal trading on the New York Stock Exchange (currently 4:00 p.m., Eastern time, unless weather, equipment failure or other factors contribute to an earlier closing time) each business day. It is expected that the New York Stock Exchange will be closed on Saturdays and Sundays and on New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. See the Prospectus for the further discussion of net asset value.
Exchange instructions may be given in writing or by telephone. Telephone exchanges may only be made if a Telephone Authorization form has been previously executed and filed with LFD. Telephone exchanges are permitted only after a minimum of seven (7) days have elapsed from the date of a previous exchange. Exchanges may not be made until all checks in payment for the shares to be exchanged have been cleared.
Telephonic exchanges can only involve shares held on deposit at State Street Bank and Trust Company (the "Agent"); shares held in certificate form by the shareholder cannot be included. However, outstanding certificates can be returned to the Agent and qualify for these services. Any new account established with the same registration will also have the privilege of exchange by telephone in the Lexington Funds. All accounts involved in a telephonic exchange must have the same registration and dividend option as the account from which the shares were transferred and will also have the privilege of exchange by telephone in the Lexington Funds in which these services are available.
By checking the box on the New Account Application authorizing telephone exchange services, a shareholder constitutes and appoints LFD, distributor of the Lexington Group of Mutual Funds, as the true and lawful attorney to surrender for redemption or exchange any and all non-certificate shares held by the Agent in account(s) designated, or in any other account with the Lexington Funds, present or future which has the identical registration, with full power of substitution in the premises, authorizes and directs LFD to act upon any instruction from any person by telephone for exchange of shares held in any of these accounts, to purchase shares of any other Lexington Fund that is available, provided the registration and mailing address of the shares to be purchased are identical to the registration of the shares being redeemed, and agrees that neither LFD, the Agent, or the Fund(s) will be liable for any loss, expense or cost arising out of any requests effected in accordance with this authorization which would include requests effected by impostors or persons otherwise unauthorized to act on behalf of the account. LFD reserves the right to cease to act as agent subject to the above appointment upon thirty (30) days written notice to the address of record. If the shareholder is an entity other than an individual, such entity may be required to certify that certain persons have been duly elected and are now legally holding the titles given and that the said corporation, trust, unincorporated association, etc. is duly organized and existing and has the power to take action called for by this continuing authorization.
Exchange Authorizations forms, Telephone Authorization forms and prospectuses of the other funds may be obtained from LFD.
LFD has made arrangements with certain dealers to accept instructions by telephone to exchange shares of the Fund or shares of one of the other Lexington Funds at net asset value as described above. Under this procedure, the dealer must agree to indemnify LFD and the funds from any loss or liability that any of them might incur as a result of the acceptance of such telephone exchange orders. A properly signed Exchange Authorization must be received by LFD within 5 days of the exchange request. LFD reserves the right to reject any telephone exchange request. In each such exchange, the registration of the shares of the Fund being acquired must be identical to the registration of the shares of the Fund being exchanged. Any telephone exchange orders so rejected may be processed by mail.
This exchange offer is available only in states where shares of the Fund being acquired may legally be sold and may be modified or terminated at any time by the Fund. Broker-dealers who process exchange orders on behalf of their customers may charge a fee for their services. Such fee may be avoided by making requests for exchange directly to the Fund or Agent.
The Fund makes available a variety of Prototype Pension and Profit Sharing plans including a 401(k) Salary Reduction Plan and a 403(b)(7} Plan. Plan services are available by contacting the Shareholder Services Department of the Distributor at 1-800-526-0056.
INDIVIDUAL RETIREMENT ACCOUNT ("IRA"): Individuals may make tax deductible contributions to their own Individual Retirement Accounts established under Section 408 of the Internal Revenue Code (the "Code"). Married investors filing a joint return neither of whom is an active participant in an employer sponsored retirement plan, or who have an adjusted gross income of $40,000 or less ($25,000 or less for single taxpayers) may continue to make a $2,000 ($2,500 for spousal IRAs) annual deductible IRA contribution. For adjusted gross incomes above $40,000 ($25,000 for single taxpayers, the IRA deduction limit is generally phased out ratably over the next $10,000 of adjusted gross income, subject to a minimum $200 deductible contribution. Investors who are not able to deduct a full $2,000 ($2,250 spousal) IRA contribution because of the limitations may make a nondeductible contribution to their IRA to the extent a deductible contribution is not allowed. Federal income tax on accumulations earned on nondeductible contributions is deferred until such time as these amounts are deemed distributed to an investor. Rollovers are also permitted under the Plan. The disclosure statement required by the Internal Revenue Service ("IRS") is provided by the Fund.
The minimum initial investment to establish a tax-sheltered plan is $250. Subsequent investments are subject to a minimum of $50 for each account.
SELF-EMPLOYED RETIREMENT PLAN (HR-10): Self-employed individuals may make tax deductible contributions to a prototype defined contribution pension plan or profit sharing plan. There are, however, a number of special rules which apply when self-employed individuals participate in such plans. Currently purchase payments under a self-employed plan are deductible only to the extent of the lesser of (i) $30,000 or (ii) 25% of the individuals earned annual income (as defined in the Code) and in applying these limitations not more than $200,000 of "earned income" may be taken into account.
CORPORATE PENSION AND PROFIT SHARING PLANS: The Fund makes available a Prototype Defined Contribution Pension Plan and a Prototype Profit Sharing Plan.
All purchases and redemptions of Fund shares pursuant to any one of the Fund's tax sheltered plans must be carried out in accordance with the provisions of the Plan. Accordingly, all plan documents should be reviewed carefully before adopting or enrolling in the Plan. Investors should especially note that a penalty tax of 10% may be imposed by the IRS on early withdrawals under corporate, Keogh or IRA plans. It is recommended by the IRS that an investor consult a tax adviser before investing in the Fund through any of these plans.
An investor participating in any of the Fund's special plans has no obligation to continue to invest in the Fund and may terminate the Plan with the Fund at any time. Except for expenses of sales and promotion, executive and administrative personnel, and certain services which are furnished by LMC, the cost of the plans generally is borne by the Fund; however, each IRA Plan account is subject to an annual maintenance fee of $12.00 charged by the Agent.
The following is only a summary of certain additional tax considerations generally affecting the Fund and its shareholders that are not described in the Prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussions here and in the Prospectus are not intended as substitutes for careful tax planning.
Qualification as a Regulated Investment Company
The Fund has elected to be taxed as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a regulated investment company, the Fund is not subject to federal income tax on the portion of its net investment income (i.e., taxable interest, dividends and other taxable ordinary income, net of expenses) and capital gain net income (i.e., the excess of capital gains over capital losses) that it distributes to shareholders, provided that it distributes at least 90% of its investment company taxable income (i.e., net investment income and the excess of net short-term capital gain over net long-term capital loss) for the taxable year (the "Distribution Requirement"), and satisfies certain other requirements of the Code that are described below. Distributions by the Fund made during the taxable year or, under specified circumstances, within twelve months after the close of the taxable year, will be considered distributions of income and gains of the taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment company must: (1) derive at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies (to the extent such currency gains are directly related to the regulated investment company's principal business of investing in stock or securities) and other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies the "Income Requirement"); and (2) derive less than 30% of its gross income (exclusive of certain gains on designated hedging transactions that are offset by realized or unrealized losses on offsetting positions) from the sale or other disposition of stock, securities or foreign currencies (or options, futures or forward contracts thereon) held for less than three months the "Short-Short Gain Test"). However, foreign currency gains, including those derived from options, futures and forwards, will not in any event be characterized as Short-Short Gain if they are directly related to the regulated investment company's investments in stock or securities (or options or futures thereon). Because of the Short-Short Gain Test, the Fund may have to limit the sale of appreciated securities that it has held for less than three months. However, the Short-Short Gain Test will not prevent the Fund from disposing of investments at a loss, since the recognition of a loss before the expiration of the three-month holding period is disregarded for this purpose. Interest (including original issue discount) received by the Fund at maturity or upon the disposition of a security held for less than three months will not be treated as gross income derived from the sale or other disposition of such security within the meaning of the Short-Short Gain Test. However, income that is attributable to realized market appreciation will be treated as gross income from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund on the disposition of an asset will be a capital gain or loss. However, gain recognized on the disposition of a debt obligation purchased by the Fund at a market discount (generally, at a price less than its principal amount) will be treated as ordinary income to the extent of the portion of the market discount which accrued during the period of time the Fund held the debt obligation. In addition, under the rules of Code Section 988, gain or loss recognized on the disposition of a debt obligation denominated in a foreign currency or an option with respect thereto (but only to the extent attributable to changes in foreign currency exchange rates), and gain or loss recognized on the disposition of a foreign currency forward contract, futures contract, option or similar financial instrument, or of foreign currency itself, except for regulated futures contracts or non-equity options subject to Code Section 1256 (unless the Fund elects otherwise), will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss recognized by the Fund on the disposition of an asset is long-term or short-term, the holding period of the asset may be affected if (1) the asset is used to close a "short sale" (which includes for certain purposes the acquisition of a put option) or is substantially identical to another asset so used, (2) the asset is otherwise held by the Fund as part of a "straddle" (which term generally excludes a situation where the asset is stock and Fund grants a qualified covered call option (which, among other things, must not be deep-in-the-money) with respect thereto) or (3) the asset is stock and Fund grants an in-the-money qualified covered call option with respect thereto. However, for purposes of the Short-Short Gain Test, the holding period of the asset disposed of may be reduced only in the case of clause (1) above. In addition, the Fund may be required to defer the recognition of a loss on the disposition of an asset held as part of a straddle to the extent of any unrecognized gain on the offsetting position.
Any gain recognized by the Fund on the lapse of, or any gain or loss recognized by the Fund from a closing transaction with respect to, an option written by the Fund will be treated as a short-term capital gain or loss. For of the Short-Short Gain Test, the holding period of an option written by the Fund will commence on the date it is written and end on the date it lapses or the date a closing transaction is entered into. Accordingly, the Fund may be limited in its ability to write options which expire within three months and to enter into closing transactions at a gain within three months of the writing of options.
Transactions that may be engaged in by the Fund (such as regulated futures contracts, certain foreign currency contracts, and options on stock indexes and futures contracts) will be subject to special tax treatment as "Section 1256 contracts." Section 1256 contracts are treated as if they are sold for their fair market value on the last business day of the taxable year, even though a taxpayer's obligations (or rights) under such contracts have not terminated (by delivery, exercise, entering into a closing transaction or otherwise) as of such date. Any gain or loss recognized as a consequence of the year-end deemed disposition of Section 1256 contracts is taken into account for the taxable year together with any other gain or loss that was previously recognized upon the termination of Section 1256 contracts during that taxable year. Any capital gain or loss for the taxable year with respect to Section 1256 contracts (including any capital gain or loss arising as a consequence of the year-end deemed sale of such contracts) is generally treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. A Fund, however, may elect not to have this special tax treatment apply to Section 1256 contracts that are part of a "mixed straddle" with other investments of the Fund that are not Section 1256 contracts. The IRS has held in several private rulings (and Treasury Regulations now provide) that gains arising from Section 1256 contracts will be treated for purposes of the Short-Short Gain Test as being derived from securities held for not less than three months if the gains arise as a result of a constructive sale under Code Section 1256.
The Fund may purchase securities of certain foreign investment funds or trusts which constitute passive foreign investment companies ("PFICs") for federal income tax purposes. If the Fund invests in a PFIC, it may elect to treat the PFIC as a qualifying electing fund (a "QEF") in which event the Fund will each year have ordinary income equal to its pro rata share of the PFIC's ordinary earnings for the year and long-term capital gain equal to its pro rata share of the PFIC's net capital gain for the year, regardless of whether the Fund receives distributions of any such ordinary earning or capital gain from the PFIC. If the Fund does not (because it is unable to, chooses not to or otherwise) elect to treat the PFIC as a QEF, then in general (1) any gain recognized by the Fund upon sale or other disposition of its interest in the PFIC or any excess distribution received by the Fund from the PFIC will be allocated ratably over the Fund's holding period of its interest in the PFIC, (2) the portion of such gain or excess distribution so allocated to the year in which the gain is recognized or the excess distribution is received shall be included in the Fund's gross income for such year as ordinary income (and the distribution of such portion by the Fund to shareholders will be taxable as an ordinary income dividend, but such portion will not be subject to tax at the Fund level), (3) the Fund shall be liable for tax on the portions of such gain or excess distribution so allocated to prior years in an amount equal to, for each such prior year, (i) the amount of gain or excess distribution allocated to such prior year multiplied by the highest tax rate (individual or corporate) in effect for such prior year plus (ii) interest on the amount determined under clause (i) for the period from the due date for filing a return for such prior year until the date for filing a return for the year in which the gain is recognized or the excess distribution is received at the rates and methods applicable to underpayments of tax for such period, and (4) the distribution by the Fund to shareholders of the portions of such gain or excess distribution so allocated to prior years (net of the tax payable by the Fund thereon) will again be taxable to the shareholders as an ordinary income dividend.
Under recently proposed Treasury Regulations the Fund can elect to recognize as gain the excess, as of the last day of its taxable year, of the fair market value of each share of PFIC stock over the Fund's adjusted tax basis in that share ("mark to market gain"). Such mark to market gain will be included by the Fund as ordinary income, such gain will not be subject to the Short-Short Gain Test, and the Fund's holding period with respect to such PFIC stock commences on the first day of the next taxable year. If the Fund makes such election in the first taxable year it holds PFIC stock, the Fund will include ordinary income from any mark to market gain, if any, and will not incur the tax described in the previous paragraph.
Treasury Regulations permit a regulated investment company, in determining its investment company taxable income and net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) for any taxable year, to elect (unless it has made a taxable year election for excise tax purposes as discussed below) to treat all or any part of any net capital loss, any net long-term capital loss or any net foreign currency loss incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund must satisfy an asset diversification test in order to qualify as a regulated investment company. Under this test, at the close of each quarter of the Fund's taxable year, at least 50% of the value of the Fund's assets must consist of cash and cash items, U.S. Government securities, securities of other regulated investment companies, and securities of other issuers (as to which the Fund has not invested more than 5% of the value of the Fund's total assets in securities of such issuer and as to which the Fund does not hold more than 10% of the outstanding voting securities of such issuer), and no more than 25% of the value of its total assets may be invested in the securities of any one issuer (other than U.S. Government securities and securities of other regulated investment companies), or in two or more issuers which the Fund controls and which are engaged in the same or similar trades or businesses. Generally, an option (call or put) with respect to a security is treated as issued by the issuer of the security not the issuer of the option.
If for any taxable year the Fund does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) will be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions will be taxable to the shareholders as ordinary dividends to the extent of the Fund's current and accumulated earnings and profits. Such distributions generally will be eligible for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment company that fails to distribute in each calendar year an amount equal to 98% of ordinary taxable income for the calendar year and 98% of capital gain net income for the one-year period ended on October 31 of such calendar year (or, at the election of a regulated investment company having a taxable year ending November 30 or December 31, for its taxable year (a "taxable year election")). The balance of such income must be distributed during the next calendar year. For the foregoing purposes, a regulated investment company is treated as having distributed any amount on which it is subject to income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall: (1) reduce its capital gain net income (but not below its net capital gain) by the amount of any net ordinary loss for the calendar year; and (2) exclude foreign currency gains and losses incurred after October 31 of any year (or after the end of its taxable year if it has made a taxable year election) in determining the amount of ordinary taxable income for the current calendar year (and, instead, include such gains and losses in determining ordinary taxable income for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed distributions of its ordinary taxable income and capital gain net income prior to the end of each calendar year to avoid liability for the excise tax. However, investors should note that the Fund may in certain circumstances be required to liquidate portfolio investments to make sufficient distributions to avoid excise tax liability.
The Fund anticipates distributing substantially all of its investment company taxable income for each taxable year. Such distributions will be taxable to shareholders as ordinary income and treated as dividends for federal income tax purposes, but they generally should not qualify for the 70% dividends-received deduction for corporate shareholders.
A Fund may either retain or distribute to shareholders its net capital gain for each taxable year. The Fund currently intends to distribute any such amounts. If net capital gain is distributed and designated as a capital gain dividend, it will be taxable to shareholders as long-term capital gain, regardless of the length of time the shareholder has held his shares or whether such gain was recognized by the Fund prior to the date on which the shareholder acquired his shares.
Conversely, if the Fund elects to retain its net capital gain, the Fund will be taxed thereon (except to the extent of any available capital loss carryovers) at the 35% corporate tax rate. If the Fund elects to retain its net capital gain, it is expected that the Fund also will elect to have shareholders of record on the last day of its taxable year treated as if each received a distribution of his pro rata share of such gain, with the result that each shareholder will be required to report his pro rata share of such gain on his tax return as long-term capital gain, will receive a refundable tax credit for his pro rata share of tax paid by the Fund on the gain, and will increase the tax basis for his shares by an amount equal to the deemed distribution less the tax credit.
Ordinary income dividends paid by the Fund with respect to a taxable year will qualify for the 70% dividends-received deduction generally available to corporations (other than corporations, such as S corporations, which are not eligible for the deduction because of their special characteristics and other than for purposes of special taxes such as the accumulated earnings tax and the personal holding company tax) to the extent of the amount of qualifying dividends received by the Fund from domestic corporations for the taxable year. A dividend received by the Fund will not be treated as a qualifying dividend (1) if it has been received with respect to any share of stock that the Fund has held for less than 46 days (91 days in the case of certain preferred stock), excluding for this purpose under the rules of Code Section 246(c)(3) and (4): (i) any day more than 45 days (or 90 days in the case of certain preferred stock) after the date on which the stock becomes ex-dividend and (ii) any period during which the Fund has an option to sell, is under a contractual obligation to sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by holding other positions with respect to, such (or substantially identical) stock; (2) to the extent that the Fund is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property; or (3) to the extent the stock on which the dividend is paid is treated as debt-financed under the rules of Code Section 246A. Moreover, the dividends-received deduction for a corporate shareholder may be disallowed or reduced (1) if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of the Fund or (2) by application of Code Section 246(b) which in general limits the dividends-received deduction to 70% of the shareholder's taxable income (determined without regard to the dividends-received deduction and certain other items). Since an insignificant portion of the Fund will be invested in stock of domestic corporations, the ordinary dividends distributed by the Fund will not qualify for the dividends-received deduction for corporate shareholders.
Alternative minimum tax ("AMT") is imposed in addition to, but only to the extent it exceeds, the regular tax and is computed at a maximum marginal rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's alternative minimum taxable income ("AMTI") over an exemption amount. In addition, under the Superfund Amendments and Reauthorization Act of 1986, a tax is imposed for taxable years beginning after 1986 and before 1996 at the rate of 0.12% on the excess of a corporate taxpayer's AMTI (determined without regard to the deduction for this tax and the AMT net operating loss deduction) over $2 million. For purposes of the corporate AMT and the environmental superfund tax (which are discussed above), the corporate dividends-received deduction is not itself an item of tax preference that must be added back to taxable income or is otherwise disallowed in determining a corporation's AMTI. However, corporate shareholders will generally be required to take the full amount of any dividend received from the Fund into account (without a dividends-received deduction) in determining its adjusted current earnings, which are used in computing an additional corporate preference item (i.e., 75% of the excess of a corporate taxpayer's adjusted current earnings over its AMTI (determined without regard to this item and the AMT net operating loss deduction)) includable in AMTI.
Investment income that may be received by the Fund from sources within foreign countries may be subject to foreign taxes withheld at the source. The United States has entered into tax treaties with many foreign countries which entitle the Fund to a reduced rate of, or exemption from, taxes on such income. It is impossible to determine the effective rate of foreign tax in advance since the amount of the Fund's assets to be invested in various countries is not known. If more than 50% of the value of the Fund's total assets at the close of its taxable year consist of the stock or securities of foreign corporations, the Fund may elect to "pass through" to the Fund's shareholders the amount of foreign taxes paid by the Fund. If the Fund so elects, each shareholder would be required to include in gross income, even though not actually received, his pro rata share of the foreign taxes paid by the Fund, but would be treated as having paid his pro rata share of such foreign taxes and would therefore be allowed to either deduct such amount in computing taxable income or use such amount (subject to various Code limitations) as a foreign tax credit against federal income tax (but not both). For purposes of the foreign tax credit limitation rules of the Code, each shareholder would treat as foreign source income his pro rata share of such foreign taxes plus the portion of dividends received from the Fund representing income derived from foreign sources. No deduction for foreign taxes could be claimed by an individual shareholder who does not itemize deductions. Each shareholder should consult his own tax adviser regarding the potential application of foreign tax credits.
Distributions by the Fund that do not constitute ordinary income dividends or capital gain dividends will be treated as a return of capital to the extent of (and in reduction of) the shareholder's tax basis in his shares; any excess will be treated as gain from the sale of his shares, as discussed below.
Distributions by the Fund will be treated in the manner described above regardless of whether such distributions are paid in cash or reinvested in additional shares of the Fund (or of another fund). Shareholders receiving a distribution in the form of additional shares will be treated as receiving a distribution in an amount equal to the fair market value of the shares received, determined as of the reinvestment date. In addition, if the net asset value at the time a shareholder purchases shares of the Fund reflects undistributed net investment income or recognized capital gain net income, or unrealized appreciation in the value of the assets of the Fund, distributions of such amounts will be taxable to the shareholder in the manner described above, although such distributions economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the Fund into account in the year in which the distributions are made. However, dividends declared in October, November or December of any year and payable to shareholders of record on a specified date in such a month will be deemed to have been received by the shareholders (and made by the Fund) on December 31 of such calendar year if such dividends are actually paid in January of the following year. Shareholders will be advised annually as to the U.S. federal income tax consequences of distributions made (or deemed made) during the year.
The Fund will be required in certain cases to withhold and remit to the U.S. Treasury 31% of ordinary income dividends and capital gain dividends, and the proceeds of redemption of shares, paid to any shareholder (1) who has provided either an incorrect tax identification number or no number at all, (2) who is subject to backup withholding by the IRS for failure to report the receipt of interest or dividend income properly, or (3) who has failed to certify to the Fund that it is not subject to backup withholding or that it is a corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of shares of the Fund in an amount equal to the difference between the proceeds of the sale or redemption and the shareholder's adjusted tax basis in the shares. All or a portion of any loss so recognized may be disallowed if the shareholder purchases other shares of the Fund within 30 days before or after the sale or redemption. In general, any gain or loss arising from (or treated as arising from) the sale or redemption of shares of the Fund will be considered capital gain or loss and will be long-term capital gain or loss if the shares were held for longer than one year. However, any capital loss arising from the sale or redemption of shares held for six months or less will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received on such shares. For this purpose, the special holding period rules of Code Section 246(c)(3) and (4) (discussed above in connection with the dividends-received deduction for corporations) generally will apply in determining the holding period of shares. Long-term capital gains of noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than the maximum rate applicable to ordinary income. Capital losses in any year are deductible only to the extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Taxation of a shareholder who, as to the United States, is a nonresident alien individual, foreign trust or estate, foreign corporation, or foreign partnership ("foreign shareholder"), depends on whether the income from the Fund is "effectively connected" with a U.S. trade or business carried on by such shareholder.
If the income from the Fund is not effectively connected with a U.S. trade or business carried on by a foreign shareholder, ordinary income dividends paid to a foreign shareholder will be subject to U.S. withholding tax at the rate of 30% (or lower treaty rate) upon the gross amount of the dividend. Furthermore, such a foreign shareholder may be subject to U.S. withholding tax at the rate of 30% (or lower treaty rate) on the gross income resulting from the Fund's election to treat any foreign taxes paid by it as paid by its shareholders, but may not be allowed a deduction against this gross income or a credit against this U.S. withholding tax for the foreign shareholder's pro rata share of such foreign taxes which it is treated as having paid. Such a foreign shareholder would generally be exempt from U.S. federal income tax on gains realized on the sale of shares of the Fund, capital gain dividends and amounts retained by the Fund that are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then ordinary income dividends, capital gain dividends, and any gains realized upon the sale of shares of the Fund will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Fund may be required to withhold U.S. federal income tax at a rate of 31% on distributions that are otherwise exempt from withholding tax (or taxable at a reduced treaty rate) unless such shareholders furnish the Fund with proper notification of its foreign status.
The tax consequences to a foreign shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Foreign shareholders are urged to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Fund, including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax consequences is based on the Code and the Treasury Regulations issued thereunder as in effect on the date of this Statement of Additional Information. Future legislative or administrative changes or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions may have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and capital gain dividends from regulated investment companies often differ from the rules for U.S. federal income taxation described above. Shareholders are urged to consult their tax advisers as to the consequences of these and other state and local tax rules affecting investment in the Fund.
For the purpose of quoting and comparing the performance of the Fund to that of other mutual funds and to other relevant market indices in advertisements or in reports to shareholders, performance may be stated in terms of total return. Under the rules of the Securities and Exchange Commission ("SEC rules"), funds advertising performance must include total return quotes calculated according to the following formula:
P(l + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10) ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5 or 10 year periods or at the end of the 1, 5 or 10 year periods (or fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication, and will cover one, five and ten year periods or a shorter period dating from the effectiveness of the Fund's Registration Statement. In calculating the ending redeemable value, all dividends and distributions by the Fund are assumed to have been reinvested at net asset value as described in the prospectus on the reinvestment dates during the period. Total return, or "T" in the formula above, is computed by finding the average annual compounded rates of return over the 1, 5 and 10 year periods (or fractional portion thereof) that would equate the initial amount invested to the ending redeemable value. Any recurring account charges that might in the future be imposed by the Fund would be included at that time.
The Fund may also from time to time include in such advertising a total return figure that is not calculated according to the formula set forth above in order to compare more accurately the performance of the Fund with other measures of investment return. For example, in comparing the Fund's total return with data published by Lipper Analytical Services, Inc., or with the performance of the Standard and Poor's 500 Stock Index or the Dow Jones Industrial Average, the Fund calculates its aggregate total return for the specified periods of time assuming the investment of $10,000 in Fund shares and assuming the reinvestment of each dividend or other distribution at net asset value on the reinvestment date. Percentage increases are determined by subtracting the initial value of the investment from the ending value and by dividing the remainder by the beginning value.
Shareholders will receive reports at least semi-annually showing the Fund's holdings and other information. In addition, shareholders will receive annual financial statements audited by KPMG Peat Marwick LLP, the Fund's independent auditors.
To the Shareholders and Directors of Lexington Crosby Small Cap Asia Growth Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of Lexington Crosby Small Cap Asia Growth Fund, Inc. (the "Fund") as of June 16, 1995. 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 statement of assets and liabilities is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of assets and liabilities. 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 Lexington Crosby Small Cap Asia Growth Fund, Inc. as of June 16, 1995 in conformity with generally accepted accounting principles.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
Statement of Assets and Liabilities
Deferred organization and registration expenses (Note 2) 50,000
Payable to Lexington Management Corporation (Note 2) $ 50,000
NET ASSETS applicable to 10,000 outstanding shares of common stock, $.001 par value per share, respectively $100,000
Common stock - at par value, $.001 per share, authorized 1,000,000,000 shares; issued and outstanding 10,000 (Note 1) $ 10 Additional Paid in Capital 99,990
NET ASSET VALUE offering and redemption price per share
(1)The Lexington Crosby Small Cap Asia Growth Fund, Inc. (the "Fund") was formed on April 19, 1995 as a Maryland Corporation and has had no operations through June 16, 1995 other than matters relating to its organization and registration as a diversified, open-end investment company under the Investment Company Act of 1940 and the sale and issuance of 10,000 shares of its common stock to the Lexington Management Corporation at an aggregate purchase price of $100,000 to provide the initial capital of the Fund.
(2)Organization and initial offering expenses will be borne by the Fund and will be advanced by Lexington Management Corporation (LMC). It is estimated that such expenses will not exceed $50,000 and will be amortized from the date operations commence over a period which it is expected that a benefit will be realized, not to exceed five years. The Fund will reimburse LMC for such expenses when the Fund's assets exceed $20 million or when the Fund has completed one year of operations, whichever occurs first. Lexington Management Corporation has agreed that in the event that any of the initial 10,000 shares are redeemed during the period of amortization of the Fund's organizational expenses, the redemption proceeds will be reduced by any such unamortized organizational expenses in the same proportion as the number of initial shares being redeemed bears to the number of initial shares (10,000) outstanding at the time of redemption.
(3)The Fund intends to comply in its initial year and thereafter with the requirements of the Internal Revenue Code necessary to qualify as a regulated investment company and as such will not be subject to federal income taxes on otherwise taxable income (including net realized capital gains) which is distributed to shareholders.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. (Including the Portfolio of Investments)
11,500 Broken Hill Proprietary Company Ltd. ................. $ 156,515 65,000 Delta Gold Ltd. ...................................... 159,352 170,000 SGIO Insurance Company Ltd. .......................... 138,922 192,000 ASM Pacific Technology ............................... 163,835 422,000 Chaifa Holdings Ltd. ................................. 120,032 440,000 China Hong Kong Photo Productions .................... 217,595 394,000 Esprit Asia Holdings Ltd. ............................ 129,897 490,000 Harbin Power Equipment Company Ltd. .................. 82,990 11,600 HSBC Holdings Plc .................................... 170,972 31,000 Hutchison Whampoa Ltd. ............................... 175,148 44,000 New World Development Company Ltd. ................... 183,745 700,000 Northeast Electric T & T Machines .................... 135,753 387,000 Sinocan Holdings Ltd. ................................ 138,847 86,000 Varitronix International Ltd. 161,224 1,100,000 Wong's International Holdings Ltd. ................... 159,285 80,000 PT Astra International ............................... 159,439 190,000 PT Gajah Tunggal ..................................... 108,190 65,000 PT Mulia Industrindo ................................. 172,964 88,000 PT Semen Gresik ...................................... 215,856 115,500 PT Sekar Bumi ........................................ 106,242 36,000 ACP Industries Bhd ................................... 150,426 40,000 Arab Malaysian Corporation Bhd ....................... 115,105 78,000 Ekran Berhad ......................................... 181,410 88,000 Integrated Logic Systems, Inc. ....................... 137,369 40,000 Road Builder (M) Holdings Bhd ........................ 134,027 106,000 Tiong Nam Transport Holdings Bhd ..................... 140,398
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. (Including the Portfolio of Investments)
740,000 Abotiz Equity Ventures, Inc. ......................... $ 141,410 911,000 Steniel Manufacturing Corporation .................... 121,861 270,000 Seksun Precision Engineering Ltd. .................... 216,229 20,000 United Overseas Banking Corporation .................. 180,015 26,000 K.R. Precision Company Ltd. .......................... 173,609 48,000 Krung Thai Bank ...................................... 177,425 29,500 Sanyo Universal Electric Company Ltd. ................ 119,595 34,000 Thai Stanley Electric ................................ 81,081 Total Investments: 92.8% ............................. 5,126,763 (cost $5,250,315) (Note 1) ---------
Other assets in excess of liabilities: 7.2% .......... 396,659 (equivalent to $9.42 per share on 586,424 shares outstanding) .......................... $5,523,422
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. STATEMENT OF ASSETS & LIABILITIES
Investments in securities, at value (cost $5,250,315) (Note 1) .... $5,126,763 Receivable for investment securities sold ......................... 65,885 Receivable for shares sold ........................................ 14,120 Dividends and interest receivable ................................. 6,211 Deferred organization expenses, net (Note 1) ...................... 63,738 Due to Lexington Management Corporation (Note 2) .................. 5,217 Payable for investment securities purchased ....................... 64,011 Payable for shares redeemed ....................................... 31,168 NET ASSETS (equivalent to $9.42 per share on 586,424 shares outstanding) (Note 3) ............... $5,523,422
$.001 par value per share ........................... $586 Additional paid-in capital ........................................ 5,855,090 Undistributed net investment income ............................... 12,441 Accumulated net realized loss on investments ................. (221,071) Net unrealized depreciation of investments ....................... (123,624)
The Notes to Financial Statements are an integral part of this statement.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. From the Commencement of Operations July 5, 1995 to November 30, 1995
Less: foreign tax expense ......................................... (3,349)
Investment advisory fee (Note 2) .................................. 28,831 Custodian and transfer agent fees and expenses .................... 13,812 Printing and mailing .............................................. 8,427 Directors' fees and expenses ...................................... 5,476 Accounting and shareholder services expenses (Note 2) ............. 3,517 Computer processing fees .......................................... 541 Amortization of deferred expenses ................................. 4,889 Less: Expenses recovered under contract with investment advisor Net Investment Income ............................................. $12,441
The Notes to Financial Statements are an integral part of this statement.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. From the Commencement of Operations July 5, 1995 to November 30, 1995
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (Note 4)
Realized loss investments and foreign currency transactions (excluding short-term securities):
Proceeds from sales ........................................... $ 935,898 Cost of securities sold ....................................... 1,156,969 Net Realized Loss ................................................. (221,071)
Unrealized depreciation of investments and foreign currency holdings:
Beginning of period .......................................... - End of period ................................................ (123,624)
Change during period .............................................. (123,624) Net realized and unrealized loss on investments and foreign currency holdings ................................ (344,695)
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS ......................................... ($332,254)
The Notes to Financial Statements are an integral part of this statement.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC. STATEMENT OF CHANGES IN NET ASSETS
From the Commencement of Operations
July 5, 1995 to November 30, 1995
Net investment income ............................................. $ 12,441
Net realized loss from investments and foreign
Increase in unrealized depreciation of investments and foreign currency holdings ..................................... (123,624) Net decrease in net assets resulting from operations .............. (332,254)
Increase in net assets from capital share transactions (Note 3) ... 5,855,676 Net increase in net assets ........................................ 5,523,422
Beginning of period ............................................... -
End of period (including undistributed net investment income of $12,441) ................................. $5,523,422
The Notes to Financial Statements are an integral part of this statement.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
Lexington Crosby Small Cap Asia Growth Fund, Inc. (the "Fund") is an open end diversified management investment company registered under the Investment Company Act of 1940, as amended. The Fund commenced operations on July 5, 1995. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements:
Investments Security transactions are accounted for on a trade date basis. Realized gains and losses from security transactions are reported on the identified cost basis. Investments are stated at market value based on closing prices reported by the exchange on which the securities are traded on the last business day of the period or, for over-the-counter securities, at the average between bid and asked prices, except for short-term securities which are stated at amortized cost, which approximates market value. Securities for which market quotations are not readily available and other assets are valued at fair value as determined by management and approved in good faith by the Board of Directors. All investments quoted in foreign currencies are valued in U.S. dollars on the basis of the foreign currency exchange rates prevailing at the close of business. Dividends and distributions to shareholders are recorded on the ex-dividend date. Interest income is accrued as earned.
Foreign Currency Transactions Foreign currencies (and receivables and payables denominated in foreign currencies) are translated into U.S. dollar amounts at current exchange rates. Translation gains or losses resulting from changes in exchange rates and realized gains and losses on the settlement of foreign currency transactions are reported in the statement of operations. In addition, the Fund may enter into forward foreign exchange contracts in order to hedge against foreign currency risk in the purchase or sale of securities denominated in foreign currency. The Fund may also enter into such contracts to hedge against changes in foreign currency exchange rates on portfolio positions. These contracts are marked to market daily, by recognizing the difference between the contract exchange rate and the current market rate as unrealized gains or losses. Realized gains or losses are recognized when contracts are settled and are reported in the statement of operations.
Federal Income Taxes It is the Fund's intention to comply with the requirements of the Internal Revenue Code applicable to "regulated investment companies" and to distribute all of its taxable income to its shareholders. Therefore, no provision for federal income taxes has been made.
Deferred Organization Expenses Organization expenses aggregating $67,351 have been deferred and are being amortized on a straight-line basis over five years.
2. Investment Advisory Fee and Other Transactions with Affiliate
The Fund pays an investment advisory fee to Lexington Management Corporation ("LMC") at the rate of 1.25% of average daily net assets. In connection with providing investment advisory services, LMC has entered into a sub-advisory contract with Crosby Asset Management (Hong Kong) Ltd. ("CAM") under which CAM provides the Fund with investment management services. Pursuant to the terms of the sub-advisory contract between LMC and CAM, LMC pays CAM a monthly sub-advisory fee at the annual rate of 0.625% of the Fund's average daily net assets. The investment advisory contract provides that the total annual expenses of the Fund (including management fees, but excluding interest, taxes, brokerage commissions and extraordinary expenses) will not exceed the level of expenses which the fund is permitted to bear under the most restrictive expense limitation imposed by any state in which shares of the Fund
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
are offered for sale. The investment advisory fee and expense reimbursement are set forth in the statement of operations.
The Fund also reimburses LMC for certain expenses, including accounting and shareholder servicing costs, which are incurred by the Fund, but paid by LMC.
Transactions in capital stock were as follows:
4. Purchases and Sales of Investment Securities The cost of purchases and proceeds from sales of securities for the five months ended November 30, 1995, excluding short-term securities, were $6,407,284 and $935,898, respectively.
At November 30, 1995, aggregate gross unrealized appreciation for all securities and foreign currency holdings (including foreign currency receivables and payables) in which there is an excess of value over tax cost amounted to $326,057 and aggregate gross unrealized depreciation for all securities and foreign currency holdings in which there is an excess of tax cost over value amounted to $449,681.
The Fund's investments in foreign securities may involve risks not present in domestic investments. Since foreign securities may be denominated in a foreign currency and involve settlement and pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which could affect the market and/or credit risk of the investments.
In addition to the risks described above, risks may arise from forward foreign currency contracts as the result of the potential inability of counterparties to meet the terms of their contracts.
LEXINGTON CROSBY SMALL CAP ASIA GROWTH FUND, INC.
From The Commencement of Operations July 5, 1995 to November 30, 1995
Selected per share data for a share outstanding throughout the period:
Net asset value, beginning of period $10.00 Income (loss) from investment operations: Net realized and unrealized loss on investments (0.60) Total loss from investment operations (0.58)
Net asset value, end of period $ 9.42
Ratio to average net assets:
Expenses, before reimbursement or waiver 3.46%* Expenses, net of reimbursement or waiver 1.66%* Net investment income (loss), before reimbursement or waiver (1.26)%* Net assets at end of period (000's omitted) $5,523 | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T17:27:05 |
0000820206-96-000003 | 0000820206-96-000003_0000.txt | (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the quarterly period ended SEPTEMBER 30, 1995
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE CHANGE ACT OF 1934
For the transition period from to
FRANKLIN REAL ESTATE INCOME FUND (Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) (I.R.S.
P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 312-2000
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 Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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
Common Stock Shares Outstanding as of September 30, 1995, Series A: 3,999,515 Common Stock Shares Outstanding as of September 30, 1995, Series B: 319,308
PART I - FINANCIAL INFORMATION
and Analysis of Financial Condition
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 THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
Net income for the nine month period ended September 30, 1995 increased $58,000, or 5%, as compared to the same period in 1994 due to the following factors: an increase in rental revenue of $229,000; an increase in interest and dividends of $10,000; a decrease in other income of $10,000; an increase in interest expense of $30,000; an increase in depreciation and amortization of $29,000; an increase in operating expenses of $165,000; an increase in related party expenses of $10,000; an increase in consolidation expense of $62,000; a decrease in general and administrative expense of $57,000, and a decrease in loss on the sale of mortgage-backed securities of $68,000. Explanations of the material changes are as follows:
Rental revenue for the nine month period ended September 30, 1995 increased $229,000, or 7%, primarily due to the recognition of rental income from the Glen Cove Shopping Center acquired on January 31, 1994 and improved occupancy and rental rates at the Shores Office Complex. The average occupancy rate of net rentable square feet for the nine month periods ended September 30, 1995 and 1994 at the Shores Office Complex was 98% and 91%; at the Northport Buildings 98% and 97%; at the Mira Loma Shopping Center 81% and 81%; and at the Glen Cove Center 97% and 95%, respectively.
Total expenses increased for the nine month period ended September 30, 1995 by $171,000, or 8%, from $2,134,000 in 1994 to $2,305,000. The increase in total expenses is attributable to the following factors: an increase in interest expense of $30,000; an increase in depreciation and amortization of $29,000, or 3%; an increase in operating expenses of $165,000, or 21%; an increase in related party expense of $10,000, or 6%; an increase in consolidation expense of $62,000 or 100%; a decrease in general and administrative expense of $57,000, or 31%, and a decrease in loss on sale of mortgage-backed securities of $68,000 or 100%.
Interest expense increased $30,000 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 $29,000 reflecting tenant improvment costs at the Shores Office Complex related to new leases commencing in late 1994 and the acquisition of rental property in January, 1994.
Related party expense increased $10,000 as a result of an increase in property management fees due to the increases in rental revenue at the Company's properties.
Consolidation expense of $62,000 relates to the proposed consolidation.
PART I - FINANCIAL INFORMATION
and Analysis of Financial Condition
General and administrative expense decreased $57,000 due to a decrease in non-recurring consulting fees and legal expenses.
Loss on sale of mortgage-backed securities decreased $68,000 due to the sale of mortgage-backed securities in January, 1994. The proceeds were used to invest in rental property.
Operating expenses increased $165,000 due to an increase in utility and insurance expense at the Company's properties and to a $100,000 writeoff of building and equipment related to ceasing operations at the Mira Loma Car Wash in August, 1995. The land will be paved and used as additional parking space at the Mira Loma Shopping Center.
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 payments of quarterly dividends. At September 30, 1995, the Company's cash reserves, including mortgage backed securities, aggregated $2,035,000.
As of September 30, 1995, one of the Company's properties was subject to secured financing with an outstanding balance of approximately $1,948,000. 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 commenced August 1, 1994, and continue 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 nine month period ended September 30, 1995 decreased $166,000 to $2,074,000 compared to the same period in 1994. Although net income increased $58,000 in 1995, the Company collected a $258,000 receivable in 1994 which increased that year's cash flow.
Funds from Operations for the nine month period ended September 30, 1995 increased $87,000, or 4%, to $2,094,000 compared to the same period in 1994. The increase is primarily due to the improvement in net income as described under "Results of Operations" above. 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,
PART I - FINANCIAL INFORMATION
and Analysis of Financial Condition
LIQUIDITY AND CAPITAL RESOURCES (Continued)
it does not measure whether income is sufficient to fund all of the Company's cash needs includingprincipal 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 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.
For the nine-month period ended September 30, 1995, the Company declared dividends totaling $1,500,000.
On November 2, 1995 the Board of Directors of the Company and of two other real estate investment trusts that Franklin Properties, Inc. advises, Franklin Advantage Real Estate Income Fund ("Advantage") and Franklin Select Real Estate Income Fund ("Select"), authorized the execution of a Merger Agreement and the filing of a Joint Proxy Statement/Registration Statement with the Securities and Exchange Commission. The Registration Statement was filed on November 13, 1995.
PART I - FINANCIAL INFORMATION
and Analysis of Financial Condition
LIQUIDITY AND CAPITAL RESOURCES (Continued)
In the proposed merger, the Company and/or Advantage would be merged into Select, which would be renamed Franklin Select Realty Trust. The shares of Select will be offered to shareholders of the Company and Advantage in exchange for their shares on the basis described in the Joint Proxy Statement/Registration Statement. The merger is subject to certain conditions including approval by a majority of the shareholders of Select, the Company, and/or Advantage. A special meeting of the shareholders of each REIT will be held to vote on the proposed merger upon the effectiveness of the Registration Statement and the close of the solicitation period.
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.
FRANKLIN REAL ESTATE INCOME FUND
By: /S/ DAVID P. GOSS | 10-Q/A | 10-Q | 1996-01-12T00:00:00 | 1996-01-11T20:06:34 |
0000720875-96-000001 | 0000720875-96-000001_0000.txt | THE SECURITIES ACT OF 1933
(Exact name of issuer as specified in its charter)
(State or other jurisdiction of (I.R.S.
Salt Lake City, Utah 84121 (Address of principal executive offices)
AMENDED AND RESTATED 1992 STOCK OPTION PLAN (Full title of the plan)
Kelvyn H. Cullimore Kevin R. Pinegar Dynatronics Corporation Durham, Evans, Jones & Pinegar 7030 Park Centre Drive 50 South Main Street, Ste. 850 Salt Lake City, Utah 84121 Salt Lake City, Utah 84144
(1) Estimated pursuant to Rule 457(h) for the purpose of calculating the registration fee. With respect to the 500,000 shares being registered, for which the exercise price is not known, the offering price and registration fee have been calculated on the basis of the average of the bid and asked price per share reported on the NASDAQ System on December 27, 1995.
Total of sequentially Exhibit Index on sequentially numbered pages: 29 numbered page: 6
The Registrant incorporates by reference the prospectus forming a part of the original Registration Statement on Form S-8, File no. 33-53524, effective October 9, 1992, as amended hereby (the "Registration Statement").
The purpose of this Amendment is to register a total of 500,000 additional shares of the Registrant's Common Stock, no par value, to the shares originally registered under the Registration Statement. The total number of shares of Common Stock available to be issued pursuant to options granted and exercised under the Plan is now 1,000,000. The Amended and Restated Plan also sets forth the formula for awards of options under the Plan to outside directors of the Registrant who form the Committee designated to administer the Plan. The Amended and Restated Plan was approved by the shareholders of the Company at its Annual Meeting of Shareholders on November 28, 1995.
The Registrant hereby incorporates by reference the information contained in the Registration Statement on Form S-8, as amended hereby.
Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-8 and has duly caused this Registration Statement Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in Salt Lake City, Utah on December 28, 1995.
By /s/ Kelvyn H. Cullimore, Jr. Kelvyn H. Cullimore, Jr.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement Amendment has been signed by the following persons in the capacities and on the dates indicated. Each person whose signature to this Registration Statement appears below hereby constitutes and appoints KELVYN H. CULLIMORE and KELVYN H. CULLIMORE, JR., and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf individually and in the capacity stated below, any and all amendments (including pre-effective and post-effective amendments) to this Registration Statement, and to perform any acts necessary to be done in order to file the Registration Statement and any and all amendments thereto and other instruments or documents in connection therewith with the Securities and Exchange Commission, and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitute, shall lawfully do or cause to be done by virtue hereof.
/s/ Kelvyn H. Cullimore Chairman of 1/3/96
/s/ Kelvyn H. Cullimore, Jr. President and 12/28/95 Kelvyn H. Cullimore, Jr. (Principal Executive
/s/ Larry K. Beardall Director and 12/28/95 Larry K. Beardall President of Sales
/s/ Keith E. Turner Treasurer 1/2/96 Keith E. Turner and Accounting
/s/ E. Keith Hansen, M.D. Director 1/2/96 E. Keith Hansen, M.D.
/s/ V. LeRoy Hansen Director 1/2/96
Salt Lake City, Utah 84121
Exhibit No. Exhibit Numbered Page
4.1 Form of certificate for Dynatronics * Laser Corporation common stock, no par value, incorporated by reference to Exhibit 3 to Form S-1 (Reg. No. 2-85045) filed July 8, 1983.
4.2 Articles of Incorporation dated April 29, 1982 * incorporated by reference to Exhibit 2 to Registrant's Registration Statement on Form S-1 (Reg. No. 2-85045) filed July 8, 1983.
4.3 Articles of Amendment dated November 21, 1988. *
4.4 Bylaws, incorporated by reference to Exhibit 2 * to Registrant's Registration Statement on Form S-1 (Reg. No. 2-85045) filed July 8, 1983.
4.5 Dynatronics Corporation Amended and 9 Restated 1992 Stock Option Plan effective November 28, 1995.
5 Opinion of Durham, Evans, Jones & Pinegar 29 as to the legality of the securities being registered (including consent).
24.1 Consent of KPMG Peat Marwick LLP, independent 8 certified public accountants.
24.2 Consent of Durham, Evans, Jones & Pinegar 29 (included in Exhibit 5).
25 Power of Attorney (included as part of 4 Signature Page to the Registration Statement). * Exhibits incorporated herein by reference. | S-8 POS | S-8 POS | 1996-01-12T00:00:00 | 1996-01-12T13:26:18 |
0000949111-96-000002 | 0000949111-96-000002_0001.txt | OPINION OF SCHWABE, WILLIAMSON & WYATT, P.C.
SCHWABE PACWEST CENTER, SUITES 1600-1800 WILLIAMSON 1211 SOUTHWEST FIFTH AVENUE . PORTLAND, OREGON 97204-3795 & WYATT TELEPHONE: 503 222-9981 . FAX: 503 796-2900 . TELEX: 650-686-1360 P.C.
Re: Oregon Metallurgical Corporation Savings Plan
At your request, we have examined the Registration Statement on Form S-8 ("Registration Statement") being filed by Oregon Metallurgical Corporation ("Company") with the Securities and Exchange Commission in connection with the registration under the Securities Act of 1933, as amended, of 600,000 shares of the Company's common stock, par value $1.00 per share ("Common Stock"), that may be granted and issued in the aggregate under the Oregon Metallurgical Corporation Savings Plan ("Plan").
In rendering this opinion, we have examined such documents and records as we deemed relevant, including, but not limited to, the following: the Company's Restated Articles of Incorporation, as amended and certified by the Oregon Secretary of State on August 30, 1995; Bylaws of the Company, as amended; the Plan; and the minutes of the meetings of the Company's Board of Directors or actions by written consents at which resolutions pertaining to the adoption or approval of the Plan were approved. With respect to all of the foregoing documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to originals of all documents submitted to us as certified or reproduced copies. We have also obtained from the officers of the Company certificates as to such factual matters as we consider necessary for the purpose of this opinion, and insofar as this opinion is based on such matters of fact, we have relied on such certificates.
Based upon the foregoing and such further review of fact and law as we have deemed necessary or appropriate under the circumstances, and assuming, without further inquiry other than such certificates of officers, that (i) all shares of Common Stock to be granted and issued under the Plan will be duly and validly granted and issued by the Company's Board of Directors pursuant to and in accordance with the terms of the Plan; and (ii) the consideration for the shares of Common Stock to be granted and issued under
Oregon . Washington . Washington 503 222-9981 206 621-9168 360 694-7551 the Plan will be received prior to the grant and issuance thereof, upon which our opinions are expressly conditioned, we opine as follows:
If, as and when such shares of Common Stock have been issued and sold pursuant to exercise and payment as provided under the terms of the Plan and in accordance with the Registration Statement, such shares of Common Stock will be duly authorized, validly issued, fully paid and non-assessable shares of the Company's Common Stock, $1.00 par value per share.
This opinion is issued to you solely for use in connection with the Registration Statement on Form S-8 and is not to be quoted or otherwise referred to in any financial statements of the Company or related document, nor is it to be filed with or furnished to any government agency or other person, without the prior written consent of this firm.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement on Form S-8 which is being filed on behalf of the Company in connection with the registration of the aforementioned shares of Common Stock under the Securities Act of 1933, as amended.
/s/ Schwabe Williamson & Wyatt Schwabe, Williamson & Wyatt, P.C. | S-8 | EX-5.1 | 1996-01-12T00:00:00 | 1996-01-11T17:39:56 |
0000907243-96-000001 | 0000907243-96-000001_0004.txt | In planning and performing our audit of the financial statements of Keystone World Bond Fund for the year ended October 31, 1995 we considered its internal control structure, including procedures for safeguarding securities, in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements and to comply with the requirements of Form N-SAR, not to provide assurance on the internal control structure.
The management of Keystone World Bond Fund is responsible for establishing and maintaining an internal control structure. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of internal control structure policies and procedures. Two of the objectives of an internal control structure are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management's authorization and recorded properly to permit preparation of financial statements in conformity with generally accepted accounting principles.
Because of inherent limitations in any internal control structure, errors or irregularities may occur and not be detected. Also, projection of any evaluation of the structure to future periods is subject to the risk that it may become inadequate because of changes in conditions or that the effectiveness of the design and operation may deteriorate.
Our consideration of the internal control structure would not necessarily disclose all matters in the internal control structure that might be material weaknesses under standards established by the American Institute of Certified Public Accountants. A material weakness is a condition in which the design or operation of the specific internal control structure elements does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. However, we noted no matters involving the internal control structure, including procedures for safeguarding securities, that we consider to be material weaknesses as defined above as of October 31, 1995.
This report is intended solely for the information and use of management and the Securities and Exchange Commission. | NSAR-B/A | EX-99 | 1996-01-12T00:00:00 | 1996-01-12T10:46:52 |
0000950168-96-000043 | 0000950168-96-000043_0002.txt | If the registered owner of this Note (as indicated below) is The Depository Trust Company (the "Depositary") or a nominee of the Depositary, this Note is a Global Security and the following legend is applicable. THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS SECURITY IS NOT EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE 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) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein.1
THIS NOTE IS NOT A SAVINGS ACCOUNT OR A DEPOSIT, IS NOT AN OBLIGATION OF OR GUARANTEED BY ANY BANKING OR NONBANKING AFFILIATE OF THE CORPORATION AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
MEDIUM-TERM SENIOR NOTE, SERIES E
ORIGINAL ISSUE DATE: BASE RATE: STATED MATURITY DATE: (check one) FINAL MATURITY DATE: ___CD Rate INITIAL INTEREST RATE: ___Commercial Paper Rate INDEX MATURITY FOR INITIAL ___LIBOR ____________ INTEREST RATE (IF DIFFERENT): ___Federal Funds Rate INDEX MATURITY FOR FINAL ___Treasury Rate INTEREST PAYMENT PERIOD ___CMT Rate (IF DIFFERENT): CMT Telerate Page:____ SPREAD MULTIPLIER: ___Eleventh District Cost MAXIMUM INTEREST RATE: of Funds Rate INTEREST PAYMENT DATES: INTEREST RATE RESET DATES: [ ] This Note is a Renewable INTEREST RATE RESET PERIOD: Note. INITIAL REDEMPTION DATE: See Attached Rider. INITIAL REDEMPTION PERCENTAGE: ANNUAL REDEMPTION PERCENTAGE REDUCTION: OPTIONAL PAYMENT DATE(S): CALCULATION AGENT: [ ] This Note is an ADDITIONAL TERMS: Extendible Note. See Attached Rider.
NationsBank Corporation, a corporation duly organized and existing under the laws of the State of North Carolina (herein called the "Corporation," which term includes any successor corporation under the Indenture referred to on the reverse hereof), for value received, hereby promises to pay to or registered assigns, the principal sum of ________________ DOLLARS on the Stated Maturity Date specified above (except to 1 Applies only if this Note is a Global Security.
the extent redeemed or repaid prior to the Stated Maturity Date), and to pay interest thereon at a rate per annum equal to the Initial Interest Rate specified above until the Initial Interest Reset Date specified above and thereafter at a rate determined in accordance with the provisions on the reverse hereof, depending upon the appropriate Base Rate and Index Maturity specified above, until the principal hereof is paid or duly made available for payment. The Corporation will pay interest on the Interest Payment Dates specified above, commencing with the first Interest Payment Date next succeeding the Original Issue Date specified above, unless the Original Issue Date occurs between a Regular Record Date, as defined below, and the next succeeding Interest Payment Date, in which case commencing on the Interest Payment Date following the next succeeding Regular Record Date, and on the Stated Maturity Date or Final Maturity Date shown above (or any Redemption Date as defined on the reverse hereof or any Optional Repayment Date with respect to which any such option has been exercised, each such Stated Maturity Date, Final Maturity Date, Redemption Date and Optional Repayment Date being herein referred to as a "Maturity Date" with respect to the principal repayable on such date). Interest on this Note will accrue from the Original Issue Date specified above until the principal amount is paid and will be computed as hereinafter described. Interest payable on this Note on any Interest Payment Date or the Maturity Date will include interest accrued from and including the next preceding Interest Payment Date in respect of which interest has been paid or duly provided for or, if no interest has been paid, from the Original Issue Date specified above, to but excluding such Interest Payment Date or Maturity Date, as the case may be; provided, however, that if the Interest Rate Reset Period with respect to this Note is daily or weekly, interest payable on any Interest Payment Date or the Maturity Date will include interest accrued from but excluding the Regular Record Date through which interest has been paid to and including the Regular Record Date next preceding such Interest Payment Date, except that interest payable on any such Maturity Date will include interest accrued to, but excluding, such Maturity Date. If any Interest Payment Date falls on a day which is not a Business Day, as defined below, such Interest Payment Date shall be the following day that is a Business Day, except that if the Base Rate is LIBOR, if such next Business Day falls in the next succeeding calendar month, such Interest Payment Date will be the preceding day that is a Business Day; and if the Maturity Date falls on a day which is not a Business Day, principal or interest payable with respect to such Maturity Date will be paid on the next succeeding Business Day with the same force and effect as if made on such Maturity Date, and no additional interest shall accrue for the period from and after such Maturity Date. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the person in whose name this Note (or one or more predecessor Notes evidencing all or a portion of the same debt as this Note) is registered at the close of business on the date 15 calendar days prior to such Interest Payment Date, whether or not a Business Day (the
"Regular Record Date"); provided, however, that the first payment of interest on any Note with an Original Issue Date, as specified above, between a Regular Record Date and an Interest Payment Date or on an Interest Payment Date will be made on the Interest Payment Date following the next succeeding Regular Record Date to the person in whose name this Note is registered at the close of business on such next succeeding Regular Record Date; and provided, further, that interest payable on the Maturity Date will be payable to the person to whom the principal hereof shall be payable. Any such interest not punctually paid or duly provided for shall be payable as provided in the Indenture. As used herein, "Business Day" means any day, other than a Saturday or Sunday, that (i) is not a day on which banking institutions are generally authorized or obligated by law to close in The City of New York and, (ii) if the Base Rate is LIBOR, is a day on which dealings in deposits on U.S. dollars are transacted in the London interbank market.
The principal of and interest on this Note are payable in immediately available funds in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts at the office or agency of the Corporation designated as provided in the Indenture; provided, however, that interest may be paid, at the option of the Corporation, by check mailed to the person entitled thereto at his address last appearing on the registry books of the Corporation relating to the Notes. Notwithstanding the preceding sentence, payments of principal of and interest payable on the Maturity Date will be made by wire transfer of immediately available funds to a designated account maintained in the United States upon (i) receipt of written notice by the Trustee from the holder hereof not less than one Business Day prior to the due date of such principal and (ii) presentation of this Note to The Bank of New York, as Issuing and Paying Agent, at 101 Barclay Street, New York, New York 10286 (the "Corporate Trust Office").
Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which shall have the same effect as though fully set forth at this place.
Unless the Certificate of Authentication hereon has been executed by the Trustee or an Authenticating Agent on behalf of the Trustee by manual signature, this Note shall not be entitled to any benefit under such Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Corporation has caused this Instrument to be duly executed, by manual or facsimile signature, under its corporate seal or a facsimile thereof.
[SEAL] Title: Senior Vice President ATTEST:
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.
FIRST TRUST OF NEW YORK, NATIONAL
By: The Bank of New York, as
MEDIUM-TERM SENIOR NOTE, SERIES E
This Medium-Term Note is one of a duly authorized series of Securities of the Corporation unlimited in aggregate principal amount (herein called the "Notes") issued and to be issued under an Indenture dated as of January 1, 1995, (herein called the "Indenture"), between the Corporation and First Trust of New York, National Association as successor Trustee to BankAmerica National Trust Company, (herein called the "Trustee,") to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights thereunder of the Corporation, the Trustee and the holders of the Notes, and the terms upon which the Notes are, and are to be, authenticated and delivered. This Note is also one of the Notes designated as the Corporation's Senior Medium-Term Notes, Series E (herein called the "Notes"), limited in aggregate principal amount to $1,500,000,000. The Notes may bear different dates, mature at different times, bear interest at different rates and vary in such other ways as are provided in the Indenture.
This Note is not subject to any sinking fund.
This Note may be subject to repayment at the option of the holder only if the Optional Repayment Date(s) are indicated on the face hereof. IF NO OPTIONAL REPAYMENT DATES ARE SET FORTH ON THE FACE HEREOF, THIS NOTE MAY NOT BE SO REPAID AT THE OPTION OF THE HOLDER HEREOF PRIOR TO THE STATED MATURITY DATE. On any Optional Repayment Date, this Note shall be repayable in whole or in part in increments of $1,000 at the option of the holder hereof at a repayment price equal to 100% of the principal amount to be repaid, together with interest thereon payable to the date of repayment. For this Note to be repaid in whole or in part at the option of the holder hereof, this Note must be received, with the form below entitled "Option to Elect Repayment" duly completed, by the Trustee/Paying Agent at the Corporate Trust Office, or such other address of which the Corporation shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 days prior to an Optional Repayment Date. Exercise of such repayment option by the holder hereof shall be irrevocable.
This Note may be redeemed at the option of the Corporation on any date on and after the Initial Redemption Date, if any, specified on the face hereof (the "Redemption Date"). IF NO INITIAL REDEMPTION DATE IS SET FORTH ON THE FACE HEREOF, THIS NOTE MAY NOT BE REDEEMED AT THE OPTION OF THE CORPORATION PRIOR TO THE STATED MATURITY DATE. On and after the Initial Redemption Date, if any, this Note may be redeemed at any time in whole or from time to time in part in increments of $1,000 at the option of the Corporation at the applicable Redemption Price (as defined below) together with interest thereon payable to the Redemption Date, on notice given not more than 60 nor less than 30 days prior to the Redemption Date. In the event of redemption of this Note in part only, a new Note for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the surrender hereof.
If this Note is redeemable at the option of the Corporation, the "Redemption Price" shall initially be the Initial Redemption Percentage, specified on the face hereof, of the principal amount of this Note to be redeemed and shall decline at each anniversary of the Initial Redemption Date by the Annual Redemption Percentage Reduction, if any, specified on the face hereof, of the principal amount to be redeemed until the Redemption Price is 100% of such principal amount.
Accrued interest hereon shall be calculated by multiplying the face amount hereof by an accrued interest factor. Such accrued interest factor shall be computed by adding the interest factor calculated for each day from and including the Original Issue Date, or from but excluding the last date to which interest has been paid, as the case may be, to and including the date for which accrued interest is being calculated. The interest factor (expressed as a decimal) for each such day shall be computed by dividing the interest rate in effect on such day by 360 or, in the case of Notes having the Treasury Rate or the CMT Rate as their Base Rate, by the actual number of days in the year.
The Base Rate (as defined herein) with respect to this Note may be (i) the CD Rate, (ii) the Commercial Paper Rate, (iii) LIBOR, (iv) the Federal Funds Rate, (v) the Prime Rate, (vi) the Treasury Rate, (vii) the CMT Rate, (viii) the Eleventh District Cost of Funds Rate or (ix) such other rate as will be described on the face hereof and a rider to this Note.
Except as described below, this Note will bear interest at the rate determined by reference to the appropriate interest rate basis (the "Base Rate") and Index Maturity shown on the face hereof (i) plus or minus the Spread, if any, or (ii) multiplied by the Spread Multiplier, if any, specified on the face hereof. The interest rate in effect on each day shall be (a) if such day is an Interest Reset Date, the interest rate determined as of the Interest Determination Date (as defined below) pertaining to such Interest Reset Date or (b) if such day is not an Interest Reset Date, the interest rate determined as of the Interest Determination Date pertaining to the next preceding Interest Reset Date, provided that (i) the interest rate in effect from the Original Issue Date to the first Interest Reset Date shall be the Initial Interest Rate specified on the face hereof, and (ii) the interest rate in effect for the ten calendar days immediately prior to the Maturity Date shall be the rate in effect on the tenth calendar day preceding such Maturity Date. If any Interest
Reset Date would otherwise be a day that is not a Business Day, such Interest Reset Date shall be postponed to the next day that is a Business Day, except that if the Base Rate specified on the face hereof is LIBOR, if such next Business Day is in the next succeeding calendar month, such Interest Reset Date shall be the immediately preceding Business Day. The term "Final Interest Payment Period" means the period from the final Interest Reset Date to the Maturity Date.
The Interest Determination Date with respect to any Note that has as its Base Rate the CD Rate, the Commercial Paper Rate, the Federal Funds Rate, the Prime Rate or the CMT Rate will be the second Business Day preceding the Interest Reset Date. The Interest Determination Date with respect to LIBOR shall be the second London Banking Day (as defined below) preceding the Interest Reset Date. The Interest Determination Date with respect to the Eleventh District Cost of Funds Rate will be the last Business Day of the month immediately preceding such Interest Reset Date in which the Federal Home Loan Bank of San Francisco (the "FHLB") publishes such Index (as defined below); and the Interest Determination Date with respect to the Treasury Rate shall be the day of the week in which the Interest Reset Date falls on which Treasury bills of the Index Maturity specified on the face hereof normally would be auctioned; provided, however, that if as a result of a legal holiday an auction is held on the Friday of the week preceding the Interest Reset Date, the related Interest Determination Date shall be such preceding Friday; and provided, further, that if an auction shall fall on any Interest Reset Date then the Interest Reset Date shall instead be the first Business Day following such auction.
The "Calculation Date" pertaining to any Interest Determination Date shall be the earlier of (i) the tenth calendar day after such Interest Determination Date or, if such day is not a Business Day, the next succeeding Business Day, or (ii) the Business Day next preceding the applicable Interest Payment Date or Maturity Date, as the case may be.
All percentages resulting from any calculation on the Notes will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward, and all dollar amounts used in or resulting from such calculation on the Notes will be rounded to the nearest cent (with one-half cent being rounded upward).
Determination of CD Rate. CD Rate means, with respect to an Interest Determination Date (a "CD Rate Interest Determination Date"), the rate on such CD Rate Interest Determination Date for negotiable certificates of deposit having the Index Maturity specified on the face hereof, as such rate is published by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") in "Statistical Release H.15(519), Selected
Interest Rates," or any successor publication of the Federal Reserve Board ("H.15(519)"), under the heading "CDs (Secondary Market)," or, if not so published by 3:00 P.M., New York City time, on the Calculation Date pertaining to such CD Rate Interest Determination Date, the CD Rate will be the rate on such CD Rate Interest Determination Date for negotiable certificates of deposit of the Index Maturity specified on the face hereof, as published by the Federal Reserve Bank of New York in its daily statistical release "Composite 3:30 P.M. Quotations for U.S. Government Securities" ("Composite Quotations") under the heading "Certificates of Deposit." If such rate is not published in either H.15(519) or the Composite Quotations by 3:00 P.M., New York City time, on such Calculation Date, then the CD Rate on such CD Rate Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the secondary market offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest Determination Date, of three leading nonbank dealers in negotiable U.S. dollar certificates of deposit in The City of New York selected by the Calculation Agent for negotiable certificates of deposit of major United States money center banks with a remaining maturity closest to the Index Maturity specified on the face hereof in denominations of $5,000,000; provided, however, that if the dealers selected as aforesaid by the Calculation Agent are not quoting as set forth above, the CD Rate for such CD Rate Interest Determination Date will be the CD Rate in effect on such CD Rate Interest Determination Date.
Determination of Commercial Paper Rate. The Commercial Paper Rate means, with respect to an Interest Determination Date (a "Commercial Paper Rate Interest Determination Date"), the Money Market Yield (as defined below) of the rate on such date for commercial paper having the Index Maturity specified on the face hereof as published in H.15(519) under the heading "Commercial Paper." In the event such rate is not published by 3:00 P.M., New York City time, on the Calculation Date pertaining to such Commercial Paper Rate Interest Determination Date, the Commercial Paper Rate shall be the Money Market Yield on such Commercial Paper Rate Interest Determination Date of the rate for commercial paper having the Index Maturity specified on the face hereof as published in Composite Quotations under the heading "Commercial Paper." If such rate is not published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on such Calculation Date, the Commercial Paper Rate for that Commercial Paper Rate Interest Determination Date shall be calculated by the Calculation Agent and shall be the Money Market Yield of the arithmetic mean of the offered rates as of 11:00 A.M., New York City time, on such Commercial Paper Rate Interest Determination Date of three leading dealers of commercial paper in The City of New York selected by the Calculation Agent for commercial paper of the Index Maturity specified on the face hereof placed for an industrial issuer whose bond rating is "AA", or the equivalent, by a nationally recognized securities rating agency; provided, however, that if the dealers selected as aforesaid by the Calculation Agent are not quoting as set forth above, the Commercial Paper Rate with respect to such Commercial Paper Rate Interest Determination Date will be the Commercial Paper Rate then in effect on such Commercial Paper Rate Interest Determination Date.
"Money Market Yield" shall be the yield (expressed as a percentage rounded to the nearest one ten-thousandth of a percent, with five one hundred-thousandths of a percent rounded upward) calculated in accordance with the following formula:
Money Market Yield = [(D x 360)/(360-(D x M))]100
where "D" refers to the per annum rate for commercial paper quoted on a bank discount basis and expressed as a decimal, and "M" refers to the actual number of days in the interest period for which interest is being calculated.
Determination of LIBOR. LIBOR means the rate determined by the Calculation Agent in accordance with the following provisions:
(i) With respect to an Interest Determination Date (a "LIBOR Interest Determination Date"), LIBOR will be "LIBOR Telerate" unless "LIBOR Reuters" is specified on the face of this Note. "LIBOR Telerate" is the rate for deposits in the LIBOR Currency (as defined below) having the Index Maturity specified on the face hereof that appears on the Designated LIBOR Page (as defined below) specified on the face hereof as of 11:00 A.M. London time, on that LIBOR Interest Determination Date. "LIBOR Reuters" is that rate which is the arithmetic mean of the offered rates (unless the specified Designated LIBOR Page by its terms provides only for a single rate, in which case such single rate shall be used) for deposits in the LIBOR Currency having the Index Maturity specified on the face hereof that appear on the Designated LIBOR Page specified on the face hereof as of 11:00 A.M. London time, on that LIBOR Interest Determination Date, if at least two such offered rates appear (unless, as aforesaid, only a single rate is required) on such Designated LIBOR Page. If LIBOR cannot be determined under this clause (i), LIBOR in respect of the related LIBOR Interest Determination Date will be determined as if the parties had specified the rate described in clause (ii) below.
(ii) With respect to a LIBOR Interest Determination Date on which the applicable LIBOR rate cannot be determined under clause (i) above, the Calculation Agent will request the principal London offices of each of four major reference banks
London interbank market, as selected by the Calculation Agent to provide the Calculation Agent with its offered quotation for deposits in the LIBOR Currency for the period of the Index Maturity specified on the face hereof to prime banks in the London interbank market commencing on the applicable Interest Reset Date at approximately 11:00 A.M., London time, on such LIBOR Interest Determination Date and in a principal amount that is representative for a single transaction in such LIBOR Currency in such market at such time. If at least two such quotations are provided, LIBOR determined on such LIBOR Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two such quotations are provided, LIBOR for such LIBOR Interest Determination Date will be the arithmetic mean of the rates quoted at approximately 11:00 A.M. in the applicable Principal Financial Center (as defined below), on such LIBOR Interest Determination Date by three major banks in such Principal Financial Center selected by the Calculation Agent for loans in the LIBOR Currency to leading European banks, having the Index Maturity specified on the face hereof commencing on the applicable Interest Reset Date and in a principal amount that is representative for a single transaction in such LIBOR Currency in such market at such time; provided, however, that if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR determined on such LIBOR Interest determination Date will be LIBOR then in effect on such LIBOR Interest Determination Date.
"LIBOR Currency" means the currency (including composite currencies) specified on the face hereof for which LIBOR shall be calculated. If no such currency is specified on the face hereof, the LIBOR Currency shall be U.S. dollars.
"Designated LIBOR Page" means either (a) if "LIBOR Telerate" is specified on the face hereof, the display on the Dow Jones Telerate Service for the purpose of displaying the London interbank offered rates of major banks for the applicable LIBOR Currency, or (b) if "LIBOR Reuters" is specified on the face hereof, the display on the Reuters Monitor Money Rates Service for the purpose of displaying the London interbank rates of major banks for the applicable LIBOR Currency. If neither LIBOR Telerate nor LIBOR Reuters is specified on the face hereof, LIBOR for the applicable LIBOR Currency will be determined as if LIBOR Telerate (and, if the U.S. dollar is the LIBOR Currency, Page 3750) had been specified.
"Principal Financial Center" shall generally be the capital city of the country of the specified LIBOR Currency, except that with respect to U.S. dollars, Deutsche Marks and ECUs, the Principal Financial Center shall be The City of New York, Frankfurt and Luxembourg, respectively.
Determination of Federal Funds Rate. The Federal Funds Rate means, with respect to an Interest Determination Date (a "Federal
Funds Rate Interest Determination Date"), the rate on that date for Federal Funds as published in H.15(519) under the heading "Federal Funds (Effective)." If H.15(519) is not so published by 3:00 P.M., New York City time, on the Calculation Date pertaining to such Federal Funds Rate Interest Determination Date, the Federal Funds Rate will be the rate on such Federal Funds Rate Interest Determination Date as published in Composite Quotations under the heading "Federal Funds/Effective Rate." If such rate is not yet published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the Calculation Date pertaining to such Federal Funds Rate Interest Determination Date, the Federal Funds Rate for such Federal Funds Rate Interest Determination Date will be calculated by the Calculation Agent and will be the arithmetic mean of the rates for the last transaction in overnight Federal Funds as of 9:00 A.M., New York City time, on such Federal Funds Rate Interest Determination Date quoted by each of three leading brokers of Federal Funds transactions in The City of New York selected by the Calculation Agent; provided, however, that if fewer than three such brokers are so quoting such rates, the Federal Funds Rate with respect to such Federal Funds Rate Interest Determination Date will be the Federal Funds Rate then in effect on such Federal Funds Rate Interest Determination Date.
Determination of Prime Rate. Prime Rate means, with respect to an Interest Determination Date (a "Prime Rate Interest Determination Date"), the rate set forth on such date in H.15(519) under the heading "Bank Prime Loan," or if not so published prior to 9:00 A.M. New York City time, on the Calculation Date pertaining to such Prime Rate Interest Determination Date, then the Prime Rate will be determined by the Calculation Agent and will be the arithmetic mean of the rates of interest publicly announced by each bank that appears on the Reuters Screen U.S. Prime 1 (as defined below) as such bank's prime rate or base lending rates as in effect for that Prime Rate Interest Determination Date. If fewer than four such rates but more than one such rate appear on the Reuters Screen U.S. Prime 1 for the Prime Rate Interest Determination Date, the Prime Rate will be determined by the Calculation Agent and will be the arithmetic mean of the prime rates, quoted on the basis of the actual number of days in the year divided by a 360-day year, as of the close of business on such Prime Rate Interest Determination Date by four major money center banks in The City of New York as selected by the Calculation Agent. If fewer than two such rates appear on the Reuters Screen U.S. Prime 1, the Prime Rate will be determined by the Calculation Agent as of the close of business on the Prime Rate Interest Determination Date, on the basis of the prime rates, as of the close of business on the Prime Rate Interest Determination Date, furnished in The City of New York by the appropriate number of substitute banks or trust companies organized and doing business under the laws of the United States, or any State thereof, having total equity capital of at least $500 million and being subject to supervision or examination by Federal or State authority, selected by the Calculation Agent to provide such rate or rates; provided, however, that if the banks selected as aforesaid are not quoting as mentioned in this sentence, the Prime Rate for such Prime Rate Interest Determination Date will be the Prime Rate then in effect on such Prime Rate Interest Determination Date.
"Reuters Screen U.S. Prime 1" means the display designated as page "U.S. Prime 1" on the Reuters Monitor Money Rates Service (or such other page as may replace the U.S. Prime 1 page on that service for the purpose of displaying prime rates or base lending rates of major United States banks).
Determination of Treasury Rate. Treasury Rate means, with respect to an Interest Determination Date (a "Treasury Rate Interest Determination Date"), the rate for the auction held on such Treasury Rate Interest Determination Date of direct obligations of the United States ("Treasury Bills") having the Index Maturity specified on the face hereof, as published in H.15(519) under the heading "U.S. Government Securities -- Treasury Bills -- auction average (investment)." If such rate is not published by 3:00 P.M., New York City time, on the Calculation Date pertaining to such Treasury Rate Interest Determination Date, the Treasury Rate will be the auction average rate (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) on such Treasury Rate Interest Determination Date as otherwise announced by the United States Department of the Treasury. In the event that the results of the auction of Treasury bills having the Index Maturity specified on the face hereof are not reported as provided by 3:00 P.M., New York City time, on such Calculation Date, or if no such auction is held on such Treasury Rate Interest Determination Date, then the Treasury Rate for such Treasury Rate Interest Determination Date shall be a yield to maturity (expressed as a bond equivalent, on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean of the secondary market bid rates, as of approximately 3:30 P.M., New York City time, on such Treasury Rate Interest Determination Date, of three leading primary United States government securities dealers selected by the Calculation Agent, for the issue of Treasury bills with a remaining maturity closest to the Index Maturity specified on the face hereof; provided, however, that if the dealers selected as aforesaid by the Calculation Agent are not quoting as mentioned in this sentence, the Treasury Rate with respect to such Treasury Rate Interest Determination Date will be the Treasury Rate then in effect on such Treasury Rate Interest Determination Date.
Determination of CMT Rate. CMT Rate means with respect to an Interest Determination Date relating to a CMT Rate Note or any Floating Rate Note for which the interest rate is determined by reference to the CMT Rate (a "CMT Rate Interest Determination Date"), the rate displayed on the designated CMT Telerate under the caption "Treasury Constant Maturities . . . Federal Reserve Board Release H.15 . . . Mondays approximately 3:45 p.m.," under the column for the Designated CMT Maturity Index for (i) if the Designated CMT Telerate Page is 7055, the rate on such CMT Rate Interest Determination Date and (ii) if the Designated CMT Telerate Page is 7052, the week, or the month, as applicable, ended immediately preceding the week in which the Related CMT Rate Interest Determination Date occurs. If such rate is no longer displayed on the relevant page, or if not displayed by 3:00 p.m., New York City time, on the related Calculation Date, then the CMT Rate for such CMT Rate Interest Determination Date will be such Treasury Constant Maturity Rate for the Designated CMT Maturity Index as published in the relevant H.15(519). If such rate is no longer published, or if not published by 3:00 p.m. New York City time, on the related Calculation Date, then the CMT Rate for such CMT Rate Interest Determination Date will be such Treasury Constant Maturity Rate for the Designated CMT Maturity Index (or other United States Treasury rate for the Designated CMT Maturity Index) for the CMT Rate Interest Determination Date with respect to such Interest Reset Date as may then be published by either the Board of Governors of the Federal Reserve System or the United States Department of the Treasury that the Calculation Agent determines to be comparable to the rate formerly displayed on the Designated CMT Telerate Page and published in the relevant H.15(519). If such information is not provided by 3:00 p.m., New York City time, on the related Calculation Date, then the CMT Rate for the CMT Rate Interest Determination Date will be calculated by the Calculation Agent and will be a yield to maturity, based on the arithmetic mean of the secondary market closing offer side prices as of approximately 3:30 p.m., New York City time, on the CMT Interest Determination Date reported, according to their written records, by three leading primary United States government securities dealers (each a "Referenced Dealer") in The City of New York selected by the Calculation Agent (from five such Referenced Dealers selected by the Calculation Agent and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for the most recently issued direct, non-callable fixed rate obligations of the United States ("Treasury Note") with an original maturity of approximately the Designated CMT Maturity Index and a remaining term to maturity of not less than such Designated CMT Maturity Index minus one year. If the Calculation Agent cannot obtain three such Treasury Note quotations, the CMT Rate for such CMT Rate Interest Determination Date will be calculated by the Calculation Agent and will be a yield to maturity based on the arithmetic mean of the secondary market side offer prices as of approximately 3:30 p.m. New York City time, on the CMT Rate Interest Determination Date of three Referenced Dealers in The City of New York (from five such Referenced Dealers selected by the Calculation Agent and eliminating the highest quotation (or, in the even of equality, one of the highest) and lowest quotation (or, in the event of equality, one of the lowest)), for Treasury Notes with original maturity of the number of years that is the next highest to the Designated CMT Maturity Index and a remaining term to maturity closest to the Designated CMT Maturity Index and in an amount of at least $100,000,000. If three or four (and not five) of such Referenced Dealers are quoting as described above, then the CMT Rate will be based on the arithmetic mean of the offer prices obtained and neither the highest nor lowest of such quotes will be eliminated; provided however, that if fewer than three Referenced Dealers selected by the Calculation Agent are quoting as described herein, the CMT Rate will be the CMT Rate in effect on such CMT Rate Interest Determination Date. If two Treasury Notes with an original maturity as described in the third preceding sentence have remaining terms to maturity equally close to the Designated CMT Maturity Index, the quotes for the Treasury Rate Note with the shorter remaining term to maturity will be used.
"Designated CMT Telerate Page" means the display on the Dow Jones Telerate Service on the page designated on the face of this Note (or any other page as may replace such page on that service for the purpose of displaying Treasury Constant Maturities as reported in H.15(519)), or the purpose of displaying Treasury Constant Maturity as reported in H.15(519). If no such page is specified, the Designated CMT Telerate Page shall be 7052, for the most recent week.
"Designated CMT Maturity Index" means the original period to maturity of the U.S. Treasury Securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years) specified on the fact of this Note with respect to which the CMT Rate will be calculated. If no such maturity is specified on the face of this Note, the Designated CMT Maturity Index shall be two years.
Determination of Eleventh District Cost of Funds Rate. Eleventh District Cost of Funds Rate means, with respect to an Interest Determination Date relating to an Eleventh District Cost of Funds Rate (an "Eleventh District Cost of Funds Rate Interest Determination Date"), the rate equal to the monthly weighted average cost of funds for the calendar month preceding such Eleventh District Cost of Funds Rate Interest Determination Date as set forth under the caption "Eleventh District" on Telerate page 7058 as of 11:00 a.m., San Francisco time, on such Eleventh District Cost of Funds Rate Interest Determination Date. If such rate does not appear on the Telerate page 7058 on any related Eleventh District Cost of Funds Rate Interest Determination Date, the Eleventh District Cost of Funds Rate for such Eleventh District Cost of Funds Rate Interest Determination Date shall be the monthly weighted average cost of funds paid by member institutions of the Eleventh Federal Home Loan Bank District that was most recently announced (the "Index") by the FHLB of San Francisco as such cost of funds for the calendar month preceding the date of such announcement. If the FHLB of San Francisco fails to announce such rate for the calendar month next preceding such Eleventh District Cost of Funds Rate Interest Determination Date, then the Eleventh District Cost of Funds Rate for such Eleventh District Cost of Funds Rate Interest Determination Date will be the Eleventh District Cost of Funds Rate in effect on such Eleventh District Cost of Funds Rate Interest Determination Date. "Telerate Page 7058" means the display on the Dow Jones Telerate Service on such page (or such other page as may replace such page on the service for the purpose of displaying the Eleventh District Cost of Funds Rate) for the purpose of displaying the monthly average cost of the funds paid by member institutions of the Eleventh Federal Home Loan Bank District.
Notwithstanding the foregoing, the interest rate hereon shall not be greater than the Maximum Interest Rate, if any, or less than the Minimum Interest Rate, if any, specified on the face hereof. The Calculation Agent shall calculate the interest rate hereon in accordance with the foregoing on or before each Calculation Date. The interest rate on this Note will in no event be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application.
At the request of the holder hereof, the Calculation Agent will provide to the holder hereof the interest rate hereon then in effect and, if determined, the interest rate which will become effective as of the next Interest Reset Date.
If an Event of Default (defined in the Indenture as (i) the Corporation's failure to pay principal of (or premium, if any, on) the Notes when due, or to pay interest on the Notes within 30 days after the same becomes due, (ii) the Corporation's breach of its other covenants contained in this Note or the Indenture, which breach is not cured within 90 days after written notice by the Trustee or the holders of at least 25% in outstanding principal amount of all Securities issued under the Indenture and affected thereby, and (iii) certain events involving the bankruptcy, insolvency or liquidation of the Corporation) shall occur with respect to the Notes, the principal of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Corporation and the rights of the holders of the Notes under the Indenture at any time by the Corporation with the consent of the holders of not less than 66 2/3% in aggregate principal amount of the Notes then outstanding and all other Securities then outstanding under the Indenture and affected by such amendment and modification. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Notes then outstanding and all other Securities then outstanding under the Indenture and affected thereby, on behalf of the holders of all Securities, to waive compliance by the Corporation with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the holder of this Note shall be conclusive and binding upon such holder and upon all future holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange here for or in lieu hereof whether or not notation of such consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Corporation, which is absolute and unconditional, to pay the principal of and interest on this Note at the time, place and rate, and in the coin or currency, herein prescribed.
No recourse shall be had for the payment of the principal of or the interest on this Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemented thereto, against any incorporator, stockholder, officer or director, as such, past, present or future, of the Corporation or any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for issue hereof, expressly waived and released.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note may be registered on the registry books of the Corporation relating to the Notes, upon surrender of this Note for registration of transfer at the office or agency of the Corporation designated by it pursuant to the Indenture, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Corporation and the Trustee duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.
The Notes are issuable only as registered Notes without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture, and subject to certain limitations therein set forth, Notes are exchangeable for a like aggregate principal amount of Notes of different authorized denominations, as requested by the holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange, but the Corporation may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment for registration of transfer of this Note, the Corporation, the Trustee and any agent of the Corporation or the Trustee may treat the entity in whose name this Note is registered as the absolute owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note be overdue, and neither the Corporation, the Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
[NOTES ISSUED AND OUTSTANDING PURSUANT TO A BOOK-ENTRY SYSTEM SHALL BE DEEMED TO CONTAIN THE FOLLOWING PARAGRAPH: The Notes are being issued by means of a book-entry system with no physical distribution of certificates to be made except as provided in the Indenture. The book-entry system maintained by The Depository Trust Company ("DTC") will evidence ownership of the Notes, with transfers of ownership effected on the records of DTC and its participants pursuant to rules and procedures established by DTC and its participants. The Corporation will recognize Cede & Co., as nominee of DTC, while the registered Owner of the Notes, as the owner of the Notes for all purposes, including payment of principal and interest, notices and voting. Transfer of principal and interest to participants of DTC will be the responsibility of DTC, and transfer of principal and interest to beneficial owners of the Notes by participants of DTC will be the responsibility of such participants and other nominees of such beneficial owners. So long as the book-entry system is in effect, the selection of any Notes to be redeemed will be determined by DTC pursuant to rules and procedures established by DTC and its participants. The Corporation will not be responsible or liable for such transfers of payments or for maintaining, supervising or reviewing the records maintained by DTC, its participants or persons acting through such participants.]
The following abbreviations, when used in the inscription on the face of the interim Note, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM--as tenants in common TEN ENT-- as tenants by the entireties JT TEN-- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT--.............Custodian.......... Under Uniform Gifts to Minors Act .................................
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, the undersigned hereby sell(s),
[PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE]
Please Insert Social Security or Other Identifying Number of Assignee: ____________________________
the within Note and all rights thereunder, hereby irrevocably constituting and appointing __________________________________ Attorney to transfer said Note on the books of the Corporation, with full power of substitution in the premises.
NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement, or any change whatever and must be guaranteed.
The undersigned hereby irrevocably request(s) and instruct(s) the Corporation to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to the principal amount hereof together with interest to the repayment date, to the undersigned, at ________________________________ (Please print or typewrite name and address of the undersigned)
For this Note to be repaid, the Trustee (or the Paying Agent on behalf of the Trustee) must receive at ______________, or at such other place or places of which the Corporation shall from time to time notify the Holder of this Note, not more than 60 nor less than 30 days prior to an Optional Repayment Date, if any, shown on the face of this Note, this Note with this "Option to Elect Repayment" form duly completed.
If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be in increments of $1,000) which the Holder elects to have repaid and specify the denomination or denominations (which shall be $__________ or an integral multiple of $1,000 in excess of $__________) of the Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid).
NOTICE: The signature on this Option to Elect Repayment must Date _______________ correspond with the name as written upon the face of this Note in every enlargement or any change whatever.]
The Corporation and the purchaser of this Note have agreed that this Note is a Renewable Note which initially matures on the Stated Maturity Date shown on the face of this Note. At each Renewal Date, the maturity of this Note will be automatically extended to the corresponding New Maturity Date unless the holder of this Note delivers a completed Extension Termination Notice to the Trustee or the Paying Agent on behalf of the Trustee not less than 15 nor more than 30 days prior to the applicable Renewal Date. The Extension Termination Notice may specify all or a portion of the outstanding principal amount of the Note so long as the principal amount of the Note remaining outstanding after repayment is an integral multiple of $1,000. Upon timely delivery of such Extension Termination Notice, the term of the principal amount of this Note subject to such notice will be deemed automatically to mature on the Stated Maturity Date or the then applicable New Maturity Date, as the case may be. The remaining principal balance of such Note, if any, will be deemed to automatically be extended to the corresponding New Maturity Date but in no circumstances may such maturity be extended beyond the Final Maturity Date. Notwithstanding any such extension, the interest rate applicable to this Note will continue to be calculated as set forth in this Note.
Renewal Date (s) New Maturity Date(s)
The Corporation and the purchaser of this Note have agreed that this Note is an Extendible Note, whereby the Corporation has the option to extend the maturity of this Note by delivery to the Trustee (or any duly authorized Paying Agent) of an Extendible Option Notice under the terms of this Note as supplemented by this Extendible Note Rider.
The Corporation may exercise its option with respect to an Extendible Note by delivery to the Trustee (or any duly appointed Paying Agent) of an Extendible Option Notice at least 45 but not more than 60 days prior to the Stated Maturity Date originally in effect with respect to such Note or, if the Stated Maturity Date of such Note has already been extended, the Extended Maturity Date then in effect. After such receipt and not later than 40 days prior to the Stated Maturity Date or an Extended Maturity Date, as the case may be (each, a "Maturity Date"), the Trustee (or any duly appointed Paying Agent) will mail first class mail, postage prepaid, to the holder of such Extendible Note a notice (the "Extension Notice") relating to such extension period (the "Extension Period") setting forth (i) the election of the Corporation to extend the maturity of such Extendible Note, (ii) the new Extended Maturity Date, (iii) in the case of a Fixed Rate Note, the interest rate applicable to the Extension Period or, in the case of a Floating Rate Note, the Spread and/or Spread Multiplier applicable to the Extension Period, and (iv) the provisions, if any, for redemption during the Extension Period, including the date or dates on which, the period or periods during which and the price or prices at which such redemption may occur during the Extension Period. Upon the mailing by the Trustee (or any duly appointed Paying Agent) of an Extension Notice to the holder of an Extendible Note, the maturity of such Note shall be extended automatically as set forth in the Extension Notice, and, except as modified by the Extension Notice and as described in the next paragraph, such Extendible Note will have the same terms as prior to the mailing of such Extension Notice.
Notwithstanding the foregoing, not later than 20 days prior to the Maturity Date for an Extendible Note (or, if such date is not a Business Day, on the immediately succeeding Business Day), the Corporation may, at its option, revoke the interest rate, in the case of a Fixed Rate Note, or the Spread and/or Spread Multiplier, in the case of a Floating Rate Note, provided for in the Extension Notice and establish a higher interest rate, in the case of a Fixed Rate Note, or a higher Spread and/or Spread Multiplier, in the case of a Floating Rate Note, for the Extension period by mailing or causing the Trustee (or any duly appointed Paying Agent) to mail notice of such higher interest rate or higher Spread and/or Spread Multiplier, as the case may be, first class mail, postage prepaid, to the holder of such Note. Such notice shall be irrevocable. All Extendible Notes with respect to which the Maturity Date is extended will bear such higher interest rate, in the case of a Fixed Rate Note, or higher Spread and/or Spread Multiplier, in the case of a Floating Rate Note, for the Extension Period.
If the Corporation elects to extend the maturity of an Extendible Note, the holder of such Note will have the option to elect repayment of such Note by the Corporation on the Maturity Date then in effect at a price equal to the principal amount thereof plus any accrued and unpaid interest to such date. In order for an Extendible Note to be so repaid on the Maturity Date, the Corporation must receive, at least 15 days but not more than 30 days prior to the Maturity Date then in effect with respect to the Note, (i) the Note with the form "Option to Elect Repayment" on the reverse of the Note duly completed or (ii) a telegram, telex, facsimile transmission or a letter from a member of a national securities exchange, or the National Association of Securities Dealers, Inc. or a commercial bank or trust company in the United States setting forth the name of the holder of the Note, the principal amount of the Note, the principal amount of the Note to be repaid, the certificate number or a description of the tenor and terms of the Note, a statement that the option to elect repayment is being exercised thereby and a guarantee that the Note to be repaid, together with the duly completed form entitled "Option to Elect Repayment" attached to the Note, will be received by the Trustee (or any duly appointed Paying Agent) not later than the fifth Business Day after the date of such telegram, telex, facsimile transmission or letter, provided, however, that such telegram, telex, facsimile transmission or letter shall only be effective if such Note and duly completed form are received by the Trustee (or any duly appointed Paying Agent) by such fifth Business Day. Such option may be exercised by the holder of an Extendible Note for less than the aggregate principal amount of the Note then outstanding, provided that the principal amount of the Note remaining outstanding after repayment is an integral multiple of $1,000. | 8-K | EX-4 | 1996-01-12T00:00:00 | 1996-01-12T15:18:58 |
0000774352-96-000006 | 0000774352-96-000006_0000.txt | <DESCRIPTION>SERIES 1996-S4 8-K COLLATERAL TERM SHEET
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: January 10, 1996 (Date of earliest event reported)
Residential Funding Mortgage Securities I, Inc. (Exact name of registrant as specified in its charter)
Other Juris- (Commission (I.R.S. Employer diction of File Number) Identification No.)
8400 Normandale Lake Blvd., Suite 600, Minneapolis, (Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code:
On February 29, 1996, the Registrant expects to cause the issuance and sale of Mortgage Pass-Through Certificates, Series 1996-S4 (the "Certificates") pursuant to a Pooling and Servicing Agreement to be dated as of February 1, 1996, among the Registrant, Residential Funding Corporation, as Master Servicer, and Trustee to be named.
In connection with the expected sale of the Series 1996-S4 Certificates, the Registrant has been advised by Paine Webber (the "Underwriter"), that the Underwriter has furnished to prospective investors certain collateral information with respect to the mortgage loans ("Mortgage Loans") underlying the proposed offering of the Certificates (the "Collateral Term Sheets"), which Collateral Term Sheets are being filed manually as exhibits to this report.
The Collateral Term Sheets have been provided by the Underwriter. The information in the Collateral Term Sheets is preliminary and will be superseded by the Description of the Mortgage Pool contained in the Prospectus Supplement relating to the Certificates and by any other information subsequently filed with the Securities and Exchange Commission.
The Collateral Term Sheets were prepared by the Underwriter at the request of certain prospective investors. The Collateral Term Sheets may be based on information that differs from the information set forth in the Prospectus Supplement.
In addition, the actual characteristics and performance of the Mortgage Loans underlying the Certificates may differ from the information provided in the Collateral Term Sheets, which were provided to certain investors only to give a sense of the underlying collateral which will effect the maturity, interest rate sensitivity and cash flow characteristics of the Certificates. Any difference between the collateral information in the Collateral Term Sheets and the actual characteristics of the Mortgage Loans will affect the actual yield, average life, duration, expected maturity, interest rate sensitivity and cash flow characteristics of the Certificates.
Item 7. Financial Statements, Pro Forma Financial
(b) Pro Forma Financial Information.
Exhibit No. Exhibit No. Description 1 99 Collateral Term Sheets
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf of the Registrant by the undersigned thereunto duly authorized.
By: /s/ Diane S. Wold
Item 601 (a) of Sequentially Number Exhibit No. Description Format | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T08:45:40 |
0000950168-96-000043 | 0000950168-96-000043_0001.txt | If the registered owner of this Note (as indicated below) is The Depository Trust Company (the "Depositary") or a nominee of the Depositary, this Note is a Global Security and the following legend is applicable. THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS SECURITY IS NOT EXCHANGEABLE FOR NOTES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITARY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS NOTE (OTHER THAN A TRANSFER OF THIS NOTE AS A WHOLE 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) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner hereof, Cede & Co., has an interest herein.
THIS NOTE IS NOT A SAVINGS ACCOUNT OR A DEPOSIT, IS NOT AN OBLIGATION OF OR GUARANTEED BY ANY BANKING OR NONBANKING AFFILIATE OF THE CORPORATION AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
MEDIUM-TERM SENIOR NOTE, SERIES E (Fixed Rate) CUSIP 63858R ____
NationsBank Corporation, a corporation duly organized and existing under the laws of the State of North Carolina (herein called the "Corporation," which term includes any successor corporation under the Indenture referred to on the reverse hereof), for value received, hereby promises to pay to ________
or registered assigns, the principal sum of ___________________ DOLLARS on the Stated Maturity Date specified above (except to the extent redeemed or repaid prior to the Stated Maturity Date), and to pay interest on said principal sum, semiannually in arrears on ____________ and __________ of each year (each an "Interest Payment Date"), at the Interest Rate per annum specified above, until payment of such principal sum has been made or duly provided for, commencing on the first Interest Payment Date next succeeding the Original Issue Date specified above, unless the Original Issue Date occurs between a Regular Record Date, as defined below, and the next succeeding Interest Payment Date, in which case commencing on the Interest Payment 1 Applies only if this Note is a Global Security.
Date following the next succeeding Regular Record Date, and on the Stated Maturity Date or Final Maturity Date shown above (or any Redemption Date as defined on the reverse hereof or any Optional Repayment Date with respect to which any such option has been exercised, each such Stated Maturity Date, Final Maturity Date, Redemption Date and Optional Repayment Date being herein referred to as a "Maturity Date" with respect to the principal payable on such date). Interest on this Note will accrue from the Original Issue Date specified above until the principal amount is paid and will be computed on the basis of a 360-day year of twelve 30-day months. Interest payments will be in the amount of interest accrued from and including the next preceding Interest Payment Date in respect of which interest has been paid or duly provided for or, if no interest has been paid, from the Original Issue Date specified above, to but excluding the Interest Payment Date or Maturity Date, as the case may be. If the Maturity Date or an Interest Payment Date falls on a day which is not a Business Day as defined below, principal or interest payable with respect to such Maturity Date or Interest Payment Date will be paid on the next succeeding Business Day with the same force and effect as if made on such Maturity Date or Interest Payment Date, as the case may be, and no additional interest shall accrue for the period from and after such Maturity Date or Interest Payment Date. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will be paid to the person in whose name this Note (or one or more predecessor Notes evidencing all or a portion of the same debt as this Note) is registered at the close of business on the Regular Record Date, which shall be the __________ or the __________, whether or not a Business Day, as the case may be, next preceding such Interest Payment Date; provided, however, that the first payment of interest on any Note with an Original Issue Date, as specified above, between a Regular Record Date and an Interest Payment Date or on an Interest Payment Date will be made on the Interest Payment Date following the next succeeding Regular Record Date to the person in whose name this Note is registered at the close of business on such next succeeding Regular Record Date; and provided, further, that interest payable on the Maturity Date will be payable to the person to whom the principal hereof shall be payable. Any interest not punctually paid or duly provided for shall be payable as provided in the Indenture. As used herein, "Business Day" means any day, other than a Saturday or Sunday, that is not a day on which banking institutions are generally authorized or obligated by law to close in the City of New York.
The principal of and interest on this Note are payable in immediately available funds in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts at the office or agency of the Corporation designated as provided in the Indenture; provided, however, that interest may be paid, at the option of the Corporation, by check mailed to the person entitled thereto at his address last appearing on the registry books of the Corporation relating to the Notes. Notwithstanding the preceding sentence, payments of principal of and interest payable on the Maturity Date will be made by wire transfer of immediately available funds to a designated account maintained in the United States upon (i) receipt of written notice by the Trustee from the holder hereof not less than one Business Day prior to the due date of such principal and (ii) presentation of this Note to The Bank of New York at 101 Barclay Street, New York, New York 10286 (the "Corporate Trust Office").
Reference is made to the further provisions of this Note set forth on the reverse hereof, which shall have the same effect as though fully set forth at this place.
Unless the certificate of authentication hereon has been executed by the Trustee or by an Authenticating Agent on behalf of the Trustee by manual signature, this Note shall not be entitled to any benefit under such Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Corporation has caused this Instrument to be duly executed, by manual or facsimile signature, under its corporate seal or a facsimile thereof.
[SEAL] Title: Senior Vice President
This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.
First Trust of New York, National
By: The Bank of New York,
MEDIUM-TERM SENIOR NOTE, SERIES E
This Medium-Term Note is one of a duly authorized series of Securities of the Corporation unlimited in aggregate principal amount (herein called the "Notes") issued and to be issued under an Indenture dated as of January 1, 1995 (herein called the "Indenture"), between the Corporation and First Trust of New York, National Association as successor Trustee to BankAmerica National Trust Company (herein called the "Trustee,") to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights thereunder of the Corporation, the Trustee and the holders of the Notes, and the terms upon which the Notes are, and are to be, authenticated and delivered. This Note is also one of the Notes designated as the Corporation's Senior Medium-Term Notes, Series E, limited in aggregate principal amount to $1,500,000,000. The Notes may bear different dates, mature at different times, bear interest at different rates and vary in such other ways as are provided in the Indenture.
This Note is not subject to any sinking fund.
This Note may be subject to repayment at the option of the holder on the Optional Repayment Date(s), if any, indicated on the face hereof. IF NO OPTIONAL REPAYMENT DATES ARE SET FORTH ON THE FACE HEREOF, THIS NOTE MAY NOT BE SO REPAID AT THE OPTION OF THE HOLDER HEREOF PRIOR TO THE STATED MATURITY DATE. On any Optional Repayment Date this Note shall be repayable in whole or in part in increments of $1,000 at the option of the holder hereof at a repayment price equal to 100% of the principal amount to be repaid, together with interest thereon payable to the date of repayment. For this Note to be repaid in whole or in part at the option of the holder hereof, this Note must be received, with the form entitled "Option to Elect Repayment" below duly completed, by the Trustee/Paying Agent at the Corporate Trust Office, or such other address of which the Corporation shall from time to time notify the holders of the Notes, not more than 60 nor less than 30 days prior to an Optional Repayment Date. Exercise of such repayment option by the holder hereof shall be irrevocable.
This Note may be redeemed at the option of the Corporation on any date on and after the Initial Redemption Date, if any, specified on the face hereof (the "Redemption Date"). IF NO INITIAL REDEMPTION DATE IS SET FORTH ON THE FACE HEREOF, THIS NOTE MAY NOT BE REDEEMED AT THE OPTION OF THE CORPORATION PRIOR TO THE STATED MATURITY DATE. On and after the Initial Redemption Date, if any, this Note may be redeemed at any time in whole or from time to time in part in increments of $1,000 at the option of the Corporation at the applicable Redemption Price (as defined below) together with interest thereon payable to the Redemption Date, on notice given not more than 60 nor less than 30 days prior to the Redemption Date. In the event of redemption of this Note in part only, a new Note for the unredeemed portion hereof shall be issued in the name of the holder hereof upon the surrender hereof.
If this Note is redeemable at the option of the Corporation, the "Redemption Price" shall initially be the Initial Redemption Percentage, specified on the face hereof, of the principal amount of this Note to be redeemed and shall decline at each anniversary of the Initial Redemption Date by the Annual Redemption Percentage Reduction, if any, specified on the face hereof, of the principal amount to be redeemed until the Redemption Price is 100% of such principal amount.
If an Event of Default (defined in the Indenture as (i) the Corporation's failure to pay principal of (or premium, if any, on) the Notes when due, or to pay interest on the Notes within 30 days after the same becomes due, (ii) the Corporation's breach of its other covenants contained in this Note or in the Indenture, which breach is not cured within 90 days after written notice by the Trustee or by the holders of at least 25% in outstanding principal amount of all Securities issued under the Indenture and affected thereby, and (iii) certain events involving the bankruptcy, insolvency or liquidation of the Corporation) shall occur with respect to the Notes, the principal of all the Notes may be declared due and payable in the manner and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Corporation and the rights of the holders of the Notes under the Indenture at any time by the Corporation with the consent of the holders of not less than 66 2/3% in aggregate principal amount of the Notes then outstanding and all other Securities then outstanding under the Indenture and affected by such amendment and modification. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of Notes then outstanding and all other Securities then outstanding under the Indenture and affected thereby, on behalf of the holders of all Securities, to waive compliance by the Corporation with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the holder of this Note shall be conclusive and binding upon such holder and upon all future holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Corporation, which is absolute and unconditional, to pay the principal of and interest on this Note at the time, place and rate, and in the coin or currency, herein prescribed.
No recourse shall be had for the payment of the principal of or the interest on this Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture or any indenture supplemental thereto, against any incorporator, stockholder, officer or director, as such, past, present or future, of the Corporation or any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for issue hereof, expressly waived and released.
As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note may be registered on the registry books of the Corporation relating to the Notes, upon surrender of this Note for registration of transfer at the office or agency of the Corporation designated by it pursuant to the Indenture, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Corporation and the Trustee duly executed by, the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.
The Notes are issuable only as registered Notes without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture, and subject to certain limitations therein set forth, Notes are exchangeable for a like aggregate principal amount of Notes of different authorized denominations, as requested by the holder surrendering the same.
No service charge will be made for any such registration of transfer or exchange, but the Corporation may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment for registration of transfer of this Note, the Corporation, the Trustee and any agent of the Corporation or the Trustee may treat the entity in whose name this Note is registered as the absolute owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note be overdue, and neither the Corporation, the Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture.
[NOTES ISSUED AND OUTSTANDING PURSUANT TO A BOOK-ENTRY SYSTEM SHALL BE DEEMED TO CONTAIN THE FOLLOWING PARAGRAPH: The Notes are being issued by means of a book-entry system with no physical distribution of certificates to be made except as provided in the Indenture. The book-entry system maintained by Depository Trust Company ("DTC") will evidence ownership of the Notes, with transfers of ownership effected on the records of DTC and its participants pursuant to rules and procedures established by DTC and its participants. The Corporation will recognize Cede & Co., as nominee of DTC, while the registered Owner of the Notes, as the owner of the Notes for all purposes, including payment of principal and interest, notices and voting. Transfer of principal and interest to participants of DTC will be the responsibility of DTC, and transfer of principal and interest to beneficial owners of the Notes by participants of DTC will be the responsibility of such participants and other nominees of such beneficial owners. So long as the book-entry system is in effect, the selection of any Notes to be redeemed will be determined by DTC pursuant to rules and procedures established by DTC and its participants. The Corporation will not be responsible or liable for such transfers of payments or for maintaining, supervising or reviewing the records maintained by DTC, its participants or persons acting through such participants.]
The following abbreviations, when used in the inscription on the face of the within Note shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM-- as tenants in common TEN ENT-- as tenants by the entireties JT TEN-- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT--..........Custodian........... Under Uniform Gifts to Minors Act .................................
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, the undersigned hereby sell(s),
[PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE, OF ASSIGNEE]
Please Insert Social Security or Other Identifying Number of Assignee: ________________________
the within Note and all rights thereunder, hereby irrevocably constituting and appointing _____________________________________ Attorney to transfer said Note on the books of the Corporation, with full power of substitution in the premises.
NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within Note in every particular, without alteration or enlargement, or any change whatever and must be guaranteed.
The undersigned hereby irrevocably request(s) and instruct(s) the Corporation to repay this Note (or portion hereof specified below) pursuant to its terms at a price equal to the principal amount hereof together with interest to the repayment date, to the undersigned, at _________________________________ (Please print or typewrite name and address of the undersigned)
For this Note to be repaid, the Trustee (or the Paying Agent on behalf of the Trustee) must receive at __________________, or at such other place or places of which the Corporation shall from time to time notify the Holder of this Note, not more than 60 nor less than 30 days prior to an Optional Repayment Date, if any, shown on the face of this Note, this Note with this "Option to Elect Repayment" form duly completed.
If less than the entire principal amount of this Note is to be repaid, specify the portion hereof (which shall be in increments of $1,000) which the Holder elects to have repaid and specify the denomination or denominations (which shall be $__________ or an integral multiple of $l,000 in excess of $__________) of the Notes to be issued to the Holder for the portion of this Note not being repaid (in the absence of any such specification, one such Note will be issued for the portion not being repaid).
DATE: __________________ NOTICE: The signature on this Option to Elect Repayment must correspond with the name as written upon the face of this Note in every | 8-K | EX-4 | 1996-01-12T00:00:00 | 1996-01-12T15:18:58 |
0000898430-96-000096 | 0000898430-96-000096_0000.txt | Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: January 12, 1996
(Exact name of registrant as specified in its charter)
(State or other jurisdiction (Commission (I.R.S. Employer of incorporation) File Number) Identification No.)
(address of principal executive office (Zip Code)
including area code: (408) 732-2400
Advanced Micro Devices, Inc. (the "Company") and NexGen, Inc. ("NexGen") are parties to an Agreement and Plan Of Merger dated October 20, 1995, as amended, pursuant to which NexGen, Inc. would merge either with and into the Company or with a wholly owned subsidiary of the Company. On January 12, 1996, NexGen, Inc. issued a press release announcing its expected financial results for the second fiscal quarter ended December 31, 1995. The full text of the press release is set forth in Exhibit 99 attached hereto and is incorporated in this report as if fully set forth herein.
Item 7. Financial Statements and Exhibits.
99 Press release dated January 12, 1996
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.
Date: January 12, 1996 By: /s/ Marvin D. Burkett
99 Press release dated January 12, 1996 | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T15:40:45 |
0000950124-96-000217 | 0000950124-96-000217_0000.txt | Pricing Supplement dated January 11, 1996 Rule 424(b)(5) (To Prospectus dated November 6, 1995 and File No. 33-63311 Prospectus Supplement dated November 17, 1995)
Principal Amount: $80,000,000 Interest Rate: 5.84% Agent's Discount or Commission: 0.350% Stated Maturity: 02-01-99 Net Proceeds to Issuer: $79,720,000 Original Issue Date: 01-17-96 INTEREST PAYMENT DATES: February 1 and August 1
REGULAR RECORD DATES: January 15 next preceding a February 1 Interest Payment Date or July 15 next preceding an August 1 Interest Payment Date.
[X] The Notes cannot be redeemed prior to Stated Maturity [ ] The Notes may be redeemed prior to Stated Maturity Initial Redemption Date: Initial Redemption Percentage: Annual Redemption Percentage Reduction: _______% until Redemption Percentage is 100% of the principal amount.
[X] The Notes cannot be repaid prior to Stated Maturity [ ] The Notes can be repaid prior to Stated Maturity at the option of the holder of the Notes. Optional Repayment Dates:
ORIGINAL ISSUES DISCOUNT: [ ] Yes [X] No Total Amount of OID: Yield to Maturity: Initial Accrual Period:
FORM: [X] Book-Entry [ ] Certificated
AGENT(S): [X] Merrill Lynch & Co. Amount Placed: $ 24,000,000 [X] Smith Barney Inc. Amount Placed: 20,000,000 [X] Donaldson, Lufkin & Jenrette Securities Corporation Amount Placed: 20,000,000 [X] First Chicago Capital Markets, Inc. Amount Placed: 16,000,000 [ ] Other _____________________ Amount Placed: ______________
AGENT ACTING IN THE CAPACITY AS INDICATED BELOW: [X] Agent [ ] Principal
[ ] The Notes are being offered at varying prices related to prevailing market prices at the time of resale. [ ] The Notes are being offered at a fixed initial public offering price of ____% of Principal Amount.
The Notes are being offered at a fixed initial public offering price of 100% of Principal Amount. | 424B5 | 424B5 | 1996-01-12T00:00:00 | 1996-01-12T15:36:07 |
0000950152-96-000090 | 0000950152-96-000090_0000.txt | <DESCRIPTION>THE PARKSTONE GROUP OF FUNDS 497
THE PARKSTONE GROUP OF FUNDS
Parkstone Equity Funds Parkstone Bond Funds Parkstone Small Capitalization Fund Parkstone Intermediate Government Parkstone International Discovery Fund Obligations Fund
Parkstone Balanced Fund TAX-FREE INCOME FUNDS Parkstone High Income Equity Fund Parkstone Municipal Bond Fund Parkstone Michigan Municipal Bond Fund
Supplement dated January 12, 1996 to Prospectuses dated October 13, 1995
1. Investors are advised that the address for Gulfstream Global Investors, Ltd., the Sub-Investment Adviser of the Parkstone International Discovery Fund and the Parkstone Balanced Fund, has changed. Gulfstream's new address is 100 Crescent Court, Suite 550, Dallas, Texas 75201.
The first paragraph of the section of the Investment A Shares Prospectus entitled "REDUCED SALES CHARGES - Sales Charge Waivers," on page 58, has been revised to read as follows:
The Distributor may waive sales charges for the purchase of Investor A Shares of a Fund by or on behalf of (1) employees and retired employees (including spouses, children and parents of employees and retired employees) of First of America Bank Corporation, BISYS and any affiliates thereof, (2) Trustees of the Group, (3) directors and retired directors (including spouses and children of directors and retired directors) of First of America Bank Corporation and any affiliate thereof, (4) employees (and their spouses and children under the age of 21) of any broker-dealer with which the Distributor enters into an agreement to sell shares of the Fund, (5) orders placed on behalf of other investment companies distributed by the Distributor and (6) qualified orders placed by broker-dealers, investment advisers or financial planners who place trades for their own accounts or the accounts of their clients and who charge a management, consulting or other fee for their services; and clients of such broker-dealers, investment advisers or financial planners who place trades for their own accounts if the accounts are linked to the master account of such broker-dealer, investment adviser or financial planner on the books and records of the broker or agent. Investors may be charged a fee if they effect transactions in Investor A Shares through a broker or agent. In addition, the Distributor may waive sales charges for the purchase of a Fund's Investor A Shares with the proceeds from the recent redemption of shares of a non-money market mutual fund (including the Investor A Shares of the other non-money market Funds of the Group, but excluding the Investor B and Investor C Shares of such Funds). The purchase must be made within 60 days of the redemption, and the Distributor must be notified in writing by the investor, or by his financial institution, at the time the purchase is made. A copy of the investor's account statement showing such redemption must accompany such notice.
Investors are advised that, currently, Investor C Shares of the Funds are available for purchase only by employee benefit plans qualified under Section 401 of the Internal Revenue Code, subject to certain requirements with respect to the number of employees or amount of purchase which may be established by the Distributor. Consequently, the Investor C Shares Prospectus is hereby amended to add the following sentence to the end of the first paragraph on Page 1 and at the beginning of the first full paragraph under the heading "HOW TO BUY INVESTOR C SHARES," on Page 54:
Investor C Shares are currently offered only to employee benefit plans qualified under Section 401 of the Internal Revenue Code, subject to the requirements established by the Distributor.
On Page 56 of the Investor C Shares Prospectus, in the first sentence under the heading "SALES CHARGES," the references to "4.00%" and "four years" are changed to "1.00%" and "one year," respectively.
INVESTORS SHOULD RETAIN THIS SUPPLEMENT WITH THEIR PROSPECTUS FOR FUTURE REFERENCE
PARKSTONE HIGH INCOME EQUITY FUND
PARKSTONE LIMITED MATURITY BOND FUND PARKSTONE INTERMEDIATE GOVERNMENT OBLIGATIONS FUND PARKSTONE U.S. GOVERNMENT INCOME FUND
PARKSTONE MICHIGAN MUNICIPAL BOND FUND
PARKSTONE U.S. GOVERNMENT OBLIGATIONS FUND
Prospectus dated October 13, 1995
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THE PARKSTONE GROUP OF FUNDS
INVESTOR A SHARES PROSPECTUS DATED OCTOBER 13, 1995
The Funds listed above are each of the fifteen currently-offered series of The Parkstone Group of Funds (the "Group") which offer Investor A Shares. This Prospectus explains concisely what you should know before investing in the Investor A Shares of the Funds listed above. Please read it carefully and keep it for future reference. You can find more detailed information about the Fund in the October 13, 1995 Statement of Additional Information, as amended from time to time. For a free copy of the Statement of Additional Information or other information, contact the Group at the number specified above. The Statement of Additional Information has been filed with the Securities and Exchange Commission and is incorporated into this Prospectus by reference.
THE SHARES OF THE THE PARKSTONE GROUP OF FUNDS ARE NOT OBLIGATIONS OR DEPOSITS OF FIRST OF AMERICA INVESTMENT CORPORATION OR ITS PARENT, AND THE INVESTMENTS DESCRIBED IN THIS PROSPECTUS ARE NOT ENDORSED, INSURED OR GUARANTEED BY FIRST OF AMERICA INVESTMENT CORPORATION, ITS PARENT OR THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY. INVESTMENTS IN THE PARKSTONE GROUP OF FUNDS INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVOLVED.
For information about the following subjects, consult the pages indicated on the table below.
The Parkstone Group of Funds (the "Group") is an open-end management investment company which offers to the public fifteen separate investment portfolios, fourteen of which are diversified portfolios and one of which is a non-diversified portfolio, each with different investment objectives. These funds enable the Group to meet a wide range of investment needs.
This Prospectus relates only to the Investor A Shares of the following Funds:
Parkstone Equity Fund (the "Equity Fund") Parkstone Small Capitalization Fund (the "Small Capitalization Fund") Parkstone International Discovery Fund (the "International Fund") Parkstone Balanced Fund (the "Balanced Fund") Parkstone High Income Equity Fund (the "High Income Equity Fund") Parkstone Bond Fund (the "Bond Fund") Parkstone Limited Maturity Bond Fund (the "Limited Maturity Bond Fund") Parkstone Intermediate Government Obligations Fund (the "Intermediate Parkstone U.S. Government Income Fund (the "Government Income Fund") Parkstone Municipal Bond Fund (the "Municipal Bond Fund") Parkstone Michigan Municipal Bond Fund (the "Michigan Fund") Parkstone Prime Obligations Fund (the "Prime Obligations Fund") Parkstone U.S. Government Obligations Fund (the "U.S. Government Parkstone Treasury Fund (the "Treasury Fund") Parkstone Tax-Free Fund (the "Tax-Free Fund")
For convenience of reference, the above Funds are sometimes referred to as part of a general grouping. The Equity, Small Capitalization and International Funds are collectively referred to as the "Growth Funds". The Balanced and High Income Equity Funds are collectively referred to as the "Growth and Income Funds". The Bond, Limited Maturity Bond, Intermediate Government Obligations and Government Income Funds are collectively referred to as the Income Funds. The Municipal Bond and Michigan Funds are collectively referred to as "Tax-Free Income Funds". Finally, the Prime Obligations, U.S. Government Obligations, Treasury and Tax-Free Funds are collectively referred to as the "Money Market Funds".
The Trustees of the Group have divided each of the Funds' beneficial ownership into an unlimited number of transferable units called shares (the "Shares"). Each Fund of the Group offers multiple classes of Shares. This Prospectus describes one class of Shares of each Fund-Investor A Shares. Interested persons who wish to obtain a copy of the Prospectus of the other Classes of Shares of the Funds or a copy of the Group's most recent annual report may contact the Group at the telephone number shown above.
The investment objectives of each of the Funds are described in this Prospectus and are summarized in the Prospectus Summary. First of America Investment Corporation, Kalamazoo, Michigan ("First of America"), acts as the investment adviser to each of the Funds of the Group. To provide investment advisory services for the International and Balanced Funds for investments in foreign securities, First of America has entered into a sub-investment advisory agreement with Gulfstream Global Investors, Ltd., Dallas, Texas ("Gulfstream" or "Subadviser").
This Prospectus relates to Investor A Shares of the following funds of the Group:
These Funds represent fifteen separate investment portfolios of The Parkstone Group of Funds, a Massachusetts business trust (the "Group") which is registered as an open-end, management investment company.
Offering Price and Sales Charges
The public offering price of Investor A Shares of each of the Growth Funds and each of the Growth and Income Funds is equal to the net asset value per share plus a sales charge equal to 4.50% of the public offering price (4.71% of the net amount invested). The public offering price of Investor A Shares of each of the Income Funds and each of the Tax-Free Income Funds is equal to the net asset value per share plus a sales charge equal to 4.00% of the public offering price (4.17% of the net amount invested). The public offering price is reduced when the amount of the transaction at the total public offering price is $50,000 or more (see "SALES CHARGES"). Under certain circumstances, the sales charge may be eliminated (see "REDUCED SALES CHARGES--Sales Charge Waivers"). The public offering price of each Money Market Fund is equal to the net asset value per share, which the Group will seek to maintain at $1.00.
$1,000 minimum initial purchase (based upon the public offering price) per Fund with no minimum subsequent investments. Such minimum initial investment may be waived for certain purchasers and is reduced to $100 for investors using the Auto Invest Plan described herein, although such investors are subject to a $50 minimum for each subsequent investment in such Fund.
Under normal market conditions, each Fund will invest as described in the following table:
Risk Factors and Special Considerations
An investment in a mutual fund such as any of the Funds involves a certain amount of risk and may not be suitable for all investors. In addition, some investment policies of the Funds may entail certain risks (see "RISK FACTORS AND INVESTMENT TECHNIQUES").
First of America Investment Corporation ("First of America") serves as investment adviser, and, with respect to the International Fund and a portion of the Balanced Fund, Gulfstream Global Investors, Ltd. ("Gulfstream") or "Subadviser" serves as subadviser.
Dividends from net income are declared and paid monthly. Net realized capital gains are distributed at least annually.
BISYS Fund Services, formerly known as The Winsbury Company, ("BISYS") a partnership owned by The BISYS Group, Inc.
BISYS Fund Services Ohio, Inc., formerly known as The Winsbury Service Corporation (the "Transfer Agent"), a subsidiary of The BISYS Group, Inc.
FEE TABLES (INVESTOR A SHARES)
Maximum Sales Charge (as a percentage of the offering price)(1)
(1) The sales charge may be eliminated under certain circumstances. (See "REDUCED SALES CHARGES--Sales Charge Waivers.")
(2) Although no such fee currently is in place, the Transfer Agent has reserved the right in the future to charge a fee for wire transfers of redemption proceeds.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)*
(1) Pursuant to the Investor A Distribution and Shareholder Service Plan, each Fund is authorized to make payments under such Plan of up to an annual rate of .25% of the average daily net asset value of such Fund's Investor A Shares. However, currently only payments of .10% are being charged under such Plan with respect to the Money Market Funds.
Absent the voluntary reduction of advisory fees, Management Fees and Total Expenses as a percentage of average net assets for the Balanced Fund would have been 1.00% and 1.72%, respectively. Absent the voluntary reduction of administration fees and advisory fees, Management Fees, Other Expenses and Total
Expenses as a percentage of average net assets for the Bond Fund would have been .74%, .34% and 1.33%, respectively. For the Limited Maturity Bond Fund they would have been .74%, .30% and 1.29%, respectively. For the Intermediate Government Obligations Fund they would have been .74%, .35% and 1.34%, respectively. For the Government Income Fund they are estimated to be .74%, .39% and 1.38%, respectively. For the Municipal Bond Fund they would have been .74%, .32% and 1.31%, respectively. For the Michigan Fund they would have been .74%, .30% and 1.29%, respectively. Absent the voluntary reduction of 12b-1 Fees and administration fees, 12b-1 Fees, Other Expenses and Total Fund Operating Expenses as a percentage of average net assets for the Prime Obligations Fund would be .25%, .27% and .92%, respectively. For the U.S. Government Obligations Fund, they would be .25%, .29% and .94%, respectively. For the Treasury Fund they would be .25%, .35% and 1.00%, respectively. For the Tax-Free Fund, they would be .25%, .26% and .91%, respectively. (See "MANAGEMENT OF THE FUNDS-- Investment Adviser and Subadviser" and "Administrator, Sub-Administrator and
You would pay the following expenses on a $1,000 investment in Investor A Shares, assuming (1) 5% annual return and (2) redemption at the end of each time period:
The information set forth in the foregoing Fee Tables and examples relates only to Investor A Shares of the Funds. Each of the Funds also may offer other classes of Shares. The other classes of Shares of the Funds are subject to the same expenses except that the sales charges and level of Rule 12b-1 fees paid by holders of the different classes will differ.
As a result of the payment of sales charges and 12b-1 fees, long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted by the National Association of Securities Dealers, Inc. (the "NASD"). The NASD has adopted rules effective July 7, 1993, which generally limit the aggregate sales charges and payments under the Group's Investor A Distribution and Shareholder Service Plan to a certain percent of total new gross share sales, plus interest. The Funds would stop accruing 12b-1 fees if, to the extent, and for as long as, such limit would otherwise be exceeded.
The purpose of the above tables is to assist a potential purchaser of Investor A Shares of any Fund in understanding the various costs and expenses that an investor in a Fund will bear directly or indirectly. Such expenses do not include any fees charged by First of America or any of its affiliates to its customer accounts which may have invested in Investor A Shares of the Funds. See "MANAGEMENT OF THE FUNDS," "GENERAL INFORMATION" and "SALES CHARGES" for a more complete discussion of the Shareholder transaction expenses and annual operating expenses of each of the Funds. The expense information for Investor A Shares reflects current fees. THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The table below sets forth certain information concerning the investment results of the Investor A Shares of each of the Funds since its inception. Further financial information is included in the Statement of Additional Information and the Group's June 30, 1995 Annual Report to Shareholders.
The Financial Highlights for the periods presented below have been derived from financial statements audited by Coopers & Lybrand L.L.P. (Limited Liability Partnership), independent accountants for the Group, whose report thereon is included in the Annual Report.
On March 31, 1993, the Shareholders of all of the then-outstanding Funds of the Group approved the reclassification of such Fund's outstanding Shares into Investor A Shares and Institutional Shares. The financial information provided below and in the Annual Report include periods prior to such reclassification.
EQUITY FUND - INVESTOR A SHARES
SMALL CAPITALIZATION FUND - INVESTOR A SHARES
INTERNATIONAL DISCOVERY FUND - INVESTOR A SHARES
BALANCED FUND - INVESTOR A SHARES
HIGH INCOME EQUITY FUND - INVESTOR A SHARES
BOND FUND - INVESTOR A SHARES
LIMITED MATURITY BOND FUND - INVESTOR A SHARES
INTERMEDIATE GOVERNMENT OBLIGATIONS FUND - INVESTOR A SHARES
GOVERNMENT INCOME FUND - INVESTOR A SHARES
MICHIGAN FUND - INVESTOR A SHARES
MUNICIPAL BOND FUND - INVESTOR A SHARES
PRIME OBLIGATIONS FUND - INVESTOR A SHARES
U.S. GOVERNMENT OBLIGATIONS FUND - INVESTOR A SHARES
TREASURY FUND - INVESTOR A SHARES
TAX-FREE FUND - INVESTOR A SHARES
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) On April 1, 1993 the shareholders of the Group exchanged their shares for either the Group's Investor A Shares or Institutional Shares. For the year ended June 30, 1993 the Financial Highlights ratios of expenses, ratios of net investment income, total return and the per share investment activities and distributions are presented on the basis whereby the Fund's net investment income, expenses, and distributions for the period July 1, 1992 through March 31, 1993 were allocated to each class of shares based upon the relative net assets of each class of shares as of April 1, 1993 and the results combined therewith the results of operations and distributions for each applicable class for the period April 1, 1993 through June 30, 1993.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued.
The investment objectives of each of the Funds is set forth below under the headings describing the Funds. The investment objectives of each Fund are fundamental policies and may not be changed without a vote of the holders of a majority of the outstanding Shares of that Fund (as defined in the Statement of Additional Information). Other policies of a Fund may be changed without a vote of the holders of a majority of outstanding Shares of that Fund unless the policy is expressly deemed to be a fundamental policy or changeable only by such majority vote. There can be no assurance that the investment objectives of any Fund will be achieved. Depending upon the performance of a Fund's investments, the net asset value per share of that Fund may decrease instead of increase.
During temporary defensive periods as determined by First of America or the Subadviser, as the case may be, each of the Funds may hold up to 100% of its total assets in short-term obligations including domestic bank certificates of deposit, bankers' acceptances and repurchase agreements secured by bank instruments. However, to the extent that a Fund is so invested, its investment objective may not be achieved during that time. Uninvested cash reserves will not earn income.
THE EQUITY FUND AND SMALL CAPITALIZATION FUND
The investment objective of the Equity Fund is to seek growth of capital by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks. The investment objective of the Small Capitalization Fund is to seek growth of capital by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks of small to medium-sized companies.
Under normal market conditions, each of the Equity and Small Capitalization Funds will invest at least 80% of the value of its total assets in common stocks and securities convertible into common stocks of companies believed by First of America to be characterized by sound management and the ability to finance expected long-term growth. In addition, under normal market conditions, the Small Capitalization Fund will invest at least 65% of the value of its total assets in common stocks and securities convertible into common stocks of companies considered by First of America to have a market capitalization of less than $1 billion. Each of the Equity and Small Capitalization Funds may also invest up to 20% of the value of its total assets in preferred stocks, corporate bonds, notes, units of real estate investment trusts, warrants, and short-term obligations (with maturities of 12 months or less) consisting of commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit, repurchase agreements, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and demand and time deposits of domestic and foreign banks and savings and loan associations. Each of the Equity and Small Capitalization Funds may also hold securities of other investment companies and depositary or custodial receipts representing beneficial interests in any of the foregoing securities.
Subject to the foregoing policies, each of the Equity and Small Capitalization Funds may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper. For a discussion of risks associated with foreign securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Foreign Securities" herein.
The Equity Fund anticipates investing in growth-oriented, medium capitalization companies. These companies have typically exhibited consistent, above average growth in revenues and earnings, strong management, and sound and improving financial fundamentals. Often, these companies are market or industry leaders, have excellent products and/or services, and exhibit the potential for growth. Core holdings of the Equity Fund are in companies that participate in long-term growth industries, although these will be supplemented by holdings in non-growth industries that exhibit the desired characteristics.
The Small Capitalization Fund anticipates investing in dynamic small- to medium-sized companies that exhibit outstanding potential for superior growth. For purposes of the foregoing sentence, small-sized companies are considered to be those with capitalization of less than $1 billion and medium-sized companies are considered to be those with capitalization of $1 billion or more but less than $5 billion. The Small Capitalization Fund will limit its investment in securities of medium-sized companies to not more than 35% of the value of its total assets. Companies that participate in sectors that are identified as having long-term growth potential generally make up a substantial portion of such Fund's holdings. These companies often have established a market niche or have developed unique products or technologies that are expected to produce superior growth in revenues and earnings. As smaller capitalization stocks are quite volatile and subject to wide fluctuations in both the short and medium term, the Small Capitalization Fund may be fairly characterized more aggressive than a general equity fund such as the Equity Fund.
Consistent with the foregoing, each of the Equity and Small Capitalization Funds will focus its investments in those companies and types of companies that First of America believes will enable such Fund to achieve its investment objective.
The investment objective of the International Fund is the long-term growth of capital.
Under normal market conditions the International Fund will invest at least 65% of its total assets in an internationally diversified portfolio of equity securities which trade on markets in countries other than the United States and which are issued by companies (i) domiciled in countries other than the United States, or (ii) that derive at least 50% of either their revenues or pre-tax income from activities outside of the United States, and (iii) which are small- or medium-sized companies on the basis of their capitalization.
Equity securities include common and preferred stock, securities (bonds and preferred stock) convertible into common stock, warrants and securities representing underlying international securities such as ADRs and EDRs.
Companies are deemed to be small- or medium-sized which at the time of purchase are of a size which would rank them in the lower half of a major market index in each country by weighted market capitalization and all equity securities listed in recognized secondary markets where such markets exist. In addition, in countries with less well-developed stock markets, where the range of investment opportunities is more restrictive, the equity securities of all listed companies will be eligible for investment. In major markets issuers could have capitalizations of up to approximately $10 billion while in smaller markets issuers would be eligible with capitalizations as low as approximately $200 million.
The International Fund may invest in securities of issuers in, but not limited to, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Korea, Malaysia, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and United Kingdom. Normally the International Fund will invest at least 65% of its total assets in securities traded in at least three foreign countries, including the countries listed above. It is possible, although not currently anticipated, that up to 35% of the International Fund's assets could be invested in U.S. companies. In addition,
Fund temporarily may invest cash in short-term debt instruments of U.S. and foreign issuers for cash management purposes or pending investment.
The investment objectives of the Balanced Fund are to seek current income, long-term capital growth and conservation of capital.
The Balanced Fund may invest in any type or class of security. Under normal market conditions the Balanced Fund will invest in common stocks, fixed income securities and securities convertible into common stocks (i.e., warrants, convertible preferred stock, fixed rate preferred stock, convertible fixed- income securities, options and rights). At least 25% of the value of the Balanced Fund's total assets will be invested in fixed income senior securities. Up to 15% of the value of the Balanced Fund's total assets may be invested in foreign securities.
The Balanced Fund's common stocks are held for the purpose of providing dividend income and long-term growth of capital. The Balanced Fund will invest in the common and preferred stocks of companies with capitalization of at least $100 million and which are traded either in established over-the-counter markets or on national exchanges. The Balanced Fund intends to invest primarily in those companies which are growth oriented and have exhibited consistent, above average growth in revenues and earnings. When choosing such stocks, the potential for long term capital appreciation will be the primary basis for selection.
The Balanced Fund's fixed income senior securities consist of bonds, debentures, notes, zero-coupon securities, mortgage-related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, certificates of deposit, time deposits, high quality commercial paper, bankers' acceptances and variable amount master demand notes. In addition, a portion of the Balanced Fund may from time to time be invested in first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Some of the securities in which the Balanced Fund invests may have warrants or options attached. The Balanced Fund may also invest in repurchase agreements.
The Balanced Fund expects to invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, as well as "stripped" U.S. Treasury obligations such as Treasury Receipts issued by the U.S. Treasury representing either future interest or principal payments ("Stripped Treasury Obligations"), and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. See "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations" below.
The Balanced Fund also expects to invest in bonds, notes and debentures of a wide range of U.S. corporate issuers. Such obligations, in the case of debentures, will represent unsecured promises to pay, in the case of notes and bonds, may be secured by mortgages on real property or security interests in personal property and will in most cases differ in their interest rates, maturities and times of issuance.
The Balanced Fund will invest only in corporate fixed income securities which are rated at the time of purchase within the four highest rating groups assigned by a nationally-recognized statistical rating organization ("NRSRO") or, if unrated, which First of America deems present attractive opportunities and are of comparable quality. For a description of the rating symbols of the NRSROs, see the Appendix to the Statement of Additional Information. For a discussion of fixed income securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES-- Medium Grade Securities" herein.
The Balanced Fund may hold some short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper, variable amount master demand notes, bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase agreements. The Balanced Fund may also invest in securities of other investment companies.
The Balanced Fund may also invest in obligations of the Export-Import Bank of the United States, in U.S. dollar denominated international bonds for which the primary trading market is in the United States ("Yankee Bonds"), or for which the primary trading market is abroad ("Eurodollar Bonds"), and in Canadian Bonds and bonds issued by institutions, such as the World Bank and the European Economic Community, organized for a specific purpose by two or more sovereign governments ("Supranational Agency Bonds"). The Balanced Fund's investments in foreign securities may be made either directly or through the purchase of American Depositary Receipts ("ADRs") and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in Canadian commercial paper ("CCP"), and in Europaper (U.S. dollar denominated commercial paper of a foreign issuer).
The amount invested in stock, bonds and cash reserves may be varied from time to time, depending upon First of America's assessment of business, economic and market conditions, including any potential advantage of price shifts between the stock market and the bond market. The Balanced Fund reserves the right to hold short-term securities in whatever proportion deemed desirable for temporary defensive periods during adverse market conditions as determined by First of America. However, to the extent that the Balanced Fund is so invested, its investment objectives may not be achieved during that time.
Like any investment program, the Balanced Fund entails certain risks. As a Fund investing primarily in common stocks the Balanced Fund is subject to stock market risk, i.e., the possibility that stock prices in general will decline over short or even extended periods.
Since the Balanced Fund also invests in bonds, investors in the Balanced Fund are also exposed to bond market risk, i.e., fluctuations in the market value of bonds. Bond prices are influenced primarily by changes in the level of interest rates. When interest rates rise, the prices of bonds generally fall; conversely, when interest rates fall, bond prices generally rise. While bonds normally fluctuate less in price than stock, there have been extended periods of cyclical increases in interest rates that have caused significant declines in bond prices.
From time to time, the stock and bond markets may fluctuate independently of one another. In other words, a decline in the stock market may in certain instances be offset by a rise in the bond market, or vice versa. As a result the Balanced Fund, with its balance of common stock and bond investments, is expected to entail less investment risk (and a potentially smaller investment return) than a mutual fund investing exclusively in common stocks.
THE HIGH INCOME EQUITY FUND
The investment objective of the High Income Equity Fund is to seek current income by investing in a diversified portfolio of high quality, dividend-paying common stocks and securities convertible into common stocks. A secondary investment objective of High Income Equity Fund is growth of capital.
The High Income Equity Fund, under normal market conditions, will invest at least 80% of the value of its total assets in common stocks and securities convertible into common stocks of companies believed by First of America to be characterized by sound management, the ability to finance expected growth and the ability to pay above average dividends. The High Income Equity Funds may also invest up to 20% of the value of its total assets in preferred stocks, corporate bonds, notes, units of real estate investment trusts, warrants, and short-term obligations (with maturities of 12 months or less) consisting of commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit, repurchase agreements, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and demand and time deposits of domestic and foreign banks and savings and loan associations. The High Income Equity Funds may also hold securities of other investment companies and depositary or custodial receipts representing beneficial interests in any of the foregoing securities.
Subject to the foregoing policies, the High Income Equity Funds may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper. For a discussion of risks associated with foreign securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Foreign Securities" herein.
The High Income Equity Fund anticipates investing in securities that currently have a high dividend yield, with the anticipation that the dividend will remain constant or be increased in the future. These securities generally represent the core holdings of this Fund. However, these holdings are balanced with lower yielding but higher growth-oriented securities to achieve portfolio balance. All securities must provide current income. Given its bias towards income, the High Income Equity Fund may be considered the more conservative than growth-oriented equity funds such as the Group's Equity and Small Capitalization Funds.
Consistent with the foregoing, the High Income Equity Fund will focus its investments in those companies and types of companies that First of America believes will enable such Fund to achieve its investment objective.
THE BOND FUND AND LIMITED MATURITY BOND FUND
The investment objective of the Bond Fund is to seek current income as well as preservation of capital by investing in a portfolio of high and medium grade fixed-income securities. The investment objective of the Limited Maturity Bond Fund is to seek current income as well as preservation of capital by investing in a portfolio of high and medium grade fixed-income securities with remaining maturities of six years or less.
Under normal market conditions, the Bond Fund will invest at least 80% of the value of its total assets in bonds, debentures, notes with remaining maturities at the time of purchase of one year or more, zero-coupon securities, mortgage-related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, debt securities convertible into, or exchangeable for, common stocks, first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Bond Fund will invest in state and municipal securities when, in the opinion of First of America, their yields are competitive with comparable taxable debt obligations. In addition, up to 20% of the value of the Bond Fund's total assets may be invested in preferred stocks, notes with remaining maturities at the time of purchase of less than one year, short-term debt obligations consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, repurchase agreements, securities of other investment companies, and Guaranteed Investment Contracts ("GICs") issued by insurance companies, as more fully described below. The Bond Fund intends that under normal market conditions its portfolio will maintain an average weighted maturity of approximately eight to twelve years. However, the Bond Fund may extend or shorten the average weighted maturity of its portfolio depending upon anticipated changes in interest rates or other relevant market factors. Some of the securities in which the Bond Fund invests may have warrants or options attached.
Under normal market conditions, the Limited Maturity Bond Fund will invest at least 80% of the value of its total assets in the following securities which have remaining maturities of six years or less: bonds, debentures, notes with remaining maturities at the time of purchase of one year or more, zero-coupon securities, mortgage related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, debt securities convertible into, or exchangeable for, common stocks, first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Limited Maturity Bond Fund will invest in state and municipal securities when, in the opinion of First of America, their yields are competitive with comparable taxable debt obligations. In addition, up to 20% of the value of the Limited Maturity Bond Fund's total assets may be invested in the debt securities listed above without regard to maturity, preferred stocks, notes with remaining maturities at the time of purchase of less than one year, short-term debt obligations consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, repurchase agreements, securities of other investment companies and GICs. Under normal market conditions, the Limited
Bond Fund expects to maintain a dollar-weighted average portfolio maturity of its debt securities of three years or less. Some of the securities in which the Limited Maturity Bond Fund invests may have warrants or options attached.
The Bond Fund and Limited Maturity Bond Fund each expects to invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, as well as Stripped Treasury Obligations, and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. See "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations" below.
The Bond Fund and the Limited Maturity Bond Fund each also expects to invest in bonds, notes and debentures of a wide range of U.S. corporate issuers. Such obligations, in the case of debentures, will represent unsecured promises to pay, in the case of notes and bonds, may be secured by mortgages on real property or security interests in personal property and will in most cases differ in their interest rates, maturities and times of issuance.
The Bond Fund and the Limited Maturity Bond Fund each will invest only in corporate debt securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or, if unrated, which First of America deems present attractive opportunities and are of comparable quality. For a discussion of debt securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium-Grade Securities" herein.
The Bond Fund and the Limited Maturity Bond Fund each may hold some short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase agreements. The Bond Fund and the Limited Maturity Bond Fund each may also invest in securities of other investment companies or in GICs.
The Bond Fund and the Limited Maturity Bond Fund each may also invest in obligations of the Export-Import Bank of the United States, in Yankee Bonds, in Eurodollar Bonds, in Canadian Bonds and in Supranational Agency Bonds. Each of the Bond Fund and Limited Maturity Bond Fund may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper.
An increase in interest rates will generally reduce the value of the investments in the Bond Fund and the Limited Maturity Bond Fund and a decline in interest rates will generally increase the value of those investments. Depending upon the prevailing market conditions, First of America may purchase debt securities at a discount from face value, which produces a yield greater than the coupon rate. Conversely, if debt securities are purchased at a premium over face value, the yield will be lower than the coupon rate. In making investment decisions for the Bond Fund, First of America will consider many factors other than current yield, including the preservation of capital, the potential for realizing capital appreciation, maturity, and yield to maturity. In making investment decisions for the Limited Maturity Bond Fund, First of America will consider many factors other than current yield, including the preservation of capital, maturity, and yield to maturity.
By seeking to maintain a dollar-weighted average portfolio maturity of three years or less, the Limited Maturity Bond Fund attempts to minimize the fluctuation in its Shares' net asset value relative to those funds which invest in longer term obligations.
THE INTERMEDIATE GOVERNMENT OBLIGATIONS FUND
The investment objective of the Intermediate Government Obligations Fund is to seek current income with preservation of capital by investing in U.S. Government securities with remaining maturities of twelve years or less.
Under normal market conditions, the Intermediate Government Obligations Fund will invest at least 80% of its total assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and with remaining maturities of twelve years or less, although up to 20% of the value of its total assets may be invested in debt securities, preferred stocks and other investments without regard to maturity, except as set forth below. Under normal market conditions, the Intermediate Government Obligations Fund expects to maintain a dollar-weighted average portfolio maturity of its debt securities of three to ten years.
The types of U.S. Government obligations invested in by the Intermediate Government Obligations Fund will include obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Treasury, such as Treasury bills, notes, bonds and certificates of indebtedness, and Government securities, as described below in "RISK FACTORS AND INVESTMENT TECHNIQUES-- Government Obligations."
The Intermediate Government Obligations Fund may also invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, as more fully described below under "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations."
By seeking to maintain a dollar-weighted average portfolio maturity of three to ten years, the Intermediate Government Obligations Fund attempts to minimize the fluctuation in its Shares' net asset value relative to those funds which invest in longer term obligations.
The investment objective of the Government Income Fund is to provide shareholders with a high level of current income consistent with prudent investment risk.
Under normal market conditions, the Government Income Fund will invest at least 65% of its total assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, although up to 35% of the value of its total assets may be invested in debt securities and preferred stocks of nongovernmental issuers. Consistent with the foregoing, under current market conditions, the Government Income Fund intends to invest up to 80% of the value of its total assets in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Government Income Fund also may invest up to 35% of its total assets in mortgage-related securities issued by nongovernmental entities and in other securities described below. For more information, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Mortgage-Related Securities," below.
The types of U.S. Government obligations, including mortgage-related securities, invested in by the Government Income Fund will include obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Treasury, such as Treasury bills, notes and bonds, Stripped Treasury Obligations and Government Securities, as described below in "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations".
The Government Income Fund may also hold short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper rated at the time of purchase within the top two categories by an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase and reverse repurchase agreements. The Government Income Fund may also invest in corporate debt securities which are rated at the time of purchase within the top three categories of an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality.
The investment objective of the Municipal Bond Fund is to seek current interest income which is exempt from federal income taxes as well as preservation of capital. The investment objectives of the Michigan Fund are to seek income which is exempt from federal income tax and Michigan state income and intangibles tax, although such income may be subject to the federal alternative minimum tax when received by certain Shareholders, and to seek preservation of capital.
Under normal market conditions and as a fundamental policy, at least 80% of the net assets of the Municipal Bond Fund will be invested in a diversified portfolio of Municipal Securities and at 80% of the net assets of the Michigan Fund will be invested in a portfolio of Michigan Municipal Securities.
"Municipal Securities" include obligations consisting of bonds, notes and commercial paper, issued by or on behalf of states, territories and possessions of the United States, the District of Columbia and other political subdivisions, agencies, instrumentalities and authorities, the interest on which is both exempt from federal income taxes and not treated as a preference item for individuals for purposes of the federal alternative minimum tax. "Michigan Municipal Securities" include debt obligations, consisting of notes, bonds and commercial paper, issued by or on behalf of the State of Michigan, its political subdivisions, municipalities and public authorities, the interest on which is, in the opinion of bond counsel to the issuer, exempt from federal income tax and Michigan state income and intangibles taxes (but may be treated as a preference item for individuals for purposes of the federal alternative minimum tax) and debt obligations issued by the Government of Puerto Rico or the U.S. territories and possessions of Guam and the U.S. Virgin Islands and such other governmental entities whose debt obligations, either by law or treaty, generate interest income which is exempt from federal and Michigan state income and intangibles tax. For more information regarding Municipal Securities and Michigan Municipal Securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Municipal Securities," below.
Under normal market conditions, at least 65% of the net assets of each of the Municipal Bond Fund and the Michigan Fund will be invested in Municipal Securities (Michigan Municipal Securities in the case of the Michigan Fund) consisting of bonds and notes with remaining maturities at the time of purchase of one year or more. Quality is the primary consideration in selecting Michigan Municipal Securities for investment by the Michigan Fund.
The Municipal Bond Fund also intends that under normal market conditions its portfolio will maintain an average weighted maturity of approximately eight to ten years and an average weighted rating of AA/Aa. The Michigan Fund, under normal market conditions, will be invested in long-term Michigan Municipal Securities and that the average weighted maturity of such investments will be 5 to 12 years, although the Michigan Fund may invest in Michigan Municipal Securities of any maturity. However, First of America may extend or shorten the average weighted maturity of its portfolio depending upon anticipated changes in interest rates or other relevant market factors. In addition, the average weighted rating of a Tax-Free Income Fund's portfolio may vary depending upon the availability of suitable Municipal Securities or other relevant market factors.
The Michigan Fund invests in Michigan Municipal Securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or rated within the two highest rating groups assigned by an NRSRO in the case of notes, tax-exempt commercial paper or variable rate demand obligations. The Michigan Fund may also purchase Michigan Municipal Securities which are unrated at the time of purchase but are determined to be of comparable quality by First of America pursuant to guidelines approved by the Group's Board of Trustees. The applicable Michigan Municipal Securities ratings are described in the Appendix to the Statement of Additional Information. For a description of debt securities rated within the fourth highest rating group assigned by the NRSROs, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium-Grade Securities" herein.
Interest income from certain types of municipal securities may be subject to federal alternative minimum tax. The Tax-Free Income Funds will not treat these bonds as "Municipal Securities" or "Michigan Municipal Securities" for purposes of measuring compliance with the 80% tests described above. To the extent the Tax-Free Income Funds invests in these bonds, individual shareholders, depending on their own tax status, may be subject to alternative minimum tax on that part of the Tax-Free Income Fund's distributions derived from these bonds. For further information relating to the types of municipal securities which will be included in income subject to alternative minimum tax, see "ADDITIONAL INFORMATION-- Additional Tax Information Concerning the Tax-Free Fund, the Municipal Bond Fund and the Michigan Fund" in the Statement of Additional Information.
In addition, investments may be made in taxable obligations if, for example, suitable tax-exempt obligations are unavailable or if acquisition of U.S. Government or other taxable securities is deemed appropriate for temporary defensive purposes as determined by First of America to be warranted due to market conditions. Such taxable obligations consist of Government Securities, certificates of deposit, time deposits and bankers' acceptances of selected banks, commercial paper meeting the Tax-Free Income Fund's quality standards (as described above) for tax-exempt commercial paper, and such taxable obligations as may be subject to repurchase agreements. These obligations are described further in the Statement of Additional Information. Under such circumstances and during the period of such investment, the affected Tax-Free Income Fund may not achieve its stated investment objectives.
Although the Municipal Bond Fund may invest more than 25% of its net assets in (i) Municipal Securities whose issuers are in the same state, (ii) Municipal Securities the interest on which is paid solely from revenues of similar projects, and (iii) private activity bonds, it does not presently intend to do so on a regular basis. To the extent the Municipal Bond Fund's assets are that are payable from the revenues of similar projects or are issued by issuers located in the same state, or are concentrated in private activity bonds, the Municipal Bond Fund will be subject to the peculiar risks presented by the laws and economic conditions relating to such states, projects and bonds to a greater extent than it would be if its assets were not so concentrated.
SPECIAL CONSIDERATIONS RELATING TO THE MICHIGAN FUND
Because the Michigan Fund invests primarily in securities issued by the State of Michigan and its political subdivisions, municipalities and public authorities, the Michigan Fund's performance is closely tied to the general economic conditions within the State as a whole and to the economic conditions within particular industries and geographic areas represented or located within the State. However, the Michigan Fund attempts to diversify, to the extent First of America deems appropriate, among issuers and geographic areas in the State of Michigan.
The Michigan Fund's classification as a "non-diversified" investment company means that the proportion of the Michigan Fund's assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. However, the Michigan Fund intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended, which requires the Michigan Fund generally to invest, with respect to 50% of its total assets, not more than 5% of such assets in the obligations of a single issuer; as to the remaining 50% of its total assets, the Michigan Fund is not so restricted. In no event, however, may the Michigan Fund invest more than 25% of its total assets in the obligations of any one issuer. Compliance with this requirement is measured at the close of each quarter of the Michigan Fund's taxable year. Since a relatively high percentage of the Michigan Fund's assets may be invested in the obligations of a limited number of issuers, some of which may be within the same economic sector, the Michigan Fund's portfolio securities may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company.
The investment objective of each of the Prime Obligations Fund, the U.S. Government Obligations Fund, and the Treasury Fund is to seek current income with liquidity and stability of principal. The investment objective of the Tax-Free Fund is to seek as high a level of current interest income free from federal income taxes as is consistent with the preservation of capital and relative stability of principal.
The Prime Obligations Fund invests in high-quality money market instruments, including Municipal Securities and other instruments deemed to be of comparable high quality as determined by the Board of Trustees. Under normal market conditions, the U.S. Government Obligations Fund invests at least 65% of the value of its total assets in short-term U.S. Treasury bills, notes, and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Treasury Fund, under normal market conditions, invests exclusively in obligations issued or guaranteed by the U.S. Treasury, its agencies or instrumentalities and in repurchase agreements related to such securities. As a matter of fundamental policy, under normal market conditions, at least 80% of the Tax-Free Fund's total assets will be invested in Municipal Securities.
The U.S. Government Obligations Fund may invest up to 35% of the value of its total assets in high-quality money market instruments, including Municipal Securities, and other instruments deemed to be of comparable high quality as determined by the Board of Trustees.
The Tax-Free Fund may invest up to 20% of its total assets in obligations, the interest on which is either subject to federal income taxation or treated as a preference item for purposes of the federal alternative minimum tax ("Taxable Obligations"). If deemed appropriate for temporary defensive purposes, the Tax- Free Fund may increase its holdings in Taxable Obligations to over 20% of its total assets and may also hold uninvested cash reserves pending investment. Taxable Obligations may include obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (some of which may be subject to repurchase agreements), certificates of deposit and bankers' acceptances of selected banks, and commercial paper meeting the Tax-Free Fund's quality standards (as described below) for tax-exempt commercial paper. These obligations are described further in the Statement of Additional Information.
As a money market fund, each Money Market Fund invests exclusively in United States dollar denominated instruments which the Trustees of the Group and the Money Market Fund's investment adviser determine present minimal credit risks and which at the time of acquisition are rated by one or more appropriate nationally recognized statistical rating organizations ("NRSRO") (e.g., Standard & Poor's Corporation and Moody's Investors Service, Inc.) in one of the two highest rating categories for short-term debt obligations or, if unrated, are of comparable quality. In addition, the U.S. Government Obligations Fund, the Prime Obligations Fund and the Treasury Fund each diversify its investments so that, with minor exceptions and except for United States Government securities, not more than five percent of its total assets is invested in the securities of any one issuer, not more than five percent of its total assets is invested in securities of all issuers rated by the NRSRO at the time of investment in the second highest rating category for short-term debt obligations or deemed to be of comparable quality to securities rated in the second highest rating categories for short-term debt obligations ("Second Tier Securities") and not more than the greater of one percent of total assets or one million dollars is invested in the securities of one issuer that are Second Tier Securities. All securities or instruments in which a Money Market Fund invests have remaining maturities of 397 calendar days (thirteen months) or less. The dollar-weighted average maturity of the obligations in a Money Market Fund will not exceed 90 days.
The Prime Obligations Fund and, within the limitations described above, the U.S. Government Obligations Fund may invest in short-term promissory notes issued by corporations (including variable amount master demand notes) rated at the time of purchase within the two highest categories assigned by an NRSRO or, if not rated, found by the Group's Board of Trustees to be of comparable quality to instruments that are so rated. Instruments may be purchased in reliance upon a rating only when the rating organization is not affiliated with the issuer or guarantor of the instrument. For a description of the rating symbols of the NRSROs as used in this paragraph, see the Appendix to the Statement of Additional Information. The Prime Obligations Fund may also invest in CCP and in Europaper.
The Tax-Free Fund may acquire zero coupon obligations, which have greater price volatility than coupon obligations and which will not result in the payment of interest until maturity.
Although the Tax-Free Fund presently does not intend to do so on a regular basis, it may invest more than 25% of its assets in Municipal Securities which are related in such a way that an economic, business, or political development or change affecting one such security would likewise affect the other Municipal Securities. Examples of such securities are obligations the repayment of which is dependent upon similar types of projects or projects located in the same state. Such investments would be made only if deemed necessary or appropriate by the Tax-Free Fund's investment adviser. To the extent that the Tax-Free Fund's assets are concentrated in Municipal Securities that are so related, the Tax-Free Fund will be subject to the peculiar risks presented by such Municipal Securities, such as negative developments in a particular industry or state, to a greater extent than it would be if the Tax-Free Fund's assets were not so concentrated.
Variable amount master demand notes in which the Prime Obligations Fund and U.S. Government Obligations Fund may invest are unsecured demand notes that permit the indebtedness thereunder to vary, and that provide for periodic adjustments in the interest rate according to the terms of the instrument. Because master demand notes are direct lending arrangements between the Fund and the issuer, they are not normally traded. Although there is no secondary market in the notes, the Fund may demand payment of principal and accrued interest at any time. While the notes are not typically rated by credit rating agencies, issuers of variable amount master demand notes (which are normally manufacturing, retail, financial, and other business concerns) must satisfy the same criteria as set forth above for commercial paper. First of America will consider the earning power, cash flow, and other liquidity ratios of the issuers of such notes and will continuously monitor their financial status and ability to meet payment on demand. In determining average weighted portfolio maturity, a variable amount master demand note will be deemed to have a maturity equal to the period of time remaining until the principal amount can be recovered from the issuer through demand. The period of time remaining until the principal amount can be recovered under a variable master demand note shall not exceed seven days.
Similarly, the Tax-Free Fund, within the limitations described above and subject to the quality standards for tax-exempt commercial paper described below, may invest in commercial paper.
RISK FACTORS AND INVESTMENT TECHNIQUES
Like any investment program, an investment in a Fund entails certain risks. The Funds will not acquire portfolio securities issued by, make savings deposits in, or enter into repurchase, reverse repurchase or dollar roll agreements with First of America Bank-Michigan, N.A. (the parent corporation of First of America), BISYS, or their affiliates, and will not give preference to First of America Bank-Michigan, N.A.'s correspondents with respect to such transactions, securities, savings deposits, repurchase agreements, reverse repurchase agreements and dollar roll agreements.
Some of the investment techniques utilized by First of America and, in the case of the International and Balanced Funds, the Subadviser in the management of each of the Funds (with the exception of the Treasury Fund) involve complex securities sometimes referred to as "derivatives." Among such securities are put and call options, foreign currency transactions and futures contracts, all of which are described below. The Adviser and Subadviser believe that such complex securities may, in some circumstances, play a valuable role in successfully implementing each Fund's investment strategy and achieving its goals. However, because complex securities and the strategies for which they are used, are by their nature complicated, they present substantial opportunities for misunderstanding and misuse. To guard against these risks, the Adviser and Subadviser will utilize complex securities primarily for hedging, not speculative, purposes and only after careful review of the unique risk factors associated with each such security.
The International Fund invests primarily in the securities of foreign issuers. The Balanced Fund may invest up to 15% of its total assets in foreign securities. The Equity, Small Capitalization and High Income Equity Funds may also invest in foreign securities as permitted by their respective investment policies. Each of the Bond Fund and Limited Maturity Bond Fund may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper. The U.S. Government Obligations Fund, the Prime Obligations Fund and the Tax-Free Fund may invest in foreign securities by purchasing ECDs, ETDs, CTDs, Yankee CDs, CCP, and Europaper.
Investment in foreign securities is subject to special investment risks that differ in some respects from those related to investments in securities of U.S. domestic issuers. Such risks include political, social or economic instability in the country of the issuer, the difficulty of predicting international trade patterns, the possibility of the imposition of exchange controls, expropriation, limits on removal of currency or other assets, nationalization of assets, foreign withholding and income taxation, and foreign trading practices (including higher trading commissions, custodial charges and delayed settlements). Such securities may be subject to greater fluctuations in price than securities issued by U.S. corporations or issued or guaranteed by the U.S. government, its agencies or instrumentalities. The markets on which such securities trade may have less volume and liquidity, and may be more volatile than securities markets in the U.S. In addition, there may be less publicly available information about a foreign company than about a U.S. domiciled company. Foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to U.S. domestic companies. There is generally less government regulation of securities exchanges, brokers and listed companies abroad than in the U.S. Confiscatory taxation or diplomatic developments could also affect investment in those countries. In addition, foreign branches of U.S. banks, foreign banks and foreign issuers may be subject to less stringent reserve requirements and to different accounting, auditing, reporting, and recordkeeping standards than those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
In many instances, foreign debt securities may provide higher yields than securities of domestic issuers which have similar maturities and quality. Under certain market conditions these investments may be less liquid than the securities of U.S. corporations and are certainly less liquid than securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. Finally, in the event of a default of any such foreign debt obligations, it may be more difficult for a Fund to obtain or to enforce a judgment against the issuers of such securities. If a security is denominated in foreign currency, the value of the security to the Fund will be affected by changes in currency exchange rates and in exchange control regulations, and costs will be incurred in connection with conversions between currencies. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of a Fund's securities denominated in that currency. Such changes will also affect a Fund's income and distributions to shareholders. In addition, although a Fund will receive income on foreign securities in such currencies, such Fund will be required to compute and distribute its income in U.S. dollars. Therefore, if the exchange rate for any such currency declines materially after such Fund's income has been accrued and translated into U.S. dollars, the Fund could be required to liquidate portfolio securities to make required distributions. Similarly, if an exchange rate declines between the time a Fund incurs expenses in U.S. dollars and the time such expenses are paid, the amount of such currency required to be converted into U.S. dollars in order to pay such expenses in U.S. dollars will be greater.
For many foreign securities, U.S. dollar-denominated American Depositary Receipts, or ADR's, which are traded in the United States on exchanges or over-the-counter, are issued by domestic banks. ADR's represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADR's do not eliminate all the risk inherent in investing in the securities of foreign issuers. However, by investing in ADR's rather than directly in foreign issuers' stock, a Fund can avoid currency risks during the settlement period for either purchases or sales. In general, there is a large, liquid market in the United States for many ADR's. The information available for ADR's is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject. The International and Balanced Funds may also invest in European Depository Receipts, or EDR's, which are receipts evidencing an arrangement with a European bank similar to that for ADR's and are designed for use in the European securities markets. EDR's are not necessarily denominated in the currency of the underlying security.
Certain of the ADR's and EDR's, typically those denominated as unsponsored, require the holders thereof to bear most of the costs of such facilities while issuers of sponsored facilities normally pay more of the costs thereof. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through the voting rights to facility holders in respect to the deposited securities, whereas the depository of a sponsored facility typically distributes shareholder communications and passes through the voting rights.
Subject to its applicable investment policies, each of the Growth Funds and Growth and Income Funds may invest in debt securities denominated in the ECU, which is a "basket" consisting of specified amounts of the currencies of certain of the twelve member states of the European Community. The specific amounts of currencies comprising the ECU may be adjusted by the Council of Ministers of the European Community to reflect changes in relative values of the underlying currencies. Such adjustments may adversely affect holders of ECU-denominated obligations or the marketability of such securities. European governments and supranationals, in particular, issue ECU-denominated obligations.
Each of the Funds, with the exception of the Money Market Funds and the Michigan Fund, may utilize foreign currency transactions in its portfolio. The value of the assets of a Fund as measured in United States dollars may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and a Fund may incur costs in connection with conversions between various currencies. A Fund will conduct its 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. A forward foreign currency exchange contract ("forward currency contracts") involves 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. These forward currency contracts are traded directly between currency traders (usually large commercial banks) and their customers. The Funds may enter into forward currency contracts in order to hedge against adverse movements in exchange rates between currencies.
For example, when a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may want to establish the United States dollar cost or proceeds, as the case may be. By entering into a forward currency contract in United States dollars for the purchase or sale of the amount of foreign currency involved in an underlying security transaction, such Fund is able to protect itself against a possible loss between trade and settlement dates resulting from an adverse change in the relationship between the United States dollar and such foreign currency. Additionally, for example, when a Fund believes that a foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a forward currency sale contract to sell an amount of that foreign currency approximating the value of some or all of that Fund's portfolio securities or other assets denominated in such foreign currency, or when a Fund believes that the U.S. dollar may suffer a substantial decline against a foreign currency, it may enter into a forward currency purchase contract to buy that foreign currency for a fixed U.S. dollar amount. However, this tends to limit potential gains which might result from a positive change in such currency relationships. A Fund may also hedge its foreign currency exchange rate risk by engaging in currency financial futures and options transactions. The forecasting of short-term currency market movement is extremely difficult and whether such a short-term hedging strategy will be successful is highly uncertain.
It is impossible to forecast with precision the market value of portfolio securities at the expiration of a forward currency contract. Accordingly, it may be necessary for a Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency such Fund is obligated to deliver when a decision is made to sell the security and make delivery of the foreign currency in settlement of a forward contract. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency such Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting transaction, such Fund will incur a gain or a loss (as described below) to the extent that there has been movement in forward currency contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward currency contract to sell the foreign currency. Should forward prices decline during the period between a Fund's entering into a forward currency contract for the sale of foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, such Fund would realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, such Fund would suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. Although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which might result should the value of such currency increase. The Funds will have to convert their holdings of foreign currencies into United States dollars from time to time. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies.
The International Fund does not intend to enter into forward currency contracts if the International Fund would have more than 15% of the value of its total assets committed to such contracts on a regular or continuous basis. The International Fund does not intend to enter into forward currency contracts or maintain a net exposure in such contracts where the International Fund would be obligated to deliver an amount of foreign currency in excess of the value of the Fund's portfolio securities or other assets denominated in that currency.
For further information about the characteristics, risks and possible benefits of options, futures and foreign currency transactions, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments" in the Statement of Additional Information.
The Growth Funds, the Growth and Income Funds, the Bond Fund, the Limited Maturity Bond Fund, the Intermediate Government, Government Obligations Fund, the Municipal Bond Fund and the Parkstone Government Income Fund may also enter into contracts for the future delivery of securities or foreign currencies and futures contracts based on a specific security, class of securities, foreign currency or an index, purchase or sell options on any such futures contracts and engage in related closing transactions. A futures contract on a securities index is an agreement obligating either party to pay, and entitling the other party to receive, while the contract is outstanding, cash payments based on the level of a specified securities index.
A Fund may engage in such futures contracts in an effort to hedge against market risks. For example, when interest rates are expected to rise or market values of portfolio securities are expected to fall, a Fund can seek through the sale of futures contracts to offset a decline in the value of its portfolio securities. When interest rates are expected to fall or market values are expected to rise, a Fund, through the purchase of such contracts, can attempt to secure better rates or prices for the Fund than might later be available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will, respectively, give a Fund the right (but not the obligation), for a specified price, to sell or to purchase the underlying futures contract, upon exercise of the option, at any time during the option period.
Aggregate initial margin deposits for futures contracts, and premiums paid for related options, may not exceed five percent of a Fund's total assets, and the value of securities that are the subject of such futures and options (both for receipt and delivery) may not exceed one-third of the market value of a Fund's total assets. Futures transactions will be limited to the extent necessary to maintain each Fund's qualification as a regulated investment company.
Futures transactions involve brokerage costs and require a Fund to segregate assets to cover contracts that would require it to purchase securities or currencies. A Fund may lose the expected benefit of futures transactions if interest rates, exchange rates or securities prices move in an unanticipated unanticipated changes may also result in poorer overall performance than if the Fund had not entered into any futures transactions. In addition, the value of a Fund's futures positions may not prove to be perfectly or even highly correlated with the value of its portfolio securities or foreign currencies, limiting the Fund's ability to hedge effectively against interest rate, exchange rate and/or market risk and giving rise to additional risks. There is no assurance of liquidity in the secondary market for purposes of closing out futures positions.
The U.S. Government Obligations Fund will invest primarily in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Subject to the investment parameters described above, each of the remaining Funds may also invest in such obligations. The Treasury Fund, however, will invest exclusively in obligations issued or guaranteed by the U.S. Treasury and in repurchase agreements backed by such securities. The remaining Funds may invest in government obligations as permitted by the investment parameters.
The types of U.S. Government obligations in which each of these Funds may invest include U.S. Treasury notes, bills, bonds, and any other securities directly issued by the U.S. Government that are available for public investment, which differ only in their interest rates, maturities, and times of issuance, as well as "stripped" U.S. Treasury obligations, such as Treasury Receipts issued by the U.S. Treasury and representing either future interest or principal payments, and, except for the Treasury Fund, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Stripped securities are issued at a discount to their "face value" and may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors. The stripped Treasury obligations in which the Money Market Funds may invest do not include certificates of accrual on treasury securities (CATS) or treasury income growth receipts (TIGRs).
Obligations of certain agencies and instrumentalities of the U.S. Government, such as the Government National Mortgage Association, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Student Loan Marketing Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law. The Funds which may invest in these government obligations will invest in the obligations of such agencies or instrumentalities only when First of America believes that the credit risk with respect thereto is minimal.
The Bond Fund and the Limited Maturity Bond Fund may invest in guaranteed investment contracts (GICs). When investing in GICs, the Bond Fund and the Limited Maturity Bond Fund make cash contributions to a deposit fund of an insurance company's general account. The insurance company then credits to the deposit fund on a monthly basis guaranteed interest. The GICs provide that this guaranteed interest will not be less than a certain minimum rate. The insurance company may assess periodic charges against a GIC for expense and service costs allocable to it, and the charges will be deducted from the value of the deposit fund. The Bond Fund and the Limited Maturity Bond Fund may invest in GICs of insurance companies without regard to the ratings, if any, assigned to such insurance companies' outstanding debt securities. Because a Fund may not receive the principal amount of a GIC from the insurance company on seven days notice or less, the GIC is considered an illiquid investment, and, together with other instruments in that Income Fund which are deemed to be illiquid, will not exceed 15% of its total assets. In determining average portfolio maturity, GICs will be deemed to have a maturity equal to the period of time remaining until the next readjustment of the guaranteed interest rate.
In order to generate additional income, each Fund may, from time to time, lend its portfolio securities to broker-dealers, banks, or institutional borrowers of securities. A Fund must receive 100% collateral in the form of cash or U.S. Government securities. This collateral will be valued daily by First of America or by the Subadvisers, as the case may be. Should the market value of the loaned securities increase, the borrower must furnish additional collateral to that Fund. During the time portfolio securities are on loan, the borrower pays that Fund any dividends or interest received on such securities. Loans are subject to termination by the Fund or the borrower at any time. While a Fund does not have the right to vote securities on loan, each Fund intends to terminate the loan and regain the right to vote if that is considered important with respect to the investment. In the event the borrower defaults in its obligation to a Fund, such Fund bears the risk of delay in the recovery of its portfolio securities and the risk of loss of rights in the collateral. The Funds will enter into loan agreements only with broker-dealers, banks, or other institutions that the Adviser or the Subadvisers, as the case may be, have determined are creditworthy under guidelines established by the Group's Board of Trustees.
As described above, the Balanced, Bond, Limited Maturity Bond, Municipal Bond and the Michigan Funds may invest in fixed income securities within the fourth highest rating group assigned by an NRSRO (i.e., BBB or Baa by S&P and Moody's, respectively) and comparable unrated securities. These types of fixed income securities are considered by the NRSROs to have some speculative characteristics, and are more vulnerable to changes in economic conditions, higher interest rates or adverse issuer-specific developments which are more likely to lead to a weaker capacity to make principal and interest payments than comparable higher rated debt securities.
Should subsequent events cause the rating of a fixed income security purchased by any of the Funds listed above to fall below the fourth highest rating, First of America will consider such an event in determining whether the Fund should continue to hold that security. In no event, however, would the Fund be required to liquidate any such portfolio security where the Fund would suffer a loss on the sale of such security.
As indicated above, the Government Income Fund intends to invest up to 80% of the value of its total assets and the Balanced Fund, Bond Fund, Limited Maturity Bond Fund, Intermediate Government Obligations Fund, Prime Obligations Fund and U.S. Government Obligations Fund may invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Such agencies or instrumentalities include the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), and in mortgage-related securities issued by nongovernmental entities which are rated, at the time of purchase, within the three highest bond rating categories assigned by an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality. However, the Government Income Fund may invest greater amounts as conditions warrant.
The mortgage-related securities in which the these Funds may invest have mortgage obligations backing such securities, consisting of conventional thirty year fixed rate mortgage obligations, graduated payment mortgage obligations, fifteen year mortgage obligations and adjustable rate mortgage obligations. All of these mortgage obligations can be used to create pass-through securities. A pass-through security is created when mortgage obligations are pooled together and undivided interests in the pool or pools are sold. The cash flow from the mortgage obligations is passed through to the holders of the securities in the form of periodic payments of interest, principal and prepayments (net of a service fee). Prepayments occur when the holder of an individual mortgage obligation prepays the remaining principal before the mortgage obligation's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, mortgage-backed securities are often subject to more rapid prepayment of principal than their stated maturity would indicate. Because the prepayment characteristics of the underlying mortgage obligations vary, it is not possible to predict accurately the realized yield or average life of a particular issue of pass-through certificates. Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments have an adverse impact on yields for pass-throughs purchased at a premium (i.e., a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may not have been fully amortized at the time the obligation is repaid. The opposite is true for pass-throughs purchased at a discount. The Fund may purchase mortgage-related securities at a premium or at a discount.
If a Fund purchases a mortgage-related 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-related 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, thereby shortening the average life of the security and shortening the period of time over which income at the higher rate is received. When interest rates are rising, though, the rate of prepayment tends to decrease, thereby lengthening the period of time over which income at the lower rate is received. For these and other reasons, a mortgage-related security's average maturity may be shortened or lengthened as a result of interest rate fluctuations and, therefore, it is not possible to predict accurately the security's return to the Fund. In addition, regular payments received with respect to mortgage-related securities include both interest and principal. No assurance can be given as to the return a Fund will receive when these amounts are reinvested.
The principal governmental (i.e., backed by the full faith and credit of the United States Government) guarantor of mortgage-related securities is GNMA. GNMA is a wholly-owned United States Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the United States Government) guarantors include FNMA and FHLMC. FNMA is a government-sponsored corporation owned entirely by private stockholders. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the United States Government. FHLMC is a corporate instrumentality of the United States Government whose stock is owned by the twelve Federal Home Loan Banks. Participation certificates issued by FHLMC are guaranteed as to the timely payment of interest and ultimate collection of principal but are not backed by the full faith and credit of the United States Government.
The Government Income Fund also may invest up to 35% of its total assets in mortgage-related securities issued by nongovernmental entities and in other securities described below. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issues also create pass-through pools of conventional residential mortgage loans. Such issuers may also be the originators of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such nongovernmental issuers generally offer a higher rate of interest than government and government-related pools because there are not direct or indirect government guarantees of payments in the former pools. However, timely payment of interest and principal of these pools is supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers and the mortgage poolers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets a Fund's investment quality standards. There can be no assurance that the private insurers can meet their obligations under the policies. The Government Income Fund may buy mortgage-related securities without insurance or guarantees if through an examination of the loan experience and practices of the poolers First of America determines that the securities meet the Government Income Fund's quality market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. The Government Income Fund will not purchase mortgage-related securities or any other assets which in First of America's opinion are illiquid, if as a result, more than 15% of the value of the Government Income Fund's total assets will be illiquid.
Mortgage-related securities in which the above-named Funds may invest may also include collateralized mortgage obligations ("CMOs"). CMOs are debt obligations issued generally by finance subsidiaries or trusts that are secured by mortgage-backed certificates, including, in many cases, certificates issued by government-related guarantors, including GNMA, FNMA and FHLMC, together with certain funds and other collateral. Although payment of the principal of and interest on the mortgage-backed certificates pledged to secure the CMOs may be guaranteed by GNMA, FNMA or FHLMC, the CMOs represent obligations solely of the issuer and are not insured or guaranteed by GNMA, FHLMC, FNMA or any other governmental agency, or by any other person or entity. The issuers of the CMOs typically have no significant assets other than those pledged as collateral for the obligations.
The Government Income Fund expects that governmental, government-related or private entities may create mortgage loan pools offering pass-through investments in addition to those described above. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments may vary or whose terms to maturity may differ from customary long-term fixed rate mortgages. As new types of mortgage-related securities are developed and offered to investors, First of America will, consistent with the Government Income Fund's investment objective, policies and quality standards, consider making investments in such new types of securities.
The two principal classifications of Municipal Securities (Michigan Municipal Securities, in the case of the Michigan Fund) which may be held by the Bond, Limited Maturity Bond, Municipal Bond Fund, Michigan Fund, Prime Obligations, U.S. Government Obligations and Tax-Free Funds are "general obligation" securities and "revenue" securities. General obligation securities are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from proceeds of a special excise tax or other specific revenue source such as the user of the facility being financed. Private activity bonds held by the Municipal Bond and Michigan Fund are in most cases revenue securities and are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved.
The above-named Funds may also invest in "moral obligation" securities, which are normally issued by special purpose public authorities. If the issuer of moral obligation securities is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.
Each of the above-named Funds invests primarily in Municipal Securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or in the highest rating group assigned by an NRSRO in the case of notes, tax-exempt commercial paper or variable rate demand obligations. The Funds may also purchase Municipal Securities which are unrated at the time of purchase but are determined to be of comparable quality by First of America pursuant to guidelines approved by the Group's Board of Trustees. The applicable Municipal Securities ratings are described in the Appendix to the Statement of Additional Information. For a discussion of debt securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium Grade Securities" herein.
Opinions relating to the validity of Municipal Securities and to the exemption of interest thereon from federal income tax are rendered by bond counsel to the respective issuers at the time of issuance. No Fund nor First of America will review the proceedings relating to the issuance of Municipal Securities or the basis for such opinions.
Municipal Securities and Michigan Municipal Securities purchased by the Tax-Free Income Funds may include rated and unrated variable and floating rate tax-exempt notes. A variable rate note is one whose terms provide for the adjustment of its interest rate on set dates and which, upon such adjustment, can reasonably be expected to have a market value that approximates its par value. A floating rate note is one whose terms provide for the adjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value. Such notes are frequently not rated by credit rating agencies; however, unrated variable and floating rate notes purchased by the Tax-Free Income Funds will be determined by First of America, under guidelines established by the Group's Board of Trustees, to be of comparable quality at the time of purchase to rated instruments eligible for purchase under the Fund's investment policies. In making such determinations, First of America will consider the earning power, cash flow and other liquidity ratios of the issuers of such notes (such issuers include financial, merchandising, bank holding and other companies) and will continuously monitor their financial condition. There may be no active secondary market with respect to a particular variable or floating rate note. Nevertheless, the periodic readjustments of their interest rates tend to assure that their value to the Tax-Free Income Fund will approximate their par value. The Tax-Free Income Funds will not purchase variable and floating rate notes or any other securities which in First of America's opinion are illiquid, if as a result, more than 15% of the Tax-Free Income Fund's total assets will be illiquid.
Each of the Funds may invest up to 5% of the value of its total assets in the securities of any one money market mutual fund (including shares of the Parkstone Prime Obligations Fund, the Parkstone U.S. Government Obligations Fund, the Parkstone Tax-Free Fund, the Parkstone Municipal Investor Fund, and the Parkstone Treasury Fund), provided that no more than 10% of the Fund's total assets may be invested in the securities of mutual funds in the aggregate. In order to avoid the imposition of additional fees as a result of investments by a Fund in Shares of the money market funds of the Group, the Investment Adviser, Administrator and their affiliates (See "MANAGEMENT OF THE FUNDS--Investment Adviser and Subadvisers" and "Administrator, Sub-Administrator and Distributor" and "GENERAL INFORMATION--Transfer Agency and Fund Accounting Services") will not retain any portion of their usual asset-based service fees from a Fund that are attributable to investments by the Fund in Shares of those money market mutual funds if the fee is being taken in the Fund. The Investment Adviser and the Administrator will promptly forward such fees to the appropriate Fund. Each Fund will incur additional expenses due to the duplication of expenses as a result of any investment in securities of unaffiliated mutual funds. Additional restrictions regarding the Funds' investments in securities of unaffiliated mutual funds and/or money market funds of the Group are contained in the Statement of Additional Information.
The Tax-Free Fund may also invest in private activity bonds. It should be noted that the Tax Reform Act of 1986 substantially revised provisions of prior federal law affecting the issuance and use of proceeds of certain tax-exempt obligations. A new definition of private activity bonds applies to many types of bonds, including those which were industrial development bonds under prior law. Any reference herein to private activity bonds includes industrial development bonds. Interest on private activity bonds is tax-exempt (and such bonds will be considered Municipal Securities for purposes of this Prospectus) only if the bonds fall within certain defined categories of qualified private activity bonds and meet the requirements specified in those respective categories. If the Tax-Free Fund invests in private activity bonds which fall outside these categories, Shareholders may become subject to the alternative minimum tax on that part of the Tax-Free Fund's distributions derived from interest on such bonds. The Tax Reform Act generally does not change the federal tax treatment of bonds issued to finance government operations. For further information relating to the types of private activity bonds which will be included in income subject to the alternative minimum tax, see "ADDITIONAL INFORMATION--Additional Tax Information Concerning the Tax-Free Fund and the Municipal Bond Fund" in the Statement of Additional Information.
Each of the Growth Funds, the Growth and Income Funds, the Income Funds and the Tax-Free Income Funds may purchase put and call options on securities and on foreign currencies, subject to its applicable investment policies, for the purposes of hedging against market risks related to its portfolio securities and adverse movements in exchange rates between currencies, respectively. Purchasing options is a specialized investment technique that entails a substantial risk of a complete loss of the amounts paid as premiums to writers of options. Each Fund may also engage in writing call options from time to time as First of America or the Subadvisers, as the case may be with respect to the International Fund, deem appropriate. The Funds will write only covered call options (options on securities or currencies owned by the particular Fund). In order to close out a call option it has written, the Fund will enter into a "closing purchase transaction"--the purchase of a call option on the same security or currency with the same exercise price and expiration date as the call option which such Fund previously has written. When a portfolio security or currency subject to a call option is sold, the Fund will effect a closing purchase transaction to close out any existing call option on that security or currency. If such Fund is unable to effect a closing purchase transaction, it will not be able to sell the underlying security or currency until the option expires or that Fund delivers the underlying security or currency upon exercise. In addition, upon the exercise of a call option by the holder thereof, the Fund will forego the potential benefit represented by market appreciation over the exercise price. Under normal conditions, it is not expected that the Funds will cause the underlying value of portfolio securities and currencies subject to such options to exceed 50% of its net assets, and with respect to each of the Balanced and International Funds, 20% of its net assets.
Each of the Growth Funds, the Growth and Income Funds and the Government Income Fund, as part of its option transactions, also may purchase index put and call options and write index options. As with options on individual securities, a Fund will write only covered index call options. Through the writing or purchase of index options a Fund can achieve many of the same objectives as through the use of options on individual securities. Options on securities indices are similar to options on a security except that, rather than the right to take or make delivery of a security at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option.
Price movements in securities which a Fund owns or intends to purchase probably will not correlate perfectly with movements in the level of an index and, therefore, a Fund bears the risk of a loss on an index option that is not completely offset by movements in the price of such securities. Because index options are settled in cash, a call writer cannot determine the amount of its settlement obligations in advance and, unlike call writing on specific securities, cannot provide in advance for, or cover, its potential settlement obligations by acquiring and holding the underlying securities. A Fund may be required to segregate assets or provide an initial margin to cover index options that would require it to pay cash upon exercise.
In addition, the Tax-Free Fund, the Municipal Bond Fund and the Michigan Fund may each acquire "puts" with respect to Municipal Securities or Michigan Municipal Securities, as the case may be, held in its portfolio. Under a put, such a Fund would have the right to sell a specified Municipal Security (or Michigan Municipal Security, as the case may be) within a specified period of time at a specified price. A put would be sold, transferred, or assigned only with the underlying security. The Municipal Bond, the Michigan and the Tax-Free Funds will acquire puts solely to either facilitate portfolio liquidity, shorten the maturity of the underlying securities, or permit the investment of its funds at a more favorable rate of return. Each of the Municipal Bond Fund, the Michigan Fund and the Tax-Free Fund expects that it will generally acquire puts only where the puts are available without the payment of any direct or indirect consideration. However, if necessary or advisable, such Fund may pay for a put either separately in cash or by paying a higher price for portfolio securities which are acquired subject to the puts (thus reducing the yield to maturity otherwise available for the same securities).
Securities held by a Fund may be subject to repurchase agreements. Under the terms of a repurchase agreement, a Fund would acquire securities from financial institutions such as member banks of the Federal Deposit Insurance Corporation or registered broker-dealers which First of America or the Subadvisers, as the case may be, deem creditworthy under guidelines approved by the Group's Board of Trustees, subject to the seller's agreement to repurchase such securities at a mutually agreed upon date and price. The repurchase price would generally equal the price paid by the Fund plus interest negotiated on the basis of current short-term rates, which may be more or less than the rate on the underlying portfolio securities. Securities subject to repurchase agreements will be held in a segregated account. If the seller were to default on its repurchase obligation or become insolvent, the Fund would suffer a loss to the extent that the proceeds from a sale of the underlying portfolio securities were less than the repurchase price under the agreement, or to the extent that the disposition of such securities by that Fund were delayed pending court action. Repurchase agreements are considered to be loans by an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). For further information about repurchase agreements, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments-Repurchase Agreements" in the Statement of Additional Information.
Securities in which each of the Funds, with the exception of the Treasury Fund, may invest include securities issued by corporations without registration under the Securities Act of 1933, as amended (the "1933 Act"), in reliance on the exemption from such registration afforded by Section 3(a)(3) thereof, and securities issued in reliance on the so-called "private placement" exemption from registration which is afforded by Section 4(2) of the 1933 Act ("Section 4(2) securities"). Section 4(2) securities are restricted as to disposition under the Federal securities laws, and generally are sold to institutional investors such as the Funds who agree that they are purchasing the securities for investment and not with a view to public distribution. Any resale must also generally be made in an exempt transaction. Section 4(2) securities are normally resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in such Section 4(2) securities, thus providing liquidity. Pursuant to procedures adopted by the Board of Trustees of the Group, First of America may determine Section 4(2) securities to be liquid if such securities are eligible for resale under Rule 144A under the 1933 Act and are readily saleable.
Thus, subject to the limitations described above, the Funds may acquire investments that are illiquid or of limited liquidity, such as private placements or investments that are not registered under the 1993 Act. An illiquid investment is any investment that cannot be disposed of within seven (7) days in the normal course of business at approximately the amount at which it is valued by a Fund. The price a Fund pays for illiquid securities or receives upon resale may be lower than the price paid or received for similar securities with a more liquid market. Accordingly, the valuation of these securities will reflect any limitations on their liquidity. A Fund may not invest in additional illiquid securities if, as a result, more than 15% (10% in the case of the Money Market Funds) of the market value of its net assets would be invested in illiquid securities.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
Each of the Funds may borrow funds by entering into reverse repurchase agreements and, in the case of the Income and the Tax-Free Income Funds, dollar roll agreements in accordance with the investment restrictions described below. Pursuant to such agreements, a Fund would sell certain of its securities to financial institutions such as banks and broker-dealers, and agree to repurchase the securities, or substantially similar securities in the case of a dollar roll agreement, at a mutually agreed upon date and price. Dollar roll agreements utilized by the Income and Tax-Free Income Funds are identical to reverse repurchase agreements except for the fact that substantially similar securities may be repurchased. At the time a Fund enters into a reverse repurchase agreement or a dollar roll agreement, it will place in a segregated custodial account assets such as U.S. Government securities or other liquid high grade debt securities consistent with its investment restrictions having a value equal
(including accrued interest), and will subsequently continually monitor the account to ensure that such equivalent value is maintained at all times. Reverse repurchase agreements and dollar roll agreements involve the risk that the market value of securities sold by a Fund may decline below the price at which it is obligated to repurchase the securities. Reverse repurchase agreements and dollar roll agreements are considered to be borrowings by an investment company under the 1940 Act and therefore a form of leverage. A Fund may experience a negative impact on its net asset value if interest rates rise during the term of a reverse repurchase agreement or dollar roll agreement. A Fund generally will invest the proceeds of such borrowings only when such borrowings will enhance a Funds's liquidity or when the Fund reasonably expects that the interest income to be earned from the investment of the proceeds is greater than the interest expense of the transaction. For further information about reverse repurchase agreements and dollar roll agreements, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments--Reverse Repurchase Agreements and Dollar Roll Agreements" in the Statement of Additional Information.
Each of the Funds, with the exception of the Treasury Fund, may each purchase securities on a when-issued or delayed-delivery basis. Such Funds will engage in when-issued and delayed-delivery transactions only for the purpose of acquiring portfolio securities consistent with its investment objectives and policies, not for investment leverage although such transactions represent a form of leveraging. When-issued securities are securities purchased for delivery beyond the normal settlement date at a stated price and yield and thereby involve a risk that the yield obtained in the transaction will be less than those available in the market when delivery takes place. A Fund will not pay for such securities or start earning interest on them until they are received. When a Fund agrees to purchase such securities, its custodian will set aside cash or liquid securities equal to the amount of the commitment in a separate account. Securities purchased on a when-issued basis are recorded as an asset and are subject to changes in the value based upon changes in the general level of interest rates. In when-issued and delayed-delivery transactions, a Fund relies on the seller to complete the transaction; the seller's failure to do so may cause such Fund to miss a price or yield considered to be advantageous. The Prime Obligations, U.S. Government Obligations and Tax-Free Funds will purchase only Municipal Securities on a when-issued or delayed delivery basis. No Fund's commitments to purchase "when-issued" securities will exceed 25% of the value of its total assets under normal market conditions, and a commitment by a Fund to purchase "when-issued" securities will not exceed 60 days. In the event its commitments to purchase "when-issued" securities ever exceeded 25% of the value of its assets, a Fund's liquidity and the investment adviser's ability to manage it might be adversely affected. The Funds intend only to purchase "when-issued" securities for the purpose of acquiring portfolio securities, not for investment leverage although such transactions represent a form of leveraging.
The portfolio turnover rate for each Fund is calculated by dividing the lesser of a Fund's purchases or sales of portfolio securities for the year by the monthly average value of the portfolio securities. The Securities and Exchange Commission requires that the calculation exclude all securities whose remaining maturities at the time of acquisition are one year or less. The portfolio turnover rate for a Fund may vary greatly from year to year, as well as within a particular year, and may also be affected by cash requirements for redemptions of Shares. High portfolio turnover rates will generally result in higher transaction costs, including brokerage commissions, to a Fund and may result in additional tax consequences to a Fund's shareholders. Portfolio turnover will not be a limiting factor in making investment decisions.
Each Fund is subject to a number of investment restrictions that may be changed only by a vote of a majority of the outstanding Shares of that Fund (as defined in the Statement of Additional Information).
None of the Funds, with the exception of the Michigan Fund, may:
Purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if, immediately after such purchase, more than 5% of the value of the Fund's total assets would be invested in such issuer, or the Fund would hold more than 10% of the outstanding voting securities of the issuer, except that 25% or less of the value of such Fund's total assets may be invested without regard to such limitations. There is no limit to the percentage of assets that may be invested in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities.
Irrespective of the investment restriction above, and pursuant to Rule 2a-7 under the 1940 Act, the U.S. Government Obligations Fund, the Prime Obligations Fund and the Treasury Fund each will, with respect to 100% of its total assets, limit its investment in the securities of any one issuer in the manner provided by such Rule, which limitations are referred to above under the caption "INVESTMENT OBJECTIVES AND POLICIES--The Money Market Funds."
The Michigan Fund may not:
Purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if, immediately after such purchase, (a) more than 5% of the value of the Fund's total assets (taken at current value) would be invested in such issuer (except that up to 50% of the value of the Fund's total assets may be invested without regard to such 5% limitation), and (b) more than 25% of its total assets (taken at current value) would be invested in the securities of a single issuer.
For purposes of the investment limitations above, a security is considered to be issued by the governmental entity (or entities) whose assets and revenues back the security and, with respect to a private activity bond that is backed only by the assets and revenues of a non-governmental user, a security is considered to be issued by such non-governmental user.
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the value of the Fund's total assets at the time of purchase to be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and repurchase agreements secured by obligations of the U.S. Government or its agencies or instrumentalities; (b) wholly owned finance companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of their parents; and (c) utilities will be divided according to their services. For example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry.
2. (a) Borrow money (not including reverse repurchase agreements or dollar roll agreements), except that the Funds may borrow from banks for temporary or emergency purposes and then only in amounts up to 30% (10% in the case of the Money Market Funds) of its total assets at the time of borrowing (and provided that such bank borrowings and reverse repurchase agreements and dollar roll agreements do not exceed in the aggregate one-third of the Fund's total assets less liabilities other than the obligations represented by the bank borrowings, reverse repurchase agreements and dollar roll agreements), or mortgage, pledge or hypothecate any assets except in connection with a bank borrowing in amounts not to exceed 30% of the Fund's net assets at the time of borrowing; (b) enter into reverse repurchase agreements, dollar roll agreements and other permitted borrowings in amounts exceeding in the aggregate one-third of the Fund's total assets less liabilities other than the obligations represented by such reverse repurchase and dollar roll agreements; and (c) issue senior securities except as permitted by the 1940 Act rule, order or interpretation thereunder.
3. Make loans, except that the Fund may purchase or hold debt instruments and lend portfolio securities in accordance with its investment objective and policies, make time deposits with financial institutions and enter into repurchase agreements.
For purposes only of investment limitation number 1 above, such limitation shall not apply to Municipal Securities or governmental guarantees of Municipal Securities, and industrial development bonds or private activity bonds that are backed only by the assets and revenues of a non-governmental user shall not be deemed to be Municipal Securities.
The following additional investment restriction may be changed without the vote of a majority of the outstanding Shares of a Fund.
1. Purchase or otherwise acquire any securities, if as a result, more than 15% (10% in the case of the Money Market Funds) of the Fund's net assets would be invested in securities that are illiquid.
In addition to the above investment restrictions, the Funds are subject to certain other investment restrictions set forth under "INVESTMENT OBJECTIVES AND POLICIES--Investment Restrictions" in the Statement of Additional Information.
Overall responsibility for management of the Group rests with its Board of Trustees, who are elected by the shareholders of all of the Group's Funds. The Group will be managed by the Trustees in accordance with the laws of the Commonwealth of Massachusetts governing business trusts. There are currently five Trustees, three of whom are not "interested persons" of the Group within the meaning of that term under the 1940 Act. The Trustees, in turn, elect the officers of the Group to supervise actively its day-to-day operations.
The Trustees of the Group are Stephen G. Mintos* (Chairman), George R. Landreth*, Robert M. Beam, Lawrence D. Bryan and Adrian Charles Edwards. The addresses, and principal occupations during the past five years of the Trustees are set forth in the Statement of Additional Information. Those Trustees designated with an asterisk (*) are considered to be "interested persons" of the Group as defined in the 1940 Act.
The Trustees of the Group receive quarterly fees and fees and expenses for each meeting of the Board of Trustees attended. However, no officer or employee of BISYS, The BISYS Group, Inc. or BISYS Fund Services Ohio, Inc. receives any compensation from the Group for acting as a Trustee of the Group. The officers of the Group receive no compensation directly from the Group for performing the duties of their offices. BISYS receives fees from the Group for acting as Administrator and may receive fees from each of the Funds pursuant to the Investor A Distribution and Shareholder Service Plan described below. BISYS Fund Services Ohio, Inc., an affiliate of BISYS, receives fees from the Group for acting as Transfer Agent and for providing certain fund accounting services. Mr. Mintos and Mr. Landreth are employees of BISYS.
First of America was established in 1932 and is the investment adviser of the Group. First of America, a registered investment adviser, is a wholly owned subsidiary of First of America Bank-Michigan, N.A., which is a wholly owned subsidiary of First of America Bank Corporation. First of America Bank Corporation currently has over $25 billion in assets and provides financial services to over 300 communities in Michigan, Indiana, Illinois and Florida. As of June 30, 1995, First of America managed over $10 billion on behalf of both taxable and tax-exempt clients, including pensions, endowments, corporations and individual portfolios. First of America also acts as investment adviser to the Trust Division of First of America Bank Corporation with respect to an additional $2.3 billion in discretionary assets, providing equity, fixed income, balanced and money management services.
Subject to such policies as the Group's Board of Trustees may determine, First of America, either directly or, with respect to the International Fund and the Balanced Fund, through one or more subadvisers, furnishes a continuous investment program for each Fund and makes investment decisions on behalf of each Fund.
First of America utilizes a team approach to the investment management of the Funds, with up to three professionals working as a team to ensure a disciplined investment process designed to result in long-term performance consistent with each Fund's investment objectives. Roger H. Stamper, Managing Director of First of America, is primarily responsible for the day-to-day management of each of the Growth Funds (except the International Fund) and the Growth and Income Funds. Mark R. Kummerer, Managing Director-Fixed Income of First of America, is primarily responsible for the day-to-day management of the Income Funds. Christian S. Swantek, Vice President of First of America, is primarily responsible for the day-to-day management of the Tax-Free Income Funds. Messrs. Stamper and Kummerer have held their respective positions with First of America since 1988 and 1986, respectively. Prior to June 1993, Mr. Swantek was a portfolio manager at PNC Investment Management & Research and its various investment management affiliates.
For the services provided and expenses assumed pursuant to its Investment Advisory Agreement with the Group, First of America receives a fee from each of the Equity, Small Capitalization, High Income Equity and Balanced Funds, computed daily and paid monthly, at the annual rate of one percent (1%) of that Fund's average daily net assets. For its services in connection with the International Fund, First of America's fee is computed daily and paid monthly at the annual rate of one and twenty-five hundredths percent (1.25%) of the first $50 Million of the International Fund's average daily net assets, one and twenty hundredths percent (1.20%) of average daily net assets between $50 Million and $100 Million, one and fifteen hundredths percent (1.15%) of average daily net assets between $100 Million and $400 Million and one and five hundredths percent (1.05%) of average daily net assets above $400 Million. For its services in connection with each Income Fund and Tax-Free Income Fund, First of America's fee is computed daily and paid monthly at the annual rate of seventy-four one-hundredths of one percent (.74%) of each Income Fund's and Tax-Free Income Fund's average daily net assets. For its services in connection with the Money Market Funds, First of America's fee is computed daily and paid monthly, at the annual rate of forty one-hundredths of one percent (.40%) of each Money Market Fund's average daily net assets. First of America may periodically voluntarily reduce all or a portion of its advisory fee with respect to a Fund to increase the net income of that Fund available for distribution as dividends. The voluntary fee reduction will cause the yield of that Fund to be higher than it would otherwise be in the absence of such a reduction.
Pursuant to the terms of its Investment Advisory Agreement with the Group, First of America has entered into a Sub-Investment Advisory Agreement with Gulfstream Global Investors, Ltd., 300 Crescent Court, Suite 1605, Dallas, Texas 75201 ("Gulfstream"). Pursuant to the terms of such Sub-Investment Advisory Agreement Gulfstream has been retained by First of America to manage the investment and reinvestment of the assets of the International Fund and to manage the investment and reinvestment of those assets of the Balanced Fund which are invested in foreign securities, subject to the direction and control of the Group's Board of Trustees.
Under this arrangement, Gulfstream is responsible for the day-to-day management of the International Fund's assets, reviews investment performance policies and guidelines and maintains certain books and records, and First of America is responsible for selecting and monitoring the performance of Gulfstream and for reporting the activities of Gulfstream in managing the International Fund to the Group's Board of Trustees. Gulfstream utilizes a team approach to the investment management of the International Fund to ensure a disciplined investment process designed to result in long-term performance consistent with its investment objective. No one person is responsible for the Fund's management. First of America may also render advice with respect to the International Fund's investments in the U.S.
For its services provided and expenses assumed pursuant to its Sub-Investment Advisory Agreement with First of America, Gulfstream receives from First of America a fee, computed daily and paid monthly, at the annual rate of one-half percent (.50%) of the first $50 million of the International Fund's average daily net assets and the average daily net assets of the Balanced Fund which are invested in foreign securities, forty-five one hundredths percent (.45%) of such average daily net assets between $50 million and $100 million, forty one hundredths percent (.40%) of such average daily net assets between $100 million and $400 million and thirty one hundredths percent (.30%) of such average daily net assets above $400 million, provided the minimum annual fee shall be $75,000.
Gulfstream, 300 Crescent Court, Suite 1605, Dallas, Texas 75201, was organized in 1991 as a Texas limited partnership by Tull, Doud, Marsh & Triltsch, Inc., a Texas corporation ("TDMT"). TDMT is the sole general partner of Gulfstream. TDMT is owned by C. Thomas Tull, Stephen C. Doud, James P. Marsh and Reiner M. Triltsch. Messrs. Tull, Doud and Triltsch are the portfolio managers and Mr. Marsh is responsible for client services with Gulfstream. First of America is the sole limited partner, holding a forty nine (49) percent interest in Gulfstream with options which would under certain circumstances permit it to acquire up to a seventy two (72) percent interest. Gulfstream has over $360 million in assets of institutional, investment company, governmental, pension fund and high net worth individual clients under its investment management. Gulfstream's portfolio management personnel average twenty (20) years of investment experience and nine (9) years of international investment experience. As of January 3, 1994, Gulfstream managed over $300 million in international investment portfolios.
Prior to January 1, 1995, Ivory & Sime International, Inc. ("ISI" and Ivory & Sime plc ("ISplc" together with ISI, "Ivory & Sime") served as subadvisers to the International Fund. The Trustees voted unanimously to terminate this arrangement and replace it with the current subadvisory arrangement with Gulfstream. As required by the 1940 Act, the Shareholders of the International Discovery Fund and the Balanced Fund each approved the appointment of Gulfstream as subadviser, as well as the related Sub-Investment Advisory Agreements, at a meeting held on February 28, 1995.
Under Gulfstream's partnership agreement, First of America possesses veto authority over the general budgetary affairs of Gulfstream. Because of its current 49 percent ownership interest and its possession of options enabling it to acquire up to a 72 percent ownership interest, First of America may be deemed to control Gulfstream for purposes of the 1940 Act.
For further information regarding the relationship between Gulfstream and First of America, see "MANAGEMENT OF THE GROUP--INVESTMENT ADVISER" in the Statement of Additional Information.
BISYS, 3435 Stelzer Road, Columbus, Ohio 43219, is the administrator for each fund of the Group, and also acts as the Group's principal underwriter and distributor (the "Administrator" or the "Distributor," as the context indicates). First of America serves as Sub-Administrator for each Fund of the Group and provides certain services as may be requested by BISYS from time to time. BISYS and its affiliated companies, including BISYS Fund Services Ohio, Inc. are wholly-owned by The BISYS Group, Inc., a publicly-held company which is a provider of information processing, loan servicing and 401(k) administration and recordkeeping services to and through banking and other financial organizations.
The Administrator generally assists in all aspects of the Funds' administration and operation. For expenses assumed and services provided as administrator pursuant to its Administration Agreement with the Group, the Administrator receives a fee from each Fund equal to the lesser of a fee, computed daily and paid periodically, at an annual rate of twenty one-hundredths of one percent (.20%) of the Fund's average daily net assets, or such other fee as may be agreed upon from time to time in writing by the Group and the Administrator. For its services as Subadministrator First of America receives, from the Administrator, pursuant to its Sub-Administration Agreement with BISYS, a fee not to exceed five one hundredths of one percent (.05%) of each Fund's average daily net assets. The Administrator may periodically voluntarily reduce all or a portion of its administrative fee with respect to a Fund to increase the net income of that Fund available for distribution as dividends. The voluntary fee reduction will cause the return of that Fund to be higher than it would otherwise be in the absence of such reduction.
The Distributor acts as agent for the Funds in the distribution of each of their Shares and, in such capacity, solicits orders for the sale of Shares, advertises, and pays the cost of advertising, office space and its personnel involved in such activities. The Distributor receives no compensation under its Distribution Agreement with the Group, but may retain some or all of any sales charge imposed upon the Investor Shares and may receive compensation under the Distribution and Shareholder Service Plans described below.
First of America, the Subadvisers and the Administrator each bear all expenses in connection with the performance of its services as investment adviser, subadviser and administrator, respectively, other than the cost of securities (including brokerage commissions) purchased for the Group. Each Fund will bear the following expenses relating to its operation: organizational expenses, taxes, interest, brokerage fees and commissions, fees of the Trustees of the Group, Securities and Exchange Commission fees, state securities qualification fees, costs of preparing and printing prospectuses for regulatory purposes and for distribution to current Shareholders, outside auditing and legal expenses, advisory and administration fees, fees and out-of-pocket expenses of the custodian, Transfer Agent and fund accountant, certain insurance premiums, costs of maintenance of the Group's existence, costs of Shareholders' reports and meetings, and any extraordinary expenses incurred in each Fund's operation. As a general matter, expenses are allocated to the Investor A Shares and the other Classes of Shares of the Funds on the basis of the relative net asset value of each class. The various Classes may bear certain additional retail transfer agency expenses and may also bear certain additional shareholder service and distribution costs incurred pursuant to a Distribution and Shareholder Service Plans.
The Trustees reserve the right, subject to the receipt of relevant regulatory approvals or rulings, if needed, to allocate certain other expenses to the Shareholders of a particular class, including Investor Shares, on a basis other than relative net asset value, as they deem appropriate ("Class Expenses"). In such event, Class Expenses would be limited to: transfer agency fees identified by the Transfer Agent as attributable to a specific class; printing and postage expenses related to preparing and distributing materials such as Shareholder reports, prospectuses and proxies to current Shareholders; Blue Sky registration fees incurred by a class of Shares; Securities and Exchange Commission registration fees incurred by a class of Shares; expenses related to administrative personnel and services as required to support the Shareholders of a specific class; litigation or other legal expenses relating solely to one class of Shares; and Trustees' fees incurred as a result of issues relating solely to one class of Shares.
DISTRIBUTION PLAN FOR INVESTOR A SHARES
Rule 12b-1 adopted by the Securities and Exchange Commission under the 1940 Act permits an investment company to pay directly or indirectly expenses associated with the distribution of its shares in accordance with a plan adopted by an investment company's trustees and approved by its shareholders. Pursuant to such Rule, the Group has adopted an Investor A Distribution and Shareholder Service Plan (the "Investor A Plan") with respect to the Investor A Shares of each Fund. Pursuant to the Investor A Plan, each Fund is authorized to pay or reimburse BISYS, as Distributor of the Investor A Shares, for certain expenses that are incurred in connection with Shareholder and distribution services. Payments under the Plan will be calculated daily and paid monthly at an annual rate not to exceed twenty-five one-hundredths of one percent (.25%) of the average daily net asset value of Investor A Shares of that Fund. Such amount may be used by BISYS to pay banks and their affiliates (including First of America Bank- Michigan, N.A., and its affiliates), and other institutions, including broker-dealers (a "Participating Organization") for administration, distribution, and/or Shareholder service assistance pursuant to an agreement between BISYS and the Participating Organization. Under the Investor A Plan, a Participating Organization may include BISYS, its subsidiaries, and its affiliates.
Payments to the Distributor pursuant to the Investor A Plan will be used (i) to compensate Participating Organizations for providing distribution assistance relating to Investor A Shares, (ii) for promotional activities intended to result in the sale of Investor A Shares such as to pay for the preparation, printing and distribution of prospectuses to other than current Shareholders, and (iii) to compensate Participating Organizations for providing Shareholder services with respect to their Customers who are, from time to time, beneficial and record holders of Investor A Shares.
Fees paid pursuant to the Investor A Plan are accrued daily and paid monthly, and are charged as expenses of Investor A Shares of a Fund as accrued.
Pursuant to the Investor A Plan, the Distributor may enter into Rule 12b-1 Agreements with Participating Organizations for providing Shareholder and distribution services to their customers who are the record or beneficial owners of Investor A Shares. Such Participating Organizations will be compensated at the annual rate of up to .25% of the average daily net asset value of the Investor A Shares held of record or beneficially by such customers. The Shareholder and distribution services provided by Participating Organizations may include promoting the purchase of Investor A Shares of a Fund by their customers; processing purchase, exchange, and redemption requests from customers and placing orders with the Distributor or the Transfer Agent; processing dividend and distribution payments from a Fund on behalf of customers; providing information periodically to customers, including information showing their positions in Investor A Shares; providing sub-accounting with respect to Investor A Shares beneficially owned by customers or the information necessary for sub-accounting; responding to inquiries from customers concerning their investment in Investor A Shares; arranging for bank wires; and providing other similar services as may be reasonably requested.
Conflicts of interest restrictions may apply to the receipt by Participating Organizations of compensation from BISYS in connection with the investment of fiduciary assets in Investor A Shares. Institutions, including banks regulated by the Comptroller of the Currency, the Federal Reserve Board, or the Federal Deposit Insurance Corporation, and investment advisers and other money managers subject to the jurisdiction of the Securities and Exchange Commission (the "Commission"), the Department of Labor, or state securities commissions, are urged to consult their legal advisers before investing such assets in Investor A Shares.
As authorized by the Investor A Plan, BISYS has entered into a Participating Organization Agreement with First of America Securities, Inc., a wholly owned subsidiary of First of America Bank Corporation ("FSI"), pursuant to which FSI has agreed to provide certain Shareholder and distribution services in connection with Investor A Shares of the Funds purchased and held by FSI for the accounts of its customers and Investor A Shares of the Funds purchased and held by customers of FSI directly, including, but not limited to printing and distributing prospectuses to persons other than holders of Investor A Shares of the Funds and printing and distributing advertising and sales literature in connection with the sale of Investor A Shares; answering routine customer questions concerning the Funds and providing such personnel and communication equipment as is necessary and appropriate to accomplish such matters. In consideration of such services BISYS has agreed to pay FSI a monthly fee, computed at the annual rate of .25% of the average aggregate net asset value of Investor A Shares held during the period in customer accounts for which FSI has provided services under this Agreement. BISYS will be compensated by the Funds in an amount equal to its payments to FSI under the Participating Organization Agreement. Such fee may exceed the actual costs incurred by FSI in providing such services.
The Group understands that Participating Organizations may charge fees to their customers who are the owners of Investor A Shares for additional services provided in connection with their customer accounts. These fees would be in addition to any amounts which may be received by a Participating Organization under its Agreement with BISYS. Customers of Participating Organizations should read this Prospectus in light of the terms governing their accounts with their Participating Organizations.
The Investor A Plan requires the officers of the Group to provide the Board of Trustees at least quarterly with a written report of the amounts expended pursuant to the Plans and the purposes for which such expenditures were made. The Board reviews these reports in connection with their decisions with respect to the Plans.
As required by Rule 12b-1, each Plan was approved by the Trustees of the Group, including a majority of the trustees who are not "interested persons" (as defined in the 1940 Act) of the Group and who have no direct or indirect financial interest in the operation of the Plans or in any agreements related to the Plan ("Independent Trustees"). The Plans continue in effect as long as such continuance is specifically approved at least annually by the Group's Trustees, including a majority of the Independent Trustees.
The Plans may be terminated by a vote of a majority of the Independent Trustees, or by a vote of a majority of the holders of the outstanding voting securities of the class of Shares subject thereto. Any change in the Plans that would increase materially the distribution expenses paid by a Fund requires shareholder approval; otherwise, the Plans may be amended by the Trustees, including a majority of the Independent Trustees by a vote cast in person at a meeting called for the purpose of voting upon the amendment. As long as any Plan is in effect, the selection or nomination of the Independent Trustees is committed to the discretion of the Independent Trustees.
First of America believes that it may perform the investment advisory services for the Group's Funds contemplated by the Investment Advisory Agreement and by this Prospectus without violating applicable banking laws or regulations. FSI believes that it may provide the distribution and shareholder services contemplated by its Participating Organization Agreements with BISYS and by this Prospectus without violating applicable banking laws or regulations. Future changes in federal or state statutes and regulations relating to permissible activities of banks or bank holding companies and their subsidiaries and affiliates as well as further judicial or administrative decisions or interpretations of present and future statutes and regulations could change the manner in which First of America or FSI could continue to perform such services for the Group. See the Statement of Additional Information ("MANAGEMENT OF THE GROUP--Glass-Steagall Act") for further discussion.
HOW TO BUY INVESTOR A SHARES
Investor A Shares of each Fund are continuously offered and may be purchased directly either by mail, by telephone, or by wire. Investor A Shares may also be purchased through a broker-dealer who has established a dealer agreement with the Distributor. Except as otherwise discussed below under "Other Information Regarding Purchases" and "Auto Invest Plan," the minimum initial investment in a Fund, based upon the public offering price, is $1,000; however, there is no minimum subsequent purchase. Shareholders will pay the next calculated net asset value after the receipt by the Distributor of an order to purchase Investor A Shares, plus any applicable sales charge as described below (see "SALES CHARGES"). In the case of an order for the purchase of Shares placed through a broker-dealer, it is the responsibility of the broker-dealer to transmit the order to the Distributor promptly.
To purchase Investor A Shares of any of the Funds by mail, complete an Account Application Form and return it along with a check or money order made payable to The Parkstone Group of Funds at the following address:
The Parkstone Group of Funds
An Account Application Form can be obtained by calling the Group at (800) 451-8377.
BY TELEPHONE OR BY WIRE
To purchase Investor A Shares of any of the Funds by telephone or by wire, your Account Application Form must have been previously received by the Distributor. To place an order by telephone or by wire call the Group's toll-free number (800) 451-8377. Payment for such Investor A Shares ordered by telephone may be made by check and must be received by the Group's custodian within seven calendar days of the telephone order. If payment for such Investor A Shares is not received within seven days, or if a check timely received does not clear, the purchase may be canceled and the investor could be liable for any losses or fees incurred. When purchasing Investor A Shares by wire, contact the Distributor for wire instructions.
Investor A Shares may also be purchased through procedures established by the Distributor in connection with the requirements of qualified accounts maintained by or on behalf of certain persons ("Customers") by First of America Bank Corporation or one of its affiliates. Investor A Shares of the Funds sold to First of America Bank Corporation or the affiliate acting in a fiduciary, advisory, custodial, or other similar capacity on behalf of Customers will normally be held of record by First of America Bank Corporation or the affiliate. With respect to such Investor A Shares so sold, it is the responsibility of the holder of record to transmit purchase or redemption orders to the Distributor and to deliver funds for the purchase thereof on a timely basis. Beneficial ownership of such Investor A Shares of the Funds will be recorded by First of America Bank Corporation or one of its affiliates and reflected in the account statements provided to Customers. First of America Bank Corporation or one of its affiliates may exercise voting authority for those Investor A Shares for which it has been granted authority by the Customer.
Investor A Shares of the Funds are purchased at the net asset value per share (see "VALUATION OF SHARES") next determined after receipt by the Distributor of an order to purchase Shares plus any applicable sales charge as described below. Purchases of Investor A Shares in any of the Funds will be effected only on a Business Day (as defined in "VALUATION OF SHARES") of the Funds. An order received prior to the Valuation Time on any Business Day will be executed at the net asset value determined as of the Valuation Time on the date of receipt. An order received after the last Valuation Time on any Business Day will be executed at the net asset value determined as of the next Valuation Time on the next Business Day of that Fund. Investor A Shares of the Money Market Funds purchased before 12:00 noon, Eastern Time, begin earning dividends on the same Business Day. Investor A Shares of the Money Market Funds continue to earn dividends through the day before their redemption.
An order to purchase Investor A Shares of the Money Market Funds will be deemed to have been received by the Distributor only when federal funds with respect thereto are available to the Group's custodian for investment. Federal funds are monies credited to a bank's account within a Federal Reserve Bank. Payment for an order to purchase any of the Money Market Funds which is transmitted by federal funds wire will be available the same day for investment by the Group's custodian, if received prior to the last Valuation Time (see "VALUATION OF SHARES"). Payments transmitted by other means (such as by check drawn on a member of the Federal Reserve System) will normally be converted into federal funds within two banking days after receipt. The Group strongly recommends that investors of substantial amounts use federal funds to purchase Investor A Shares of the Money Market Funds.
The minimum initial investment amount referred to above may be waived if purchases are made in connection with Individual Retirement Accounts (IRAs), Keoghs or similar plans. For information on IRAs, Keoghs or similar plans, contact First of America Bank Corporation at (800) 544-6155. Due to the relatively high cost of handling small investments, the Group reserves the right to redeem involuntarily, at net asset value, the Investor A Shares of any Shareholder if, because of redemptions of Investor A Shares by or on behalf of the Shareholder (but not as a result of a decrease in the market price of such Investor A Shares, the deduction of any sales charge or the establishment of an account with less than $1,000 using the Auto Invest Plan), the account of such Shareholder in that Fund has a value of less than $1,000. Accordingly, an investor purchasing Investor A Shares of a Fund in only the minimum investment amount may be subject to such involuntary redemption if the investor thereafter redeems any such Investor A Shares. Before the Group exercises its right to redeem such Investor A Shares and to send the proceeds to the Shareholder, the Shareholder will be given notice that the value of the Investor A Shares in the Shareholder's account is less than the minimum amount and will be allowed 60 days to make an additional investment in the appropriate Fund in an amount which will increase the value of the account to at least $1,000.
Depending upon the terms of a particular Customer account, First of America Bank Corporation or one of its affiliates may charge a Customer account fees for services provided in connection with investment in a Fund. Information concerning these services and any charges may be obtained from First of America Bank Corporation or the affiliate. This Prospectus should be read in conjunction with any such information so received.
The Group reserves the right to reject any order for the purchase of its Shares in whole or in part.
Every Shareholder will receive a confirmation of each new transaction in the Shareholder's account, which will also show the total number of Investor A Shares of the respective Fund of the Group owned by the Shareholder. Confirmation of purchases and redemptions of Investor A Shares of the Funds by First of America Bank Corporation or one of its affiliates on behalf of a Customer may be obtained from First of
America Bank Corporation or the affiliate. Shareholders may rely on these statements in lieu of certificates. Certificates representing Investor A Shares of the Funds will not be issued.
The Parkstone Group of Funds Auto Invest Plan enables Shareholders to make regular monthly or quarterly purchases of Investor A Shares through automatic deduction from their bank accounts. With Shareholder authorization, the Group's Transfer Agent will deduct the amount specified (subject to the applicable minimums) from the Shareholder's bank account which will automatically be invested in Shares at the public offering price on the date of such deduction (or the next Business Day thereafter, as defined under "VALUATION OF SHARES" below). The required minimum initial investment when opening an account using the Auto Invest Plan is $100; the minimum amount for subsequent investments in a Fund is $50. To participate in the Auto Invest Plan, Shareholders should complete the appropriate section of the account application or a supplemental Auto Invest application that can be acquired by calling the Group at (800) 451-8377. For a Shareholder to change the Auto Invest instructions, the request must be made in writing to the Group, c/o The Parkstone Group of Funds, 3435 Stelzer Road, Columbus, Ohio 43219 and may take up to 15 days to implement.
The public offering price of Investor A Shares of the Funds equals net asset value plus the applicable sales charge. BISYS receives this sales charge as Distributor and may reallow it as dealer discounts and brokerage commissions as follows:
From time to time dealers who receive dealer discounts and brokerage commissions from the Distributor may reallow all or a portion of such dealer discounts and brokerage commissions to other dealers or brokers.
In addition to amounts paid to dealers as a dealer concession out of the sales charge paid by investors, if any, the Distributor may, from time to time, at its expense or as an expense for which it may be reimbursed under the Plans, pay a bonus or other consideration or incentive to dealers who sell a minimum dollar amount of shares of a Fund during a specified period of time. Any such additional consideration or incentive program may be terminated at any time by the Distributor.
The Dealer Discounts and Brokerage Commissions schedule above applies to all dealers who have agreements with the Distributor except FSI, to which the Distributor reallows all of the sales charge on the Shares sold by FSI. The Distributor, at its expense, may also provide additional compensation to dealers in connection with sales of Shares of any of the Funds and other Funds of the Group. Compensation may include financial assistance to dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising campaigns regarding one or more Funds of the Group, and/or other dealer-sponsored special events. In some instances, this compensation may be made available only to certain dealers whose representatives have sold or are expected to sell a significant amount of such shares. Compensation may include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their families to exotic locations within or outside of the United States for meetings or seminars of a business nature. The Distributor, at its expense, currently conducts an annual sales contest for dealers, including FSI, in connection with their sales of Shares of the Funds. Dealers may not use sales of a Fund's Shares to qualify for this compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc.
The Distributor may waive sales charges for the purchase of Investor A Shares of a Fund by or on behalf of (1) employees and retired employees (including spouses, children and parents of employees and retired employees) of First of America Bank Corporation, BISYS and any affiliates thereof, (2) Trustees of the Group, (3) directors and retired directors (including spouses and children of directors and retired directors) of First of America Bank Corporation and any affiliate thereof, (4) employees (and their spouses and children under the age of 21) of any broker-dealer with which the Distributor enters into an agreement to sell shares of the Funds, (5) orders placed on behalf of other investment companies distributed by the Distributor and (6) qualified orders placed by broker-dealers and investment advisers for the account of customers who participate in a fee-based program for the investment of customer funds in various mutual funds. In addition, the Distributor may waive sales charges for the purchase of a Fund's Investor A Shares with the proceeds from the recent redemption of shares of a non-money market mutual fund (including the Investor A Shares of the other non-money market Funds of the Group, but excluding the Investor B and Investor C Shares of such Funds). The purchase must be made within 60 days of the redemption, and the Distributor must be notified in writing by the investor, or by his financial institution, at the time the purchase is made. A copy of the investor's account statement showing such redemption must accompany such notice.
The Distributor may also waive sales charges for the purchase of Investor A Shares of a Fund by employee benefit plans qualified under Section 401 of the Internal Revenue Code, including salary reduction plans qualified under Section 401(k) of the Internal Revenue Code, subject to minimum requirements with respect to number of employees or amount of purchase, which may be established by the Distributor. Currently, those criteria require that the employer establishing the plan have 200 or more employees or that the amount invested or to be invested during the subsequent thirteen-month period in the Funds or the Investor A Shares of the other Funds of the Group totals at least $1,000,000.00.
Participating Organizations through which employee benefit plans purchase Investor A Shares may be compensated by the Distributor under the Investor A Plan.
For purposes of qualifying for a lower sales charge, investors have the privilege of combining "concurrent purchases" of Investor A Shares of a Fund and of one or more of the other Funds of the Group sold with a sales charge. For example, if a shareholder concurrently purchases Investor A Shares in one of the other Funds of the Group sold with a sales charge at the total public offering price of $25,000 and Investor A Shares in a Fund at the total public offering price of $25,000, the sales charge would be that applicable to a $50,000 purchase as shown in the appropriate table above. The investor's "concurrent purchases" described above shall include the combined purchases of the investor, the investor's spouse and children under the age of 21 and the purchaser's retirement plan accounts. To receive the applicable public offering price pursuant to this privilege, Shareholders must, at the time of purchase, give the Transfer Agent or the Distributor sufficient information to permit confirmation of qualification. This privilege, however, may be modified or eliminated at any time or from time to time by the Group without notice thereof.
An investor may obtain a reduced sales charge by means of a written Letter of Intent which expresses the intention of such investor to purchase Investor A Shares of a Fund at a designated total public offering price within a designated 13-month period. Each purchase of Investor A Shares under a Letter of Intent will be made at the net asset value plus the sales charge applicable at the time of such purchase to a single transaction of the total dollar amount indicated in the Letter of Intent (the "Applicable Sales Charge"). A Letter of Intent may include purchases of Investor A Shares made not more than 90 days prior to the date such investor signs a Letter of Intent; however, the 13-month period during which the Letter of Intent is in effect will begin on the date of the earliest purchase to be included. An investor will receive as a credit against his/her initial purchase(s) of Shares at the end of the 13-month period the difference, if any, between the sales load paid on previous purchases qualifying under the Letter of Intent and the Applicable Sales Charge.
A Letter of Intent is not a binding obligation upon the investor to purchase the full amount indicated. The minimum initial investment under a Letter of Intent is 5% of such amount. Investor A Shares purchased with the first 5% of such amount will be held in escrow (while remaining registered in the name of the investor) to secure payment of the higher sales charge applicable to the Investor A Shares actually purchased if the full amount indicated is not purchased, and such escrowed Investor A Shares will be involuntarily redeemed to pay the additional sales charge, if necessary. Dividends on escrowed Investor A Shares, whether paid in cash or reinvested in additional Investor A Shares, are not subject to escrow. The escrowed Investor A Shares will not be available for disposal by the investor until all purchases pursuant to the Letter of Intent have been made or the higher sales charge has been paid. When the full amount indicated has been purchased, the escrow will be released. To the extent that an investor purchases more than the dollar amount indicated on the Letter of Intent and qualifies for a further reduced sales charge, the sales charge will be adjusted for the entire amount purchased, along with any purchases made during the 90 days prior to the date such investor signs the Letter of Intent, at the applicable public offering price at the end of the 13-month period. The difference in sales charge will be used to purchase additional Investor A Shares of such Fund subject to the rate of sales charge applicable to the actual amount of the aggregate purchases.
For further information about Letters of Intent, interested investors should contact the Group at (800) 451-8377. This program, however, may be modified or eliminated at any time or from time to time by the Group without notice.
Pursuant to the right of accumulation, investors are permitted to purchase Investor A Shares of a Fund at the public offering price applicable to the total of (a) the total public offering price of the Investor A
Shares of the Fund then being purchased plus (b) an amount equal to the then current net asset value of the "purchaser's combined holdings" of the Investor A Shares of all of the Funds of the Group sold with a sales charge. The "purchaser's combined holdings" described in the preceding sentence shall include the combined holdings of the purchaser, the purchaser's spouse and children under the age of 21 and the purchaser's retirement plan accounts. To receive the applicable public offering price pursuant to the right of accumulation, Shareholders must, at the time of purchase, give the Transfer Agent or the Distributor sufficient information to permit confirmation of qualification. This right of accumulation, however, may be modified or eliminated at any time or from time to time by the Group without notice.
A Shareholder may elect to have all income dividends and capital gains distributions paid by check, reinvested in the Fund or reinvested in any of the Group's other Funds, without the payment of a sales charge (provided the other Fund is maintained at the minimum required balance).
The Directed Dividend Option may be modified or terminated by the Group at any time after notice to participating Shareholders. Participation in the Directed Dividend Option may be terminated or changed by the Shareholder at any time by writing the Distributor. The Directed Dividend Option is not available to participants in any of the Parkstone IRA's.
The exchange privilege enables Shareholders of Investor A Shares to acquire Investor A Shares that are offered by another fund of the Group with a different investment objective. This exchange privilege does not apply to other classes of Shares of a Fund. For example, holders of a Fund's Investor B Shares may not exchange their Shares for Investor A Shares, and holders of a Fund's Investor A Shares may not exchange their Shares for Investor B Shares.
Holders of Investor A Shares of one of the Group's Funds (including Investor A Shares acquired through reinvestment of dividends and distributions on such shares) may exchange those Investor A Shares at net asset value without any sales charge for Investor A Shares offered by any of the Group's other Funds, provided that the amount to be exchanged meets the applicable minimum investment requirements and the exchange is made in states where it is legally authorized.
An exchange is considered a sale of Shares and will result in a capital gain or loss for federal income tax purposes. A Shareholder may not include any sales charge on Shares of a Fund as a part of the cost of those Shares for purposes of calculating the gain or loss realized on an exchange of those Shares within 90 days of their purchase.
A Shareholder wishing to exchange his or her Shares may do so by contacting the Group at (800) 451-8377 or by providing written instructions to the Transfer Agent. Any Shareholder who wishes to make an exchange should obtain and review the current prospectus of the Fund of the Group in which the Shareholder wishes to invest before making the exchange. For a discussion of risks associated with unauthorized telephone exchanges, see "HOW TO REDEEM YOUR INVESTOR A SHARES--By Telephone" below.
Investor A Shares of the Funds are available to Shareholders on a tax-deferred basis through the following retirement plans:
A Parkstone IRA enables individuals, even if they participate in an employer-sponsored retirement plan, to establish their own retirement program. Parkstone IRA contributions may be tax-deductible and earnings are tax-deferred. Under the Tax Reform Act of 1986, the tax deductibility of IRA contributions is restricted or eliminated for individuals who participate in certain employer pension plans and whose annual income exceeds certain limits. Existing IRA's and future contributions up to the IRA maximums, whether deductible or not, still earn income on a tax-deferred basis.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP/IRA")
A Parkstone SEP/IRA may be established on a group basis by an employer who wishes to sponsor a tax-sheltered retirement program by making contributions into IRA's on behalf of all eligible employees.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLAN ("SAR-SEP/IRA")
A Parkstone SAR-SEP/IRA offers employers with 25 or fewer eligible employees the ability to establish a SEP/IRA that permits salary reduction contributions.
All Parkstone IRA distribution requests must be made in writing to BISYS Ohio. Any additional deposits to a Parkstone IRA must distinguish the type and year of the contribution.
For more information on any of the Parkstone IRA's or other retirement plan options available (401(k) Defined Contribution Plans, 403(b)(7) Defined Compensation Plans, etc.), call the Group at (800) 451-8377. Shareholders are advised to consult a tax adviser on Parkstone IRA contribution and withdrawal requirements and restrictions.
HOW TO REDEEM YOUR INVESTOR A SHARES
Shareholders may redeem their Investor A Shares without charge on any day that net asset value is calculated (see "VALUATION OF SHARES"). Redemptions will be effected at the net asset value per share next determined after receipt of a redemption request. Redemptions may be requested by mail or by telephone.
A written request for redemption must be received by the Transfer Agent in order to honor the request. The Transfer Agent's address is: BISYS Fund Services Ohio, Inc., c/o The Parkstone Group of Funds, Department L-1270, Columbus, Ohio 43260-1270. The Transfer Agent will require a signature guarantee by an eligible guarantor institution. The signature guarantee requirement will be waived if all of the following conditions apply: (1) the redemption check is payable to the Shareholder(s) of record, and (2) the redemption check is mailed to the Shareholder(s) at the address of record. The Shareholder may also have the proceeds mailed to a commercial bank account previously designated on the Account Application. There is no charge for having redemption proceeds mailed to a designated bank account. To change the address to which a redemption check is to be mailed, a written request therefor must be received by the Transfer Agent. In connection with such request, the Transfer Agent will require a signature guarantee by an eligible guarantor institution.
For purposes of this policy, the term "eligible guarantor institution" shall include banks, brokers, dealers, credit unions, securities exchanges and associations, clearing agencies and savings associations as those terms are defined in the Securities Exchange Act of 1934. The Transfer Agent reserves the right to reject any signature guarantee if (1) it has reason to believe that the signature is not genuine, (2) it has reason to believe that the transaction would otherwise be improper, or (3) the guarantor institution is a broker or dealer that is neither a member of a clearing corporation nor maintains net capital of at least $100,000.
Investor A Shares may be redeemed by telephone if the Account Application Form reflects that the Shareholder has that capability. The Shareholder may have the proceeds mailed to his or her address or mailed or sent electronically to a commercial bank account previously designated on the Account Application Form. Under most circumstances, payments will be transmitted on the next Business Day. Electronic payment requests may be made by the Shareholder by telephone to the Group at (800) 451-8377. While the Transfer Agent currently does not charge a wire redemption fee, the Transfer Agent reserves the right to impose such a fee in the future.
The Group's Account Application Form provides that none of BISYS, the Transfer Agent, the Group or any of their affiliates or agents will be liable for any loss, expense or cost when acting upon any oral, wired or electronically transmitted instructions or inquiries believed by them to be genuine. While precautions will be taken, Shareholders bear the risk of any loss as the result of unauthorized telephone redemptions or exchanges believed by the Transfer Agent to be genuine. If the telephone feature was not originally selected, the Shareholder must provide written instructions to the Group to add it. The Group will employ reasonable procedures to confirm that instructions communicated by telephone are genuine; if these procedures are not followed, the Group may be liable for any losses due to unauthorized or fraudulent instructions. These procedures include recording all phone conversations, sending confirmations to Shareholders within 72 hours of the telephone transaction, verifying the account name and a shareholder's account number or tax identification number and sending redemption proceeds only to the address of record or to a previously authorized bank account. If, due to temporary adverse conditions, investors are unable to effect telephone transactions, shareholders may mail the request to the Transfer Agent.
The Auto Withdrawal Plan enables Shareholders of a Fund to make regular monthly or quarterly redemptions of Investor A Shares. With Shareholder authorization, the Transfer Agent will automatically redeem such Investor Shares at the net asset value on the fifteenth day of the month or quarter (or the next Business Day thereafter) and have the amount specified transferred according to the written instructions of the Shareholder. Shareholders participating in this Plan must maintain a minimum account balance of $1,000. The required minimum withdrawal is $100, monthly or quarterly.
The Auto Withdrawal Plan may be modified or terminated without notice. In addition, the Group may suspend a Shareholder's withdrawal plan without notice if the account contains insufficient funds to effect a withdrawal or in the event that the account balance is less than the minimum $1,000 amount.
To participate in the Auto Withdrawal Plan, Shareholders should call (800) 451-8377 for more information. Purchases of additional Investor Shares concurrently with withdrawals may be disadvantageous to certain Shareholders because of tax liabilities and sales charges. For a Shareholder to change the Auto Withdrawal instructions, the request must be made in writing to the Distributor and may take up to 15 days to implement.
OTHER INFORMATION REGARDING REDEMPTION OF SHARES
All or part of a Customer's Investor A Shares may be redeemed in accordance with instructions and limitations pertaining to his or her account at First of America Bank Corporation or one of its affiliates.
All redemption orders are effected at the net asset value per share next determined after the Investor Shares are properly tendered for redemption, as described above. The proceeds paid upon redemption of such Investor Shares in the Funds, less any applicable contingent deferred sales charge, may be more or less than the amount invested. Payment to Shareholders for such Investor Shares redeemed will be made within seven days after receipt by the Transfer Agent of the request for redemption. However, to the greatest extent possible, requests from Shareholders for next day payments upon redemption of Investor Shares will be honored if received by the Transfer Agent before the last Valuation Time on a Business Day or, if received after the last Valuation Time, within two Business Days, unless it would be disadvantageous to that Fund or its Shareholders to sell or liquidate portfolio securities in an amount sufficient to satisfy requests for payments in that manner.
At various times, the Group may be requested to redeem Investor A Shares for which it has not yet received good payment. In such circumstances, the forwarding of proceeds may be delayed until payment has been collected for the purchase of such Investor Shares which delay may be for 15 days or more. Such delay may be avoided if such Investor Shares are purchased by wire transfer of federal funds. The Group intends to pay cash for all Investor Shares redeemed, but under abnormal conditions which make payment in cash unwise, payment may be made wholly or partly in portfolio securities at their then market value equal to the redemption price. In such cases, an investor may incur brokerage costs in converting such securities to cash.
See the Statement of Additional Information ("ADDITIONAL PURCHASE AND REDEMPTION INFORMATION") for examples of when the right of redemption may be suspended.
The net asset value of each class of Shares of the Funds, with the exception of the Money Market Funds, is determined and their Shares are priced as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time) on each Business Day (the "Valuation Time"). The net asset value of each class of Shares of Money Market Funds is determined and their Shares are priced as of noon and as of the close of trading on the New York Stock Exchange on each Business Day (the "Valuation Time"). A "Business Day" is a day on which the New York Stock Exchange is open for trading and the Federal Reserve Bank of Chicago, and any other day (other than a day on which no Shares are tendered for redemption and no order to purchase any Shares is received) during which there is sufficient trading in its portfolio instruments that its net asset value per share might be materially affected. Currently, the New York Stock Exchange or the Federal Reserve Bank of Chicago will not open in observance of the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran's Day, Thanksgiving and Christmas.
Net asset value per share for a particular class for purposes of pricing sales and redemptions is calculated by dividing the value of all securities and other assets belonging to a Fund allocable to such class, less the liabilities charged to that Fund allocable to such class and any liabilities charged directly to that class, by the number of outstanding Shares of such class.
The net asset value per share will fluctuate as the value of the investment portfolio of a Fund changes. However, the assets in each Money Market Fund are valued based upon the amortized cost method. Pursuant to the rules and regulations of the Securities and Exchange Commission regarding the use of the amortized cost method, each Money Market Fund will maintain a dollar-weighted average portfolio maturity of 90 days or less. Although the Group seeks to maintain each Money Market Fund's net asset value per share at $1.00, there can be no assurance that net asset value will not vary.
The securities in each Fund will be valued at market value. If market quotations are not available, the securities will be valued by a method which the Board of Trustees believes accurately reflects fair value. Foreign securities are valued based on quotations from the primary market in which they are traded and are translated from the local currency into U.S. dollars using current exchange rates. For further information about valuation of investments, see "NET ASSET VALUE" in the Statement of Additional Information.
Net income is declared monthly as a dividend to Shareholders at the close of business on the day of declaration and is generally paid monthly. Distributable net realized capital gains are distributed at least annually. A Shareholder will automatically receive all income dividends and capital gains distributions in additional full and fractional Shares at net asset value as of the date of declaration, unless the Shareholder elects to receive dividends or distributions in cash or elects to participate in the Parkstone Directed Dividend Option. Such election, or any revocation thereof, must be made in writing to the Transfer Agent at 3435 Stelzer Road, Columbus, Ohio 43219, and will become effective with respect to dividends and distributions having record dates after its receipt by the Transfer Agent.
Each Fund's net investment income available for distribution to the holders of Investor A Shares will be reduced by the amount of Rule 12b-1 fees payable to Participating Organizations under the Investor A Plan. Each Fund's net investment income available for distribution to the holders of Investor A Shares may also be reduced by the amount of retail transfer agency fees payable to the Transfer Agent applicable to the Investor A Shares.
Each of the Funds of the Group is treated as a separate entity for Federal income tax purposes, intends to qualify as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"), for so long as such qualification is in the best interest of its shareholders and intends to distribute all of its net income and capital gains so that it is not required to pay Federal income taxes on amounts so distributed to shareholders.
To avoid Federal income tax, the Code requires each Fund to distribute each taxable year at least 90% of its investment company taxable income and at least 90% of its exempt-interest income. In addition, to avoid imposition of a nondeductible 4% excise tax, each Fund is required annually to distribute, prior to calendar year end, 98% of taxable ordinary income on a calendar year basis, 98% of capital gain net income realized in the twelve months preceding October 31, and the balance of undistributed taxable ordinary income and capital gain net income from the prior calendar year. Finally, in order to permit the Municipal Bond Fund and the Michigan Fund each to distribute exempt-interest dividends which Shareholders may exclude from their gross taxable income for federal income tax purposes, at least 50% of such Fund's total assets must consist of obligations the interest on which is exempt from federal income tax as of the close of each fiscal quarter of such Fund.
A Shareholder receiving a distribution of ordinary income and/or an excess of short-term capital gain over net long-term loss would treat it as a receipt of ordinary income. The dividends-received deduction for corporations will apply to the aggregate of such ordinary income distributions in the same proportion as the aggregate dividends from domestic corporations, if any, received by that Fund bear to its gross income. A Shareholder will not be able to take the dividends-received deduction unless that Shareholder holds the Shares for at least 46 days.
Distribution by a Fund of the excess of net long-term capital gain over net short-term capital loss is taxable to its Shareholders as long-term capital gain in the year in which it is received, regardless of how long the Shareholder has held Shares. Such distributions are not eligible for the dividends-received deduction.
Prior to purchasing Shares, the impact of dividends or capital gains distributions which are expected to be declared or have been declared, but have not been paid, should be carefully considered. Any such dividends or capital gains distributions paid shortly after a purchase of Shares prior to the record date will have the effect of reducing the per share net asset value of the Shares by the amount of the dividends or distributions. All or a portion of such dividends or distributions, although in effect a return of capital, is subject to tax.
Taxes may be imposed on the Funds, particularly the Balanced and International Funds, by foreign countries with respect to income received on foreign securities. If more than 50% of the value of a Fund's assets at the close of its taxable year consists of stocks or securities of foreign corporations, the Fund may elect to treat any foreign income taxes it paid as paid by its Shareholders. In this case, Shareholders generally will be required to include in income their pro rata share of such taxes, but will then be entitled to claim a credit or deduction for their share of such taxes. However, a particular Shareholder's ability to utilize such a credit will be subject to certain limitations imposed by the Code. The Funds will report to its Shareholders each year the amount, if any, of foreign taxes per share that it has elected to have treated as paid by its Shareholders.
Shareholders will be advised at least annually as to the Federal income tax consequences of distributions made during the year.
THE MUNICIPAL BOND FUND, THE MICHIGAN FUND AND THE TAX-FREE FUND (THE "EXEMPT
Dividends derived from exempt-interest income may be treated by an Exempt Fund's Shareholders as items of interest excludable from their gross income. However, such dividends may be taxable to Shareholders of the Municipal Bond Fund and the Tax-Free Fund under state or local law as ordinary income even though all or a portion of the amounts may be derived from interest on tax-exempt obligations which, if realized directly, would be exempt from such taxes. In determining net exempt-interest income, expenses of the Exempt Fund are allocated to gross tax-exempt interest income in the proportion that the gross amount of such interest income bears to the Exempt Fund's total gross income, excluding net capital gains. (Shareholders are advised to consult a tax adviser with respect to whether exempt-interest dividends retain the exclusion if such Shareholder would be treated as a "substantial user" or a "related person" to such user under the Code.) Interest on indebtedness incurred or continued by a Shareholder to purchase or carry Shares is not deductible for federal income tax purposes if an Exempt Fund distributes exempt-interest dividends during the Shareholder's taxable year. It is anticipated that distributions from the Exempt Funds will not be eligible for the dividends received deduction for corporations.
Under the Code, if a Shareholder receives an exempt-interest dividend with respect to any Share and such Share is held for six months or less, any loss on the sale or exchange of such Share will be disallowed to the extent of the amount of such exempt-interest dividend, although the Treasury Department is authorized to issue regulations reducing the period to not less than 31 days for regulated investment companies that regularly distribute at least 90% of their net tax-exempt interest. No such regulations have been issued as of the date of this Prospectus. In addition, dividends attributable to interest on certain private activity bonds may have to be included in Shareholders' income for purposes of calculating alternative minimum tax. See "ADDITIONAL INFORMATION--Additional Tax Information Concerning the Tax-Free Fund, the Municipal Bond Fund and the Michigan Fund" in the Statement of Additional Information for more information regarding the federal alternative minimum tax.
To the extent dividends paid to Shareholders are derived from taxable income (for example, from interest on certificates of deposit or repurchase agreements) or from long-term or short-term capital gains, such dividends will be subject to federal income tax. A Shareholder should consult his or her own tax adviser for any special advice.
Distributions by the Michigan Fund to holders of Shares who are subject to the Michigan personal income tax and/or single business tax will not be subject to the Michigan personal income tax, single business tax or any Michigan city income tax to the extent that the distributions are attributable to income received by the Michigan Fund as interest from Michigan Municipal Securities or to the extent that the distributions are attributable to interest income and gains from the sale or disposal of United States obligations exempted from state taxation by the United States Constitution, treaties, and statutes. However, some or all of the other distributions by the Michigan Fund may be taxable by the State of Michigan or subject to applicable city income taxes, even if the distributions are attributable to income of the Michigan Fund derived from obligations of the United States or its agencies and instrumentalities. In addition, to the extent that a Shareholder of the Michigan Fund is obligated to pay state or local taxes outside of Michigan, dividends earned by an investment in the Michigan Fund may represent taxable income. Investments held in the Michigan Fund by a Michigan resident are not subject to the Michigan intangible personal property tax to the extent that the investments are attributable to bonds or other similar obligations of the State of Michigan or a political subdivision thereof, or obligations of the United States.
The Michigan Department of Treasury in a 1986 Revenue Administrative Bulletin has taken the position that the tax attributes of the securities held by a mutual fund flow through to the investors. Based on this position, the Michigan Department of Treasury has stated that mutual fund distributions attributable to interest from the fund's investment in direct U.S. government securities, as well as Municipal Securities, will not be subject to the Michigan personal income tax. The Michigan Department of Treasury also has stated that an owner of a share of a mutual fund will not be subject to intangible personal property tax to the extent that the pro rata share of the securities underlying the mutual fund would be exempt.
For Michigan personal income tax and intangible personal property tax purposes, taxable distributions from investment income and short term capital gains, if any, are taxable as ordinary income, whether received in cash or additional Shares, and are subject to the Michigan intangible personal property tax and to applicable Michigan city income taxes. The Michigan single business tax, a modified value added tax, is computed by applying the tax rate to a tax base determined by making certain adjustments to federal taxable income. Taxable distributions from investment income and gains, if any, may be included in federal taxable income or may comprise one of the adjustments made to the tax base. Distributions of cash, other property or additional Shares by the Michigan Fund to a Michigan single business taxpayer attributable to any gain realized from the sale, exchange or other disposition of Michigan Municipal Securities are includable in the Michigan single business taxpayer's adjusted tax base for purposes of the Michigan single business tax to the extent included in federal taxable income. Distributions of cash, other property or additional Shares by the Michigan Fund to a Michigan single business taxpayer are not subject to the Michigan single business tax to the extent that the distributions are attributable to interest income from and any gain realized from the sale, exchange or other disposition of U.S. Securities. Taxable long- term capital gains distributions are taxable as long-term capital gains for Michigan purposes irrespective of how long a Shareholder has held the Shares, except that such distributions reinvested in Shares of the Michigan Fund are exempt from the Michigan intangible personal property tax.
U.S. GOVERNMENT OBLIGATIONS FUND, PRIME OBLIGATIONS FUND AND TREASURY FUND
Since all of the net investment income of the U.S. Government Obligations Fund, the Prime Obligations Fund and the Treasury Fund is expected to be derived from earned interest, it is anticipated that no part of any distribution will be eligible for the dividends received deduction for corporations. The U.S. Government Obligations Fund, the Prime Obligations Fund and the Treasury Fund do not expect to realize any long-term capital gains and, therefore, do not foresee paying any "capital gains dividends" as described in the Code.
The foregoing is intended only as a brief summary of some of the important tax considerations generally affecting the Funds and their Shareholders. Potential investors are advised to consult their tax advisers concerning state and local taxes, which may differ from the Federal income taxes described above.
From time to time performance information for the Funds showing their average annual total return, aggregate total return and/or yield may be presented in advertisements, sales literature and shareholder reports. Such performance figures are based on historical earnings and are not intended to indicate future performance. Average annual total return of a class of Shares in a Fund will be calculated for the period since the establishment of the Funds and will reflect the imposition of the maximum sales charge, if any. Average annual total return is measured by comparing the value of an investment in a class of Shares in a Fund at the beginning of the relevant period to the redemption value of the investment at the end of the period (assuming immediate reinvestment of any dividends or capital gains distributions) and annualizing the result. Aggregate total return is calculated similarly to average annual total return except that the return figure is aggregated over the relevant period instead of annualized. Yield of a class of Shares will be computed by dividing a class of Shares' net investment income per share earned during a recent one-month period by that class of Shares' per share maximum offering price (reduced by any undeclared earned income expected to be paid shortly as a dividend) on the last day of the period and annualizing the result. Each Fund may also present its average annual total return, aggregate total return and yield, as the case may be, excluding the effect of a sales charge, if any.
In addition, from time to time the Funds may present their respective distribution rates for a class of Shares in supplemental sales literature which is accompanied or preceded by a prospectus and in Shareholder reports. Distribution rates will be computed by dividing the distribution per share of a class made by a Fund over a twelve-month period by the maximum offering price per share. The calculation of income in the distribution rate includes both income and capital gain dividends and does not reflect unrealized gains or losses, although a Fund may also present a distribution rate excluding the effect of capital gains. The distribution rate differs from the yield, because it includes capital gains which are often non-recurring in nature, whereas yield does not include such items. Distribution rates may also be presented excluding the effect of a sales charge, if any.
Standardized yield and total return quotations will be computed separately for Investor A Shares and the other classes of the Funds. Because of differences in the fees and/or expenses borne by different classes of Shares of the Funds, the net yield and total return on Investor A Shares may be different from that for another class of the same Fund. For example, net yield and total return on Investor A Shares is expected, at any given time, to be lower than the net yield and total return on Institutional Shares for the same period.
Investors may also judge the performance of any class of Shares or Fund by comparing or referencing it to the performance of other mutual funds with comparable investment objectives and policies through various mutual fund or market indices such as those prepared by various services which indices may be published by such services or by other services or publications, including, but not limited to, ratings published by Morningstar, Inc. In addition to performance information, general information about the Funds that appears in such publications may be included in advertisements, in sales literature and in reports to Shareholders. For further information regarding such services and publications, see "ADDITIONAL INFORMATION--Performance Comparisons" in the Statement of Additional Information.
Total return and yield are functions of the type and quality of instruments held in the portfolio, operating expenses, and market conditions. Consequently, total return and yield will fluctuate and are not necessarily representative of future results. Any fees charged by First of America Bank Corporation or any of its affiliates with respect to customer accounts for investing in shares of the Funds will not be included in performance calculations; such fees, if charged, will reduce the actual performance from that quoted. In addition, if First of America and BISYS voluntarily reduce all or a part of their respective fees, as further discussed below, the total return of such Fund will be higher than it would otherwise be in the absence of such voluntary fee reductions.
Shareholders of the Group may obtain current price, yield and other performance information on any of the Group's funds through FUNDATA(R), an Automated Voice Response System, 24 hours a day by calling (800) 451-8377 from any touch-tone phone. Shareholders may also speak directly with a Group representative, employed by BISYS, during regular business hours.
The Group was organized as a Massachusetts business trust in 1987 and currently offers fifteen Funds. The shares of each of the Funds of the Group, other than its four Money Market Funds, are offered in four separate classes: Investor A Shares, Investor B Shares, Investor C Shares and Institutional Shares. Shares of each of the four Money Market Funds of the Group are offered in two separate classes: Investor A Shares and Institutional Shares. Each Share represents an equal proportionate interest in a fund with other shares of the same fund, and is entitled to such dividends and distributions out of the income earned on the assets belonging to that Fund as are declared at the discretion of the Trustees. Shares are without par value.
Shareholders are entitled to one vote for each dollar of value invested and a proportionate fractional vote for any fraction of a dollar invested. Shareholders will vote in the aggregate and not by fund except as otherwise expressly required by law. For example, Shareholders of the Funds will vote in the aggregate with other shareholders of the Group with respect to the election of trustees and ratification of the selection of independent accountants. However, Shareholders of a Fund will vote as a fund, and not in the aggregate with other shareholders of the Group, for purposes of approval of that Fund's investment advisory agreement. In addition, holders of Investor A Shares of a Fund will vote as a class and not with holders of another class of that Fund with respect to the approval of its Investor A Plan.
An annual or special meeting of shareholders to conduct necessary business is not required by the Declaration of Trust, the 1940 Act or other authority except, under certain circumstances, to elect Trustees, amend the Declaration of Trust, approve an investment and sub-investment advisory agreements and to satisfy certain other requirements. To the extent that such a meeting is not required, the Group may elect not to have an annual or special meeting.
The Group has represented to the Commission that the Trustees will call a special meeting of shareholders for purposes of considering the removal of one or more Trustees upon written request therefor from shareholders holding not less than 10% of the outstanding votes of the Group. At such a meeting, a quorum of shareholders (constituting a majority of votes attributable to all outstanding shares of the Group), by majority vote, has the power to remove one or more Trustees.
As of June 30, 1995, First of America Bank Corporation, through its wholly owned subsidiaries, possessed on behalf of its underlying accounts voting or investment power with respect to more than 25% of the Shares of each of the Funds, and therefore may be presumed to control each Fund within the meaning of the 1940 Act.
In addition to Investor A Shares, the Group also offers Investor B, Investor C and Institutional Shares of the Funds under an exemptive order granted by the Commission. A salesperson or other person entitled to receive compensation for selling or servicing the Shares may receive different compensation with respect to one particular class of Shares over another in the same Fund. The amount of dividends payable with respect to other Classes of Shares will differ from dividends on Investor A Shares as a result of the Investor A Plan fees applicable to Investor A Shares and because Investor A Shares may bear different retail transfer agency expenses. For further details regarding these other Classes of Shares, call the Group at (800) 451-8377.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
BISYS Fund Services Ohio, Inc., formerly known as The Winsbury Service Corporation, 3435 Stelzer Road, Columbus, Ohio 43219, serves as the Group's Transfer Agent pursuant to a Transfer Agency Agreement with the Group and receives a fee for such services. BISYS Fund Services Ohio, Inc. also provides certain accounting services for each of the Funds and receives a fee for such services. See "MANAGEMENT OF THE GROUP--Custodian, Transfer Agent and Fund Accounting Services" in the Statement of Additional Information for further information.
While BISYS Fund Services Ohio, Inc. is a distinct legal entity from BISYS (the Group's administrator and distributor), BISYS Fund Services Ohio, Inc. is considered to be an affiliated person of BISYS under the 1940 Act due to, among other things, the fact that BISYS Fund Services Ohio, Inc. and BISYS are both owned by The BISYS Group, Inc.
Shareholders will receive unaudited semi-annual reports and annual reports audited by independent public accountants.
Inquiries regarding the Group may be directed in writing to The Parkstone Group of Funds at 3435 Stelzer Road, Columbus, Ohio 43219, or by calling toll free (800) 451-8377.
No person has been authorized to give any information or to 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 Funds or their Distributor. This Prospectus does not constitute an offering by the Funds or by their Distributor in any jurisdiction in which such offering may not lawfully be made.
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THE PARKSTONE GROUP OF FUNDS First of America Investment Corporation SUB-INVESTMENT ADVISER (INTERNATIONAL AND BALANCED FUNDS) Gulfstream Global Investors, Ltd. BISYS Fund Services Ohio, Inc. The Bank of California, N.A. Howard & Howard Attorneys, P.C.
PARKSTONE HIGH INCOME EQUITY FUND
PARKSTONE LIMITED MATURITY BOND FUND PARKSTONE INTERMEDIATE GOVERNMENT OBLIGATIONS FUND PARKSTONE U.S. GOVERNMENT INCOME FUND
PARKSTONE MICHIGAN MUNICIPAL BOND FUND
Prospectus dated October 13, 1995
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THE PARKSTONE GROUP OF FUNDS
INVESTOR B SHARES PROSPECTUS DATED OCTOBER 13, 1995
The Funds listed above are each of the eleven currently-offered series of The Parkstone Group of Funds (the "Group") which offer Investor B Shares. This Prospectus explains concisely what you should know before investing in the Investor B Shares of the Funds listed above. Please read it carefully and keep it for future reference. You can find more detailed information about the Fund in the October 13, 1995 Statement of Additional Information, as amended from time to time. For a free copy of the Statement of Additional Information or other information, contact the Group at the number specified above. The Statement of Additional Information has been filed with the Securities and Exchange Commission and is incorporated into this Prospectus by reference.
THE SHARES OF THE PARKSTONE GROUP OF FUNDS ARE NOT OBLIGATIONS OR DEPOSITS OF FIRST OF AMERICA INVESTMENT CORPORATION OR ITS PARENT, AND THE INVESTMENTS DESCRIBED IN THIS PROSPECTUS ARE NOT ENDORSED, INSURED OR GUARANTEED BY FIRST OF AMERICA INVESTMENT CORPORATION, ITS PARENT OR THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY. INVESTMENTS IN THE PARKSTONE GROUP OF FUNDS INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVOLVED.
For information about the following subjects, consult the pages indicated on the table below.
The Parkstone Group of Funds (the "Group") is an open-end management investment company which offers to the public fifteen separate investment portfolios, fourteen of which are diversified portfolios and one of which is a non-diversified portfolio, each with different investment objectives. These Funds enable the Group to meet a wide range of investment needs.
This Prospectus relates only to the Investor B Shares of the following Funds:
Parkstone Equity Fund (the "Equity Fund") Parkstone Small Capitalization Fund (the "Small Capitalization Fund") Parkstone International Discovery Fund (the "International Fund") Parkstone Balanced Fund (the "Balanced Fund") Parkstone High Income Equity Fund (the "High Income Equity Fund") Parkstone Bond Fund (the "Bond Fund") Parkstone Limited Maturity Bond Fund (the "Limited Maturity Bond Fund") Parkstone Intermediate Government Obligations Fund (the "Intermediate Parkstone U.S. Government Income Fund (the "Government Income Fund") Parkstone Municipal Bond Fund (the "Municipal Bond Fund") Parkstone Michigan Municipal Bond Fund (the "Michigan Fund")
For convenience of reference, the above Funds are sometimes referred to as part of a general grouping. The Equity, Small Capitalization and International Funds are collectively referred to as the "Growth Funds". The Balanced and High Income Equity Funds are collectively referred to as the "Growth and Income Funds". The Bond, Limited Maturity Bond, Intermediate Government Obligations and Government Income Funds are collectively referred to as the Income Funds. Finally, the Municipal Bond and Michigan Funds are collectively referred to as "Tax-Free Income Funds".
The Trustees of the Group have divided each of the Funds beneficial ownership into an unlimited number of transferable units called shares (the "Shares"). Each Fund of the Group offers multiple classes of
Shares. This Prospectus describes one class of Shares of each Fund-Institutional Shares. Interested persons who wish to obtain a copy of the Prospectus of the other Classes of Shares of the Funds or a copy of the Group's most recent annual report may contact the Group at the telephone number shown above.
The investment objectives of each of the Funds are described in this Prospectus and are summarized in the Prospectus Summary. First of America Investment Corporation, Kalamazoo, Michigan ("First of America"), acts as the investment adviser to each of the Funds of the Group. To provide investment advisory services for the International and Balanced Funds for investments in foreign securities, First of America has entered into a sub-investment advisory agreement with Gulfstream Global Investors, Ltd., Dallas, Texas ("Gulfstream" or "Subadviser").
This Prospectus relates to Investor B Shares of the following funds of the Group:
These Funds represent eleven separate investment portfolios of The Parkstone Group of Funds, a Massachusetts business trust (the "Group") which is registered as an open-end, management investment company.
Offering Price and Sales Charges
The public offering price of Investor B Shares of each Fund is equal to the net asset value per share, but investors may be subject to a contingent deferred sales charge of up to 4.00% when Investor B Shares are redeemed within four years of purchase.
$1,000 minimum initial purchase (based upon the public offering price) per Fund with no minimum subsequent investments. Such minimum initial investment may be waived for certain purchasers and is reduced to $100 for investors using the Auto Invest Plan described herein, although such investors are subject to a $50 minimum for each subsequent investment in such Fund. Investor B Shares must be purchased in amounts less than $250,000.
Under normal market conditions, each Fund will invest as described in the following table:
Risk Factors and Special Considerations
An investment in a mutual fund such as any of the Funds involves a certain amount of risk and may not be suitable for all investors. In addition, some investment policies of the Funds may entail certain risks (see "RISK FACTORS AND INVESTMENT TECHNIQUES").
First of America Investment Corporation ("First of America") serves as investment adviser, and, with respect to the International Fund and a portion of the Balanced Fund, Gulfstream Global Investors, Ltd. ("Gulfstream") or "Subadviser" serves as subadviser.
Dividends from net income are declared and paid monthly. Net realized capital gains are distributed at least annually.
BISYS Fund Services, formerly known as The Winsbury Company, ("BISYS") a partnership owned by The BISYS Group, Inc.
BISYS Fund Services Ohio, Inc., formerly known as The Winsbury Service Corporation (the "Transfer Agent"), a subsidiary of The BISYS Group, Inc.
FEE TABLES (INVESTOR B SHARES)
(1) A Contingent Deferred Sales Load is charged only with respect to Investor B Shares redeemed within four years of the date of purchase. (See "CONTINGENT
(2) Although no such fee currently is in place, the Transfer Agent has reserved the right in the future to charge a fee for wire transfers of redemption proceeds.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)*
(1) Pursuant to the Investor B Distribution and Shareholder Service Plan, each Fund is authorized to make payments under such Plan of up to an annual rate of 1.00% of the average daily net asset value of such Fund's Investor B Shares.
Absent the voluntary reduction of advisory fees and Other Expenses, Management Fees, Other Expenses and Total Expenses as a percentage of average net assets for the Balanced Fund would have been 1.00%, 1.00% and 2.75%, respectively. Absent the voluntary reduction of administration fees and advisory fees, Management Fees, Other Expenses and Total Expenses as a percentage of average net assets for the Bond Fund would have been .74%, .63% and 2.37%, respectively. For the Limited Maturity Bond Fund they would have been .74%, .60% and 2.34%, respectively. For the Intermediate Government Obligations Fund they would have been .74%, .66% and 2.40%, respectively. For the Government Income Fund they are estimated to be .74%, .68% and 2.42%, respectively. For the Municipal Bond Fund they would have been .74%, .60% and 2.34%, respectively. For the Michigan Fund they would have been .74%, .58% and 2.32%, respectively. Absent the voluntary reduction of Other Expenses, Other Expenses and Total Expenses for the Equity Fund would have been .54% and 2.54%, respectively. For the Small Capitalization Fund they would have been .57% and 2.57%, respectively. For the High Income have been .57% and 2.57%, respectively. (See "MANAGEMENT OF THE FUNDS--Investment Adviser and Subadviser" and "Administrator, Sub-Administrator
You would pay the following expenses on a $1,000 investment in Investor B Shares, assuming (1) 5% annual return and (2) redemption at the end of each time period:
You would pay the following expenses on a $1,000 investment in Investor B Shares, assuming (1) 5% annual return and (2) no redemption at the end of each time period:
The information set forth in the foregoing Fee Tables and examples relates only to Investor B Shares of the Funds. Each of the Funds also may offer other classes of Shares. The other classes of Shares of the Funds are subject to the same expenses except that the sales charges and level of Rule 12b-1 fees paid by holders of the different classes will differ.
As a result of the payment of sales charges and 12b-1 fees, long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc. (the "NASD"). The NASD has adopted rules effective July 7, 1993, which generally limit the aggregate sales charges and payments under the Group's Investor B Distribution and Shareholder Service Plan to a certain percent of total new gross share sales, plus interest. The Funds would stop accruing 12b-1 fees if, to the extent, and for as long as, such limit would otherwise be exceeded.
The purpose of the above tables is to assist a potential purchaser of Investor B Shares of any Fund in understanding the various costs and expenses that an investor in a Fund will bear directly or indirectly. Such expenses do not include any fees charged by First of America or any of its affiliates to its customer accounts which may have invested in Investor B Shares of the Funds. See "MANAGEMENT OF THE FUNDS," "GENERAL INFORMATION" and "SALES CHARGES" for a more complete discussion of the Shareholder transaction expenses and annual operating expenses of each of the Funds. The expense information for Investor B Shares reflects current fees. THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The table below sets forth certain information concerning the investment results of the Investor B Shares of each of the Funds since its inception. Further financial information is included in the Statement of Additional Information and the Group's June 30, 1995 Annual Report to Shareholders.
The Financial Highlights for the periods presented below have been derived from financial statements audited by Coopers & Lybrand L.L.P. (Limited Liability Partnership), independent accountants for the Group, whose report thereon is included in the Annual Report.
Also included for the information of Shareholders is information concerning the investment results of the Investor A Shares of the Group. This information is made available to allow Shareholders to evaluate the Investor A Shares into which the Investor B Shares will convert. See "CONVERSION FEATURE" below. With respect to the financial information regarding the Investor A Shares, on March 31, 1993, the Shareholders of all of the then-outstanding Funds of the Group approved the reclassification of such Fund's outstanding Shares into Investor A Shares and Institutional Shares. The financial information provided below with respect to the Investor A Shares and in the Annual Report include periods prior to such reclassification.
EQUITY FUND - INVESTOR B SHARES
SMALL CAPITALIZATION FUND - INVESTOR B SHARES
INTERNATIONAL DISCOVERY FUND - INVESTOR B SHARES
BALANCED FUND - INVESTOR B SHARES
HIGH INCOME EQUITY FUND - INVESTOR B SHARES
BOND FUND - INVESTOR B SHARES
LIMITED MATURITY BOND FUND - INVESTOR B SHARES
INTERMEDIATE GOVERNMENT OBLIGATIONS FUND - INVESTOR B SHARES
GOVERNMENT INCOME FUND - INVESTOR B SHARES
MICHIGAN FUND - INVESTOR B SHARES
MUNICIPAL BOND FUND - INVESTOR B SHARES
EQUITY FUND - INVESTOR A SHARES
SMALL CAPITALIZATION FUND - INVESTOR A SHARES
INTERNATIONAL DISCOVERY FUND - INVESTOR A SHARES
BALANCED FUND - INVESTOR A SHARES
HIGH INCOME EQUITY FUND - INVESTOR A SHARES
BOND FUND - INVESTOR A SHARES
LIMITED MATURITY BOND FUND - INVESTOR A SHARES
INTERMEDIATE GOVERNMENT OBLIGATIONS FUND - INVESTOR A SHARES
GOVERNMENT INCOME FUND - INVESTOR A SHARES
MUNICIPAL BOND FUND - INVESTOR A SHARES
MICHIGAN FUND - INVESTOR A SHARES
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios would have been as indicated. (a) Period from commencement of operations. (b) On April 1, 1993 the shareholders of the Group exchanged their shares for either the Group's Investor A Shares or Institutional Shares. For the year ended June 30, 1993 the Financial Highlights ratios of expenses, ratios of net investment income, total return and the per share investment activities and distributions are presented on the basis whereby the Fund's net investment income, expenses, and distributions for the period July 1, 1992 through March 31, 1993 were allocated to each class of shares based upon the relative net assets of each class of shares as of April 1, 1993 and the results combined therewith the results of operations and distributions for each applicable class for the period April 1, 1993 through June 30, 1993. (c) Annualized. (d) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued. (e) Not annualized. (f) Period from commencement of offering of Investor B shares.
The investment objectives of each of the Funds is set forth below under the headings describing the Funds. The investment objectives of each Fund are fundamental policies and may not be changed without a vote of the holders of a majority of the outstanding Shares of that Fund (as defined in the Statement of Additional Information). Other policies of a Fund may be changed without a vote of the holders of a majority of outstanding Shares of that Fund unless the policy is expressly deemed to be a fundamental policy or changeable only by such majority vote. There can be no assurance that the investment objectives of any Fund will be achieved. Depending upon the performance of a Fund's investments, the net asset value per share of that Fund may decrease instead of increase.
During temporary defensive periods as determined by First of America or the Subadviser, as the case may be, each of the Funds may hold up to 100% of its total assets in short-term obligations including domestic bank certificates of deposit, bankers acceptances and repurchase agreements secured by bank instruments. However, to the extent that a Fund is so invested, its investment objective may not be achieved during that time. Uninvested cash reserves will not earn income.
THE EQUITY FUND AND SMALL CAPITALIZATION FUND
The investment objective of the Equity Fund is to seek growth of capital by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks. The investment objective of the Small Capitalization Fund is to seek growth of capital by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks of small to medium-sized companies.
Under normal market conditions, each of the Equity and Small Capitalization Funds will invest at least 80% of the value of its total assets in common stocks and securities convertible into common stocks of companies believed by First of America to be characterized by sound management and the ability to finance expected long-term growth. In addition, under normal market conditions, the Small Capitalization Fund will invest at least 65% of the value of its total assets in common stocks and securities convertible into common stocks of companies considered by First of America to have a market capitalization of less than $1 billion. Each of the Equity and Small Capitalization Funds may also invest up to 20% of the value of its total assets in preferred stocks, corporate bonds, notes, units of real estate investment trusts, warrants, and short-term obligations (with maturities of 12 months or less) consisting of commercial paper (including variable amount master demand notes), bankers acceptances, certificates of deposit, repurchase agreements, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and demand and time deposits of domestic and foreign banks and savings and loan associations. Each of the Equity and Small Capitalization Funds may also hold securities of other investment companies and depositary or custodial receipts representing beneficial interests in any of the foregoing securities.
Subject to the foregoing policies, each of the Equity and Small Capitalization Funds may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper. For a discussion of risks associated with foreign securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Foreign Securities" herein.
The Equity Fund anticipates investing in growth-oriented, medium capitalization companies. These companies have typically exhibited consistent, above average growth in revenues and earnings, strong management, and sound and improving financial fundamentals. Often, these companies are market or industry leaders, have excellent products and/or services, and exhibit the potential for growth. Core holdings of the Equity Fund are in companies that participate in long-term growth industries, although these will be supplemented by holdings in non-growth industries that exhibit the desired characteristics.
The Small Capitalization Fund anticipates investing in dynamic small- to medium-sized companies that exhibit outstanding potential for superior growth. For purposes of the foregoing sentence, small-sized companies are considered to be those with capitalization of less than $1 billion and medium-sized companies are considered to be those with capitalization of $1 billion or more but less than $5 billion. The Small Capitalization Fund will limit its investment in securities of medium-sized companies to not more than 35% of the value of its total assets. Companies that participate in sectors that are identified as having long-term growth potential generally make up a substantial portion of such Fund's holdings. These companies often have established a market niche or have developed unique products or technologies that are expected to produce superior growth in revenues and earnings. As smaller capitalization stocks are quite volatile and subject to wide fluctuations in both the short and medium term, the Small Capitalization Fund may be fairly characterized more aggressive than a general equity fund such as the Equity Fund.
Consistent with the foregoing, each of the Equity and Small Capitalization Funds will focus its investments in those companies and types of companies that First of America believes will enable such Fund to achieve its investment objective.
The investment objective of the International Fund is the long-term growth of capital.
Under normal market conditions the International Fund will invest at least 65% of its total assets in an internationally diversified portfolio of equity securities which trade on markets in countries other than the United States and which are issued by companies (i) domiciled in countries other than the United States, or (ii) that derive at least 50% of either their revenues or pre-tax income from activities outside of the United States, and (iii) which are small- or medium-sized companies on the basis of their capitalization.
Equity securities include common and preferred stock, securities (bonds and preferred stock) convertible into common stock, warrants and securities representing underlying international securities such as ADRs and EDRs.
Companies are deemed to be small- or medium-sized which at the time of purchase are of a size which would rank them in the lower half of a major market index in each country by weighted market capitalization and all equity securities listed in recognized secondary markets where such markets exist. In addition, in countries with less well-developed stock markets, where the range of investment opportunities is more restrictive, the equity securities of all listed companies will be eligible for investment. In major markets issuers could have capitalizations of up to approximately $10 billion while in smaller markets issuers would be eligible with capitalizations as low as approximately $200 million.
The International Fund may invest in securities of issuers in, but not limited to, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Korea, Malaysia, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and United Kingdom. Normally the International Fund will invest at least 65% of its total assets in securities traded in at least three foreign countries, including the countries listed above. It is possible, although not currently anticipated, that up to 35% of the International Fund's assets could be invested in U.S. companies. In addition, the International Fund temporarily may invest cash in short-term debt instruments of U.S. and foreign issuers for cash management purposes or pending investment.
The investment objectives of the Balanced Fund are to seek current income, long-term capital growth and conservation of capital.
The Balanced Fund may invest in any type or class of security. Under normal market conditions the Balanced Fund will invest in common stocks, fixed income securities and securities convertible into common stocks (i.e., warrants, convertible preferred stock, fixed rate preferred stock, convertible fixed- income securities, options and rights). At least 25% of the value of the Balanced Fund's total assets will be invested in fixed income senior securities. Up to 15% of the value of the Balanced Fund's total assets may be invested in foreign securities.
The Balanced Fund's common stocks are held for the purpose of providing dividend income and long-term growth of capital. The Balanced Fund will invest in the common and preferred stocks of companies with capitalization of at least $100 million and which are traded either in established over-the-counter markets or on national exchanges. The Balanced Fund intends to invest primarily in those companies which are growth oriented and have exhibited consistent, above average growth in revenues and earnings. When choosing such stocks, the potential for long term capital appreciation will be the primary basis for selection.
The Balanced Fund's fixed income senior securities consist of bonds, debentures, notes, zero-coupon securities, mortgage-related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, certificates of deposit, time deposits, high quality commercial paper, bankers' acceptances and variable amount master demand notes. In addition, a portion of the Balanced Fund may from time to time be invested in first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Some of the securities in which the Balanced Fund invests may have warrants or options attached. The Balanced Fund may also invest in repurchase agreements.
The Balanced Fund expects to invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, as well as "stripped" U.S. Treasury obligations such as Treasury Receipts issued by the U.S. Treasury representing either future interest or principal payments ("Stripped Treasury Obligations"), and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. See "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations" below.
The Balanced Fund also expects to invest in bonds, notes and debentures of a wide range of U.S. corporate issuers. Such obligations, in the case of debentures, will represent unsecured promises to pay, in the case of notes and bonds, may be secured by mortgages on real property or security interests in personal property and will in most cases differ in their interest rates, maturities and times of issuance.
The Balanced Fund will invest only in corporate fixed income securities which are rated at the time of purchase within the four highest rating groups assigned by a nationally-recognized statistical rating organization ("NRSRO") or, if unrated, which First of America deems present attractive opportunities and are of comparable quality. For a description of the rating symbols of the NRSROs, see the Appendix to the Statement of Additional Information. For a discussion of fixed income securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES-- Medium Grade Securities" herein.
The Balanced Fund may hold some short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper, variable amount master demand notes, bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase agreements. The Balanced Fund may also invest in securities of other investment companies.
The Balanced Fund may also invest in obligations of the Export-Import Bank of the United States, in U.S. dollar denominated international bonds for which the primary trading market is in the United States ("Yankee Bonds"), or for which the primary trading market is abroad ("Eurodollar Bonds"), and in Canadian Bonds and bonds issued by institutions, such as the World Bank and the European Economic Community, organized for a specific purpose by two or more sovereign governments ("Supranational Agency Bonds"). The Balanced Fund's investments in foreign securities may be made either directly or through the purchase of American Depositary Receipts ("ADRs") and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in Canadian commercial paper ("CCP"), and in Europaper (U.S. dollar denominated commercial paper of a foreign issuer).
The amount invested in stock, bonds and cash reserves may be varied from time to time, depending upon First of America's assessment of business, economic and market conditions, including any potential advantage of price shifts between the stock market and the bond market. The Balanced Fund reserves the right to hold short-term securities in whatever proportion deemed desirable for temporary defensive periods during adverse market conditions as determined by First of America. However, to the extent that the Balanced Fund is so invested, its investment objectives may not be achieved during that time.
Like any investment program, the Balanced Fund entails certain risks. As a Fund investing primarily in common stocks the Balanced Fund is subject to stock market risk, i.e., the possibility that stock prices in general will decline over short or even extended periods.
Since the Balanced Fund also invests in bonds, investors in the Balanced Fund are also exposed to bond market risk, i.e., fluctuations in the market value of bonds. Bond prices are influenced primarily by changes in the level of interest rates. When interest rates rise, the prices of bonds generally fall; conversely, when interest rates fall, bond prices generally rise. While bonds normally fluctuate less in price than stock, there have been extended periods of cyclical increases in interest rates that have caused significant declines in bond prices.
From time to time, the stock and bond markets may fluctuate independently of one another. In other words, a decline in the stock market may in certain instances be offset by a rise in the bond market, or vice versa. As a result the Balanced Fund, with its balance of common stock and bond investments, is expected to entail less investment risk (and a potentially smaller investment return) than a mutual fund investing exclusively in common stocks.
THE HIGH INCOME EQUITY FUND
The investment objective of the High Income Equity Fund is to seek current income by investing in a diversified portfolio of high quality, dividend-paying common stocks and securities convertible into common stocks. A secondary investment objective of High Income Equity Fund is growth of capital.
The High Income Equity Fund, under normal market conditions, will invest at least 80% of the value of its total assets in common stocks and securities convertible into common stocks of companies believed by First of America to be characterized by sound management, the ability to finance expected growth and the ability to pay above average dividends. The High Income Equity Funds may also invest up to 20% of the value of its total assets in preferred stocks, corporate bonds, notes, units of real estate investment trusts, warrants, and short-term obligations (with maturities of 12 months or less) consisting of commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit, repurchase agreements, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and demand and time deposits of domestic and foreign banks and savings and loan associations. The High Income Equity Funds may also hold securities of other investment companies and depositary or custodial receipts representing beneficial interests in any of the foregoing securities.
Subject to the foregoing policies, the High Income Equity Funds may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper. For a discussion of risks associated with foreign securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Foreign Securities" herein.
The High Income Equity Fund anticipates investing in securities that currently have a high dividend yield, with the anticipation that the dividend will remain constant or be increased in the future. These securities generally represent the core holdings of this Fund. However, these holdings are balanced with lower yielding but higher growth-oriented securities to achieve portfolio balance. All securities must provide current income. Given its bias towards income, the High Income Equity Fund may be considered the more conservative than growth-oriented equity funds such as the Group's Equity and Small Capitalization Funds.
Consistent with the foregoing, the High Income Equity Fund will focus its investments in those companies and types of companies that First of America believes will enable such Fund to achieve its investment objective.
THE BOND FUND AND LIMITED MATURITY BOND FUND
The investment objective of the Bond Fund is to seek current income as well as preservation of capital by investing in a portfolio of high and medium grade fixed-income securities. The investment objective of the Limited Maturity Bond Fund is to seek current income as well as preservation of capital by investing in a portfolio of high and medium grade fixed-income securities with remaining maturities of six years or less.
Under normal market conditions, the Bond Fund will invest at least 80% of the value of its total assets in bonds, debentures, notes with remaining maturities at the time of purchase of one year or more, zero-coupon securities, mortgage-related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, debt securities convertible into, or exchangeable for, common stocks, first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Bond Fund will invest in state and municipal securities when, in the opinion of First of America, their yields are competitive with comparable taxable debt obligations. In addition, up to 20% of the value of the Bond Fund's total assets may be invested in preferred stocks, notes with remaining maturities at the time of purchase of less than one year, short-term debt obligations consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, repurchase agreements, securities of other investment companies, and Guaranteed Investment Contracts ("GICs") issued by insurance companies, as more fully described below. The Bond Fund intends that under normal market conditions its portfolio will maintain an average weighted maturity of approximately eight to twelve years. However, the Bond Fund may extend or shorten the average weighted maturity of its portfolio depending upon anticipated changes in interest rates or other relevant market factors. Some of the securities in which the Bond Fund invests may have warrants or options attached.
Under normal market conditions, the Limited Maturity Bond Fund will invest at least 80% of the value of its total assets in the following securities which have remaining maturities of six years or less: bonds, debentures, notes with remaining maturities at the time of purchase of one year or more, zero-coupon securities, mortgage related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, debt securities convertible into, or exchangeable for, common stocks, first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Limited Maturity Bond Fund will invest in state and municipal securities when, in the opinion of First of America, their yields are competitive with comparable taxable debt obligations. In addition, up to 20% of the value of the Limited Maturity Bond Fund's total assets may be invested in the debt securities listed above without regard to maturity, preferred stocks, notes with remaining maturities at the time of purchase of less than one year, short-term debt obligations consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, repurchase agreements, securities of other investment companies and GICs. Under normal market conditions, the Limited Maturity Bond Fund expects to maintain a dollar-weighted average portfolio maturity of its debt securities of three years or less. Some of the securities in which the Limited Maturity Bond Fund invests may have warrants or options attached.
The Bond Fund and Limited Maturity Bond Fund each expects to invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, as well as Stripped Treasury Obligations, and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. See "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations" below.
The Bond Fund and the Limited Maturity Bond Fund each also expects to invest in bonds, notes and debentures of a wide range of U.S. corporate issuers. Such obligations, in the case of debentures, will represent unsecured promises to pay, in the case of notes and bonds, may be secured by mortgages on real property or security interests in personal property and will in most cases differ in their interest rates, maturities and times of issuance.
The Bond Fund and the Limited Maturity Bond Fund each will invest only in corporate debt securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or, if unrated, which First of America deems present attractive opportunities and are of comparable quality. For a discussion of debt securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium-Grade Securities" herein.
The Bond Fund and the Limited Maturity Bond Fund each may hold some short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase agreements. The Bond Fund and the Limited Maturity Bond Fund each may also invest in securities of other investment companies or in GICs.
The Bond Fund and the Limited Maturity Bond Fund each may also invest in obligations of the Export-Import Bank of the United States, in Yankee Bonds, in Eurodollar Bonds, in Canadian Bonds and in Supranational Agency Bonds. Each of the Bond Fund and Limited Maturity Bond Fund may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper.
An increase in interest rates will generally reduce the value of the investments in the Bond Fund and the Limited Maturity Bond Fund and a decline in interest rates will generally increase the value of those investments. Depending upon the prevailing market conditions, First of America may purchase debt securities at a discount from face value, which produces a yield greater than the coupon rate. Conversely, if debt securities are purchased at a premium over face value, the yield will be lower than the coupon rate. In making investment decisions for the Bond Fund, First of America will consider many factors other than current yield, including the preservation of capital, the potential for realizing capital appreciation, maturity, and yield to maturity. In making investment decisions for the Limited Maturity Bond Fund, First of America will consider many factors other than current yield, including the preservation of capital, maturity, and yield to maturity.
By seeking to maintain a dollar-weighted average portfolio maturity of three years or less, the Limited Maturity Bond Fund attempts to minimize the fluctuation in its Shares' net asset value relative to those funds which invest in longer term obligations.
THE INTERMEDIATE GOVERNMENT OBLIGATIONS FUND
The investment objective of the Intermediate Government Obligations Fund is to seek current income with preservation of capital by investing in U.S. Government securities with remaining maturities of twelve years or less.
Under normal market conditions, the Intermediate Government Obligations Fund will invest at least 80% of its total assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and with remaining maturities of twelve years or less, although up to 20% of the value of its total assets may be invested in debt securities, preferred stocks and other investments without regard to maturity, except as set forth below. Under normal market conditions, the Intermediate Government Obligations Fund expects to maintain a dollar-weighted average portfolio maturity of its debt securities of three to ten years.
The types of U.S. Government obligations invested in by the Intermediate Government Obligations Fund will include obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Treasury, such as Treasury bills, notes, bonds and certificates of indebtedness, and Government Securities, as described below in "RISK FACTORS AND INVESTMENT TECHNIQUES-- Government Obligations."
The Intermediate Government Obligations Fund may also invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, as more fully described below under "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations."
By seeking to maintain a dollar-weighted average portfolio maturity of three to ten years, the Intermediate Government Obligations Fund attempts to minimize the fluctuation in its Shares net asset value relative to those funds which invest in longer term obligations.
The investment objective of the Government Income Fund is to provide shareholders with a high level of current income consistent with prudent investment risk.
Under normal market conditions, the Government Income Fund will invest at least 65% of its total assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, although up to 35% of the value of its total assets may be invested in debt securities and preferred stocks of nongovernmental issuers. Consistent with the foregoing, under current market conditions, the Government Income Fund intends to invest up to 80% of the value of its total assets in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Government Income Fund also may invest up to 35% of its total assets in mortgage-related securities issued by nongovernmental entities and in other securities described below. For more information, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Mortgage-Related Securities," below.
The types of U.S. Government obligations, including mortgage-related securities, invested in by the Government Income Fund will include obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Treasury, such as Treasury bills, notes and bonds, Stripped Treasury Obligations and Government Securities, as described below in "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations".
The Government Income Fund may also hold short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper rated at the time of purchase within the top two categories by an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase and reverse repurchase agreements. The Government Income Fund may also invest in corporate debt securities which are rated at the time of purchase within the top three categories of an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality.
The investment objective of the Municipal Bond Fund is to seek current interest income which is exempt from federal income taxes as well as preservation of capital. The investment objectives of the Michigan Fund are to seek income which is exempt from federal income tax and Michigan state income and intangibles tax, although such income may be subject to the federal alternative minimum tax when received by certain Shareholders, and to seek preservation of capital.
Under normal market conditions and as a fundamental policy, at least 80% of the net assets of the Municipal Bond Fund will be invested in a diversified portfolio of Municipal Securities and at 80% of the net assets of the Michigan Fund will be invested in a portfolio of Michigan Municipal Securities.
"Municipal Securities" include obligations consisting of bonds, notes and commercial paper, issued by or on behalf of states, territories and possessions of the United States, the District of Columbia and other political subdivisions, agencies, instrumentalities and authorities, the interest on which is both exempt from federal income taxes and not treated as a preference item for individuals for purposes of the federal alternative minimum tax. "Michigan Municipal Securities" include debt obligations, consisting of notes, bonds and commercial paper, issued by or on behalf of the State of Michigan, its political subdivisions, municipalities and public authorities, the interest on which is, in the opinion of bond counsel to the issuer, exempt from federal income tax and Michigan state income and intangibles taxes (but may be treated as a preference item for individuals for purposes of the federal alternative minimum tax) and debt obligations issued by the Government of Puerto Rico or the U.S. territories and possessions of Guam and the U.S. Virgin Islands and such other governmental entities whose debt obligations, either by law or treaty, generate interest income which is exempt from federal and Michigan state income and intangibles tax. For more information regarding Municipal Securities and Michigan Municipal Securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Municipal Securities," below.
Under normal market conditions, at least 65% of the net assets of each of the Municipal Bond Fund and the Michigan Fund will be invested in Municipal Securities (Michigan Municipal Securities in the case of the Michigan Fund) consisting of bonds and notes with remaining maturities at the time of purchase of one year or more. Quality is the primary consideration in selecting Michigan Municipal Securities for investment by the Michigan Fund.
The Municipal Bond Fund also intends that under normal market conditions its portfolio will maintain an average weighted maturity of approximately eight to ten years and an average weighted rating of AA/Aa. The Michigan Fund, under normal market conditions, will be invested in long-term Michigan Municipal Securities and that the average weighted maturity of such investments will be 5 to 12 years, although the Michigan Fund may invest in Michigan Municipal Securities of any maturity. However, First of America may extend or shorten the average weighted maturity of its portfolio depending upon anticipated changes in interest rates or other relevant market factors. In addition, the average weighted rating of a Tax-Free Income Fund's portfolio may vary depending upon the availability of suitable Municipal Securities or other relevant market factors.
The Michigan Fund invests in Michigan Municipal Securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or rated within the two highest rating groups assigned by an NRSRO in the case of notes, tax-exempt commercial paper or variable rate demand obligations. The Michigan Fund may also purchase Michigan Municipal Securities which are unrated at the time of purchase but are determined to be of comparable quality by First of America pursuant to guidelines approved by the Group's Board of Trustees. The applicable Michigan Municipal Securities ratings are described in the Appendix to the Statement of Additional Information. For a description of debt securities rated within the fourth highest rating group assigned by the NRSROs, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium-Grade Securities" herein.
Interest income from certain types of municipal securities may be subject to federal alternative minimum tax. The Tax-Free Income Funds will not treat these bonds as "Municipal Securities" or "Michigan Municipal Securities" for purposes of measuring compliance with the 80% tests described above. To the extent the Tax-Free Income Funds invests in these bonds, individual shareholders, depending own tax status, may be subject to alternative minimum tax on that part of the Tax-Free Income Fund's distributions derived from these bonds. For further information relating to the types of municipal securities which will be included in income subject to alternative minimum tax, see "ADDITIONAL INFORMATION-- Additional Tax Information Concerning the Tax-Free Fund, the Municipal Bond Fund and the Michigan Fund" in the Statement of Additional Information.
In addition, investments may be made in taxable obligations if, for example, suitable tax-exempt obligations are unavailable or if acquisition of U.S. Government or other taxable securities is deemed appropriate for temporary defensive purposes as determined by First of America to be warranted due to market conditions. Such taxable obligations consist of Government Securities, certificates of deposit, time deposits and bankers' acceptances of selected banks, commercial paper meeting the Tax-Free Income Fund's quality standards (as described above) for tax-exempt commercial paper, and such taxable obligations as may be subject to repurchase agreements. These obligations are described further in the Statement of Additional Information. Under such circumstances and during the period of such investment, the affected Tax-Free Income Fund may not achieve its stated investment objectives.
Although the Municipal Bond Fund may invest more than 25% of its net assets in (i) Municipal Securities whose issuers are in the same state, (ii) Municipal Securities the interest on which is paid solely from revenues of similar projects, and (iii) private activity bonds, it does not presently intend to do so on a regular basis. To the extent the Municipal Bond Fund's assets are concentrated in Municipal Securities that are payable from the revenues of similar projects or are issued by issuers located in the same state, or are concentrated in private activity bonds, the Municipal Bond Fund will be subject to the peculiar risks presented by the laws and economic conditions relating to such states, projects and bonds to a greater extent than it would be if its assets were not so concentrated.
SPECIAL CONSIDERATIONS RELATING TO THE MICHIGAN FUND
Because the Michigan Fund invests primarily in securities issued by the State of Michigan and its political subdivisions, municipalities and public authorities, the Michigan Fund's performance is closely tied to the general economic conditions within the State as a whole and to the economic conditions within particular industries and geographic areas represented or located within the State. However, the Michigan Fund attempts to diversify, to the extent First of America deems appropriate, among issuers and geographic areas in the State of Michigan.
The Michigan Fund's classification as a "non-diversified" investment company means that the proportion of the Michigan Fund's assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. However, the Michigan Fund intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended, which requires the Michigan Fund generally to invest, with respect to 50% of its total assets, not more than 5% of such assets in the obligations of a single issuer; as to the remaining 50% of its total assets, the Michigan Fund is not so restricted. In no event, however, may the Michigan Fund invest more than 25% of its total assets in the obligations of any one issuer. Compliance with this requirement is measured at the close of each quarter of the Michigan Fund's taxable year. Since a relatively high percentage of the Michigan Fund's assets may be invested in the obligations of a limited number of issuers, some of which may be within the same economic sector, the Michigan Fund's portfolio securities may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company.
RISK FACTORS AND INVESTMENT TECHNIQUES
Like any investment program, an investment in a Fund entails certain risks. The Funds will not acquire portfolio securities issued by, make savings deposits in, or enter into repurchase, reverse repurchase or dollar roll agreements with First of America Bank-Michigan, N.A. (the parent corporation of First of America), BISYS, or their affiliates, and will not give preference to First of America Bank-Michigan, N.A.'s correspondents with respect to such transactions, securities, savings deposits, repurchase agreements, reverse repurchase agreements and dollar roll agreements.
Some of the investment techniques utilized by First of America and, in the case of the International and Balanced Funds, the Subadviser in the management of each of the Funds (with the exception of the Treasury Fund) involve complex securities sometimes referred to as "derivatives." Among such securities are put and call options, foreign currency transactions and futures contracts, all of which are described below. The Adviser and Subadviser believe that such complex securities may, in some circumstances, play a valuable role in successfully implementing each Fund's investment strategy and achieving its goals. However, because complex securities and the strategies for which they are used, are by their nature complicated, they present substantial opportunities for misunderstanding and misuse. To guard against these risks, the Adviser and Subadviser will utilize complex securities primarily for hedging, not speculative, purposes and only after careful review of the unique risk factors associated with each such security.
The International Fund invests primarily in the securities of foreign issuers. The Balanced Fund may invest up to 15% of its total assets in foreign securities. The Equity, Small Capitalization and High Income Equity Funds may also invest in foreign securities as permitted by their respective investment policies. Each of the Bond Fund and Limited Maturity Bond Fund may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper.
Investment in foreign securities is subject to special investment risks that differ in some respects from those related to investments in securities of U.S. domestic issuers. Such risks include political, social or economic instability in the country of the issuer, the difficulty of predicting international trade patterns, the possibility of the imposition of exchange controls, expropriation, limits on removal of currency or other assets, nationalization of assets, foreign withholding and income taxation, and foreign trading practices (including higher trading commissions, custodial charges and delayed settlements). Such securities may be subject to greater fluctuations in price than securities issued by U.S. corporations or issued or guaranteed by the U.S. government, its agencies or instrumentalities. The markets on which such securities trade may have less volume and liquidity, and may be more volatile than securities markets in the U.S. In addition, there may be less publicly available information about a foreign company than about a U.S. domiciled company. Foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to U.S. domestic companies. There is generally less government regulation of securities exchanges, brokers and listed companies abroad than in the U.S. Confiscatory taxation or diplomatic developments could also affect investment in those countries. In addition, foreign branches of U.S. banks, foreign banks and foreign issuers may be subject to less stringent reserve requirements and to different accounting, auditing, reporting, and recordkeeping standards than those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
In many instances, foreign debt securities may provide higher yields than securities of domestic issuers which have similar maturities and quality. Under certain market conditions these investments may be less liquid than the securities of U.S. corporations and are certainly less liquid than securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. Finally, in the event of a default of any such foreign debt obligations, it may be more difficult for a Fund to obtain or to enforce a judgment against the issuers of such securities. If a security is denominated in foreign currency, the value of the security to the Fund will be affected by changes in currency exchange rates and in exchange control regulations, and costs will be incurred in connection with conversions between currencies. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of a Fund's securities denominated in that currency. Such changes will also affect a Fund's income and distributions to shareholders. In addition, although a Fund will receive income on foreign securities in such currencies, such Fund will be required to compute and distribute its income in U.S. dollars. Therefore, if the exchange rate for any such currency declines materially after such Fund's income has been accrued and translated into U.S. dollars, the Fund could be required to liquidate portfolio securities to make required distributions. Similarly, if an exchange rate declines between the time a Fund incurs expenses in U.S. dollars and the time such expenses are paid, the amount of such currency required to be converted into U.S. dollars in order to pay such expenses in U.S. dollars will be greater.
For many foreign securities, U.S. dollar-denominated American Depositary Receipts, or ADR's, which are traded in the United States on exchanges or over-the-counter, are issued by domestic banks. ADR's represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADR's do not eliminate all the risk inherent in investing in the securities of foreign issuers. However, by investing in ADR's rather than directly in foreign issuers' stock, a Fund can avoid currency risks during the settlement period for either purchases or sales. In general, there is a large, liquid market in the United States for many ADR's. The information available for ADR's is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject. The International and Balanced Funds may also invest in European Depository Receipts, or EDR's, which are receipts evidencing an arrangement with a European bank similar to that for ADR's and are designed for use in the European securities markets. EDR's are not necessarily denominated in the currency of the underlying security.
Certain of the ADR's and EDR's, typically those denominated as unsponsored, require the holders thereof to bear most of the costs of such facilities while issuers of sponsored facilities normally pay more of the costs thereof. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through the voting rights to facility holders in respect to the deposited securities, whereas the depository of a sponsored facility typically distributes shareholder communications and passes through the voting rights.
Subject to its applicable investment policies, each of the Growth Funds and Growth and Income Funds may invest in debt securities denominated in the ECU, which is a "basket" consisting of specified amounts of the currencies of certain of the twelve member states of the European Community. The specific amounts of currencies comprising the ECU may be adjusted by the Council of Ministers of the European Community to reflect changes in relative values of the underlying currencies. Such adjustments may adversely affect holders of ECU-denominated obligations or the marketability of such securities. European governments and supranationals, in particular, issue ECU-denominated obligations.
Each of the Funds, with the exception of the Michigan Fund, may utilize foreign currency transactions in its portfolio. The value of the assets of a Fund as measured in United States dollars may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and a Fund may incur costs in connection with conversions between various currencies. A Fund will conduct its 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. A forward foreign currency exchange contract ("forward currency contracts") involves 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. These forward currency contracts are traded directly between currency traders (usually large commercial banks) and their customers. The Funds may enter into forward currency contracts in order to hedge against adverse movements in exchange rates between currencies.
For example, when a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may want to establish the United States dollar cost or proceeds, as the case may be. By entering into a forward currency contract in United States dollars for the purchase or sale of the amount of foreign currency involved in an underlying security transaction, such Fund is able to protect itself against a possible loss between trade and settlement dates resulting from an adverse change in the relationship between the United States dollar and such foreign currency. Additionally, for example, when a Fund believes that a foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a forward currency sale contract to sell an amount of that foreign currency approximating the value of some or all of that Fund's portfolio securities or other assets denominated in such foreign currency, or when a Fund believes that the U.S. dollar may suffer a substantial decline against a foreign currency, it may enter into a forward currency purchase contract to buy that foreign currency for a fixed U.S. dollar amount. However, this tends to limit potential gains which might result from a positive change in such currency relationships. A Fund may also hedge its foreign currency exchange rate risk by engaging in currency financial futures and options transactions. The forecasting of short-term currency market movement is extremely difficult and whether such a short-term hedging strategy will be successful is highly uncertain.
It is impossible to forecast with precision the market value of portfolio securities at the expiration of a forward currency contract. Accordingly, it may be necessary for a Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency such Fund is obligated to deliver when a decision is made to sell the security and make delivery of the foreign currency in settlement of a forward contract. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency such Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting transaction, such Fund will incur a gain or a loss (as described below) to the extent that there has been movement in forward currency contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward currency contract to sell the foreign currency. Should forward prices decline during the period between a Fund's entering into a forward currency contract for the sale of foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, such Fund would realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, such Fund would suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. Although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which might result should the value of such currency increase. The Funds will have to convert their holdings of foreign currencies into United States dollars from time to time. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies.
The International Fund does not intend to enter into forward currency contracts if the International Fund would have more than 15% of the value of its total assets committed to such contracts on a regular or continuous basis. The International Fund does not intend to enter into forward currency contracts or maintain a net exposure in such contracts where the International Fund would be obligated to deliver an amount of foreign currency in excess of the value of the Fund's portfolio securities or other assets denominated in that currency.
For further information about the characteristics, risks and possible benefits of options, futures and foreign currency transactions, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments" in the Statement of Additional Information.
The Growth Funds, the Growth and Income Funds, the Bond Fund, the Limited Maturity Bond Fund, the Intermediate Government Obligations Fund, the Municipal Bond Fund and the Parkstone Government Income Fund may also enter into contracts for the future delivery of securities or foreign currencies and futures contracts based on a specific security, class of securities, foreign currency or an index, purchase or sell options on any such futures contracts and engage in related closing transactions. A futures contract on a securities index is an agreement obligating either party to pay, and entitling the other party to receive, while the contract is outstanding, cash payments based on the level of a specified securities index.
A Fund may engage in such futures contracts in an effort to hedge against market risks. For example, when interest rates are expected to rise or market values of portfolio securities are expected to fall, a Fund can seek through the sale of futures contracts to offset a decline in the value of its portfolio securities. When interest rates are expected to fall or market values are expected to rise, a Fund, through the purchase of such contracts, can attempt to secure better rates or prices for the Fund than might later be available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will, respectively, give a Fund the right (but not the obligation), for a specified price, to sell or to purchase the underlying futures contract, upon exercise of the option, at any time during the option period.
Aggregate initial margin deposits for futures contracts, and premiums paid for related options, may not exceed five percent of a Fund's total assets, and the value of securities that are the subject of such futures and options (both for receipt and delivery) may not exceed one-third of the market value of a Fund's total assets. Futures transactions will be limited to the extent necessary to maintain each Fund's qualification as a regulated investment company.
Futures transactions involve brokerage costs and require a Fund to segregate assets to cover contracts that would require it to purchase securities or currencies. A Fund may lose the expected benefit of futures transactions if interest rates, exchange rates or securities prices move in an unanticipated manner. Such unanticipated changes may also result in poorer overall performance than if the Fund had not entered into any futures transactions. In addition, the value of a Fund's futures positions may not prove to be perfectly or even highly correlated with the value of its portfolio securities or foreign currencies, limiting the Fund's ability to hedge effectively against interest rate, exchange rate and/or market risk and giving rise to additional risks. There is no assurance of liquidity in the secondary market for purposes of closing out futures positions.
Subject to the investment parameters described above, each of the Funds may invest in government obligations. The types of U.S. Government obligations in which each these Funds may invest include U.S. Treasury notes, bills, bonds, and any other securities directly issued by the U.S. Government that are available for public investment, which differ only in their interest rates, maturities, and times of issuance, as well as "stripped" U.S. Treasury obligations, such as Treasury Receipts issued by the U.S. Treasury and representing either future interest or principal payments, and, except for the Treasury Fund, obligations issued or guaranteed by the U.S. Government or its agencies or securities are issued at a discount to their "face value" and may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors. The stripped Treasury obligations in which the Money Market Funds may invest do not include certificates of accrual on treasury securities (CATS) or treasury income growth receipts (TIGRs).
Obligations of certain agencies and instrumentalities of the U.S. Government, such as the Government National Mortgage Association, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Student Loan Marketing Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law. The Funds which may invest in these government obligations will invest in the obligations of such agencies or instrumentalities only when First of America believes that the credit risk with respect thereto is minimal.
The Bond Fund and the Limited Maturity Bond Fund may invest in guaranteed investment contracts (GICs). When investing in GICs, the Bond Fund and the Limited Maturity Bond Fund make cash contributions to a deposit fund of an insurance company's general account. The insurance company then credits to the deposit fund on a monthly basis guaranteed interest. The GICs provide that this guaranteed interest will not be less than a certain minimum rate. The insurance company may assess periodic charges against a GIC for expense and service costs allocable to it, and the charges will be deducted from the value of the deposit fund. The Bond Fund and the Limited Maturity Bond Fund may invest in GICs of insurance companies without regard to the ratings, if any, assigned to such insurance companies' outstanding debt securities. Because a Fund may not receive the principal amount of a GIC from the insurance company on seven days notice or less, the GIC is considered an illiquid investment, and, together with other instruments in that Income Fund which are deemed to be illiquid, will not exceed 15% of its total assets. In determining average portfolio maturity, GICs will be deemed to have a maturity equal to the period of time remaining until the next readjustment of the guaranteed interest rate.
In order to generate additional income, each Fund may, from time to time, lend its portfolio securities to broker-dealers, banks, or institutional borrowers of securities. A Fund must receive 100% collateral in the form of cash or U.S. Government securities. This collateral will be valued daily by First of America or by the Subadvisers, as the case may be. Should the market value of the loaned securities increase, the borrower must furnish additional collateral to that Fund. During the time portfolio securities are on loan, the borrower pays that Fund any dividends or interest received on such securities. Loans are subject to termination by the Fund or the borrower at any time. While a Fund does not have the right to vote securities on loan, each Fund intends to terminate the loan and regain the right to vote if that is considered important with respect to the investment. In the event the borrower defaults in its obligation to a Fund, such Fund bears the risk of delay in the recovery of its portfolio securities and the risk of loss of rights in the collateral. The Funds will enter into loan agreements only with broker-dealers, banks, or other institutions that the Adviser or the Subadvisers, as the case may be, have determined are creditworthy under guidelines established by the Group's Board of Trustees.
As described above, the Balanced, Bond, Limited Maturity Bond, Municipal Bond and the Michigan Funds may invest in fixed income securities within the fourth highest rating group assigned by an NRSRO (i.e., BBB or Baa by S&P and Moody's, respectively) and comparable unrated securities. These types of fixed income securities are considered by the NRSROs to have some speculative vulnerable to changes in economic conditions, higher interest rates or adverse issuer-specific developments which are more likely to lead to a weaker capacity to make principal and interest payments than comparable higher rated debt securities.
Should subsequent events cause the rating of a fixed income security purchased by any of the Funds listed above to fall below the fourth highest rating, First of America will consider such an event in determining whether the Fund should continue to hold that security. In no event, however, would the Fund be required to liquidate any such portfolio security where the Fund would suffer a loss on the sale of such security.
As indicated above, the Government Income Fund intends to invest up to 80% of the value of its total assets and the Balanced Fund, Bond Fund, Limited Maturity Bond Fund and Intermediate Government Obligations Fund may invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Such agencies or instrumentalities include the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), and in mortgage-related securities issued by nongovernmental entities which are rated, at the time of purchase, within the three highest bond rating categories assigned by an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality. However, the Government Income Fund may invest greater amounts as conditions warrant.
The mortgage-related securities in which the these Funds may invest have mortgage obligations backing such securities, consisting of conventional thirty year fixed rate mortgage obligations, graduated payment mortgage obligations, fifteen year mortgage obligations and adjustable rate mortgage obligations. All of these mortgage obligations can be used to create pass-through securities. A pass-through security is created when mortgage obligations are pooled together and undivided interests in the pool or pools are sold. The cash flow from the mortgage obligations is passed through to the holders of the securities in the form of periodic payments of interest, principal and prepayments (net of a service fee). Prepayments occur when the holder of an individual mortgage obligation prepays the remaining principal before the mortgage obligation's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, mortgage-backed securities are often subject to more rapid prepayment of principal than their stated maturity would indicate. Because the prepayment characteristics of the underlying mortgage obligations vary, it is not possible to predict accurately the realized yield or average life of a particular issue of pass-through certificates. Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments have an adverse impact on yields for pass-throughs purchased at a premium (i.e., a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may not have been fully amortized at the time the obligation is repaid. The opposite is true for pass-throughs purchased at a discount. The Fund may purchase mortgage-related securities at a premium or at a discount.
If a Fund purchases a mortgage-related 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-related 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, thereby shortening the average life of the security and shortening the period of time over which income at the higher rate is received. When interest rates are rising, though, the rate of prepayment tends to decrease, thereby lengthening the period of time over which income at the lower rate is received. For these and other reasons, a mortgage-related security's average maturity may be shortened or lengthened as a result of interest rate fluctuations and, therefore, it is not possible to predict accurately the security's return to the Fund. In addition, regular payments received with respect to mortgage-related interest and principal. No assurance can be given as to the return a Fund will receive when these amounts are reinvested.
The principal governmental (i.e., backed by the full faith and credit of the United States Government) guarantor of mortgage-related securities is GNMA. GNMA is a wholly-owned United States Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the United States Government) guarantors include FNMA and FHLMC. FNMA is a government-sponsored corporation owned entirely by private stockholders. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the United States Government. FHLMC is a corporate instrumentality of the United States Government whose stock is owned by the twelve Federal Home Loan Banks. Participation certificates issued by FHLMC are guaranteed as to the timely payment of interest and ultimate collection of principal but are not backed by the full faith and credit of the United States Government.
The Government Income Fund also may invest up to 35% of its total assets in mortgage-related securities issued by nongovernmental entities and in other securities described below. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issues also create pass-through pools of conventional residential mortgage loans. Such issuers may also be the originators of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such nongovernmental issuers generally offer a higher rate of interest than government and government-related pools because there are not direct or indirect government guarantees of payments in the former pools. However, timely payment of interest and principal of these pools is supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers and the mortgage poolers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets a Fund's investment quality standards. There can be no assurance that the private insurers can meet their obligations under the policies. The Government Income Fund may buy mortgage-related securities without insurance or guarantees if through an examination of the loan experience and practices of the poolers First of America determines that the securities meet the Government Income Fund's quality standards. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. The Government Income Fund will not purchase mortgage-related securities or any other assets which in First of America's opinion are illiquid, if as a result, more than 15% of the value of the Government Income Fund's total assets will be illiquid.
Mortgage-related securities in which the above-named Funds may invest may also include collateralized mortgage obligations ("CMOs"). CMOs are debt obligations issued generally by finance subsidiaries or trusts that are secured by mortgage-backed certificates, including, in many cases, certificates issued by government-related guarantors, including GNMA, FNMA and FHLMC, together with certain funds and other collateral. Although payment of the principal of and interest on the mortgage-backed certificates pledged to secure the CMOs may be guaranteed by GNMA, FNMA or FHLMC, the CMOs represent obligations solely of the issuer and are not insured or guaranteed by GNMA, FHLMC, FNMA or any other governmental agency, or by any other person or entity. The issuers of the CMOs typically have no significant assets other than those pledged as collateral for the obligations.
The Government Income Fund expects that governmental, government-related or private entities may create mortgage loan pools offering pass-through investments in addition to those described above. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments may vary or whose terms to maturity may differ from customary long-term fixed rate mortgages. As new types of mortgage-related securities are developed and offered to investors, First of America will, consistent with the Government Income Fund's investment objective, policies and quality standards, consider making investments in such new types of securities.
The two principal classifications of Municipal Securities (Michigan Municipal Securities, in the case of the Michigan Fund) which may be held by the Bond, Limited Maturity Bond, Municipal Bond Fund and Michigan Fund are "general obligation" securities and "revenue" securities. General obligation securities are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from proceeds of a special excise tax or other specific revenue source such as the user of the facility being financed. Private activity bonds held by the Municipal Bond and Michigan Fund are in most cases revenue securities and are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved.
The above-named Funds may also invest in "moral obligation" securities, which are normally issued by special purpose public authorities. If the issuer of moral obligation securities is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.
Each of the above-named Funds invests primarily in Municipal Securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or in the highest rating group assigned by an NRSRO in the case of notes, tax-exempt commercial paper or variable rate demand obligations. The Funds may also purchase Municipal Securities which are unrated at the time of purchase but are determined to be of comparable quality by First of America pursuant to guidelines approved by the Group's Board of Trustees. The applicable Municipal Securities ratings are described in the Appendix to the Statement of Additional Information. For a discussion of debt securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium Grade Securities" herein.
Opinions relating to the validity of Municipal Securities and to the exemption of interest thereon from federal income tax are rendered by bond counsel to the respective issuers at the time of issuance. No Fund nor First of America will review the proceedings relating to the issuance of Municipal Securities or the basis for such opinions.
Municipal Securities and Michigan Municipal Securities purchased by the Tax-Free Income Funds may include rated and unrated variable and floating rate tax-exempt notes. A variable rate note is one whose terms provide for the adjustment of its interest rate on set dates and which, upon such adjustment, can reasonably be expected to have a market value that approximates its par value. A floating rate note is one whose terms provide for the adjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value. Such notes are frequently not rated by credit rating agencies; however, unrated variable and floating rate notes purchased by the Tax-Free Income Funds will be determined by First of America, under guidelines established by the Group's Board of Trustees, to be of comparable quality at the time of purchase to rated instruments eligible for purchase under the Fund's investment policies. In making such determinations, First of America will consider the earning power, cash flow and other liquidity ratios of the issuers of such notes (such issuers include financial, merchandising, bank holding and other companies) and will continuously monitor their financial condition. There may be no active secondary market with respect to a particular variable or floating rate note. Nevertheless, the periodic readjustments of their interest rates tend to assure that their value to the Tax-Free Income Fund will approximate their par value. The Tax-Free Income Funds will not purchase variable and floating rate notes or any other securities which in First of America's opinion are illiquid, if as a result, more than 15% of the Tax-Free Income Fund's total assets will be illiquid.
Each of the Funds may invest up to 5% of the value of its total assets in the securities of any one money market mutual fund (including shares of the Parkstone Prime Obligations Fund, the Parkstone U.S. Government Obligations Fund, the Parkstone Tax-Free Fund, the Parkstone Municipal Investor Fund, and the Parkstone Treasury Fund), provided that no more than 10% of the Fund's total assets may be invested in the securities of mutual funds in the aggregate. In order to avoid the imposition of additional fees as a result of investments by a Fund in Shares of the money market funds of the Group, the Investment Adviser, Administrator and their affiliates (See "MANAGEMENT OF THE FUNDS--Investment Adviser and Subadvisers" and "Administrator, Sub-Administrator and Distributor" and "GENERAL INFORMATION--Transfer Agency and Fund Accounting Services") will not retain any portion of their usual asset-based service fees from a Fund that are attributable to investments by the Fund in Shares of those money market mutual funds if the fee is being taken in the Fund. The Investment Adviser and the Administrator will promptly forward such fees to the appropriate Fund. Each Fund will incur additional expenses due to the duplication of expenses as a result of any investment in securities of unaffiliated mutual funds. Additional restrictions regarding the Funds' investments in securities of unaffiliated mutual funds and/or money market funds of the Group are contained in the Statement of Additional Information.
The Tax-Free Income Funds may also invest in private activity bonds. It should be noted that the Tax Reform Act of 1986 substantially revised provisions of prior federal law affecting the issuance and use of proceeds of certain tax-exempt obligations. A new definition of private activity bonds applies to many types of bonds, including those which were industrial development bonds under prior law. Any reference herein to private activity bonds includes industrial development bonds. Interest on private activity bonds is tax-exempt (and such bonds will be considered Municipal Securities for purposes of this Prospectus) only if the bonds fall within certain defined categories of qualified private activity bonds and meet the requirements specified in those respective categories. If the Tax-Free Income Funds invest in private activity bonds which fall outside these categories, Shareholders may become subject to the alternative minimum tax on that part of the Tax-Free Income Fund's distributions derived from interest on such bonds. The Tax Reform Act generally does not change the federal tax treatment of bonds issued to finance government operations. For further information relating to the types of private activity bonds which will be included in income subject to the alternative minimum tax, see "ADDITIONAL INFORMATION--Additional Tax Information Concerning the Tax-Free Fund and the Municipal Bond Fund" in the Statement of Additional Information.
Each of the Growth Funds, the Growth and Income Funds, the Income Funds and the Tax-Free Income Funds may purchase put and call options on securities and on foreign currencies, subject to its applicable investment policies, for the purposes of hedging against market risks related to its portfolio securities and adverse movements in exchange rates between currencies, respectively. Purchasing options is a specialized investment technique that entails a substantial risk of a complete loss of the amounts paid as premiums to writers of options. Each Fund may also engage in writing call options from time to time as First of America or the Subadvisers, as the case may be with respect to the International Fund, deem appropriate. The Funds will write only covered call options (options on securities or currencies owned by the particular Fund). In order to close out a call option it has written, the Fund will enter into a "closing purchase transaction"--the purchase of a call option on the same security or currency with the same exercise price and expiration date as the call option which such Fund previously has written. When a portfolio security or currency subject to a call option is sold, the Fund will effect a closing purchase transaction to close out any existing call option on that security or currency. If such Fund is unable to effect a closing purchase transaction, it will not be able to sell the underlying security or currency until the option expires or that Fund delivers the underlying security or currency upon exercise. In addition, upon the exercise of a call option by the holder thereof, the Fund will forego the potential benefit represented by market appreciation over the exercise price. Under normal conditions, it is not expected that the Funds will cause the underlying value of portfolio securities and currencies subject to such options to exceed 50% of its net assets, and with respect to each of the Balanced and International Funds, 20% of its net assets.
Each of the Growth Funds, the Growth and Income Funds and the Government Income Fund, as part of its option transactions, also may purchase index put and call options and write index options. As with options on individual securities, a Fund will write only covered index call options. Through the writing or purchase of index options a Fund can achieve many of the same objectives as through the use of options on individual securities. Options on securities indices are similar to options on a security except that, rather than the right to take or make delivery of a security at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option.
Price movements in securities which a Fund owns or intends to purchase probably will not correlate perfectly with movements in the level of an index and, therefore, a Fund bears the risk of a loss on an index option that is not completely offset by movements in the price of such securities. Because index options are settled in cash, a call writer cannot determine the amount of its settlement obligations in advance and, unlike call writing on specific securities, cannot provide in advance for, or cover, its potential settlement obligations by acquiring and holding the underlying securities. A Fund may be required to segregate assets or provide an initial margin to cover index options that would require it to pay cash upon exercise.
In addition, the Tax-Free Income Funds may each acquire "puts" with respect to Municipal Securities or Michigan Municipal Securities, as the case may be, held in its portfolio. Under a put, such a Fund would have the right to sell a specified Municipal Security (or Michigan Municipal Security, as the case may be) within a specified period of time at a specified price. A put would be sold, transferred, or assigned only with the underlying security. The Tax-Free Income Funds will acquire puts solely to either facilitate portfolio liquidity, shorten the maturity of the underlying securities, or permit the investment of its funds at a more favorable rate of return. Each of the Tax-Free Income Funds expects that it will generally acquire puts only where the puts are available without the payment of any direct or indirect consideration. However, if necessary or advisable, such Fund may pay for a put either separately in cash or by paying a higher price for portfolio securities which are acquired subject to the puts (thus reducing the yield to maturity otherwise available for the same securities).
Securities held by a Fund may be subject to repurchase agreements. Under the terms of a repurchase agreement, a Fund would acquire securities from financial institutions such as member banks of the Federal Deposit Insurance Corporation or registered broker-dealers which First of America or the Subadvisers, as the case may be, deem creditworthy under guidelines approved by the Group's Board of Trustees, subject to the seller's agreement to repurchase such securities at a mutually agreed upon date and price. The repurchase price would generally equal the price paid by the Fund plus interest negotiated on the basis of current short-term rates, which may be more or less than the rate on the underlying portfolio securities. Securities subject to repurchase agreements will be held in a segregated account. If the seller were to default on its repurchase obligation or become insolvent, the Fund would suffer a loss to the extent that the proceeds from a sale of the underlying portfolio securities were less than the repurchase price under the agreement, or to the extent that the disposition of such securities by that Fund were delayed pending court action. Repurchase agreements are considered to be loans by an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). For further information about repurchase agreements, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments--Repurchase Agreements" in the Statement of Additional Information.
Securities in which each of the Funds may invest include securities issued by corporations without registration under the Securities Act of 1933, as amended (the "1933 Act"), in reliance on the exemption from such registration afforded by Section 3(a)(3) thereof, and securities issued in reliance on the so-called "private placement" exemption from registration which is afforded by Section 4(2) of the 1933 Act ("Section 4(2) securities"). Section 4(2) securities are restricted as to disposition under the Federal securities laws, and generally are sold to institutional investors such as the Funds who agree that they are purchasing the securities for investment and not with a view to public distribution. Any resale must also generally be made in an exempt transaction. Section 4(2) securities are normally resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in such Section 4(2) securities, thus providing liquidity. Pursuant to procedures adopted by the Board of Trustees of the Group, First of America may determine Section 4(2) securities to be liquid if such securities are eligible for resale under Rule 144A under the 1933 Act and are readily saleable.
Thus, subject to the limitations described above, the Funds may acquire investments that are illiquid or of limited liquidity, such as private placements or investments that are not registered under the 1993 Act. An illiquid investment is any investment that cannot be disposed of within seven (7) days in the normal course of business at approximately the amount at which it is valued by a Fund. The price a Fund pays for illiquid securities or receives upon resale may be lower than the price paid or received for similar securities with a more liquid market. Accordingly, the valuation of these securities will reflect any limitations on their liquidity. A Fund may not invest in additional illiquid securities if, as a result, more than 15% of the market value of its net assets would be invested in illiquid securities.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
Each of the Funds may borrow funds by entering into reverse repurchase agreements and, in the case of the Income and the Tax-Free Income Funds, dollar roll agreements in accordance with the investment restrictions described below. Pursuant to such agreements, a Fund would sell certain of its securities to financial institutions such as banks and broker-dealers, and agree to repurchase the securities, or substantially similar securities in the case of a dollar roll agreement, at a mutually agreed upon date and price. Dollar roll agreements utilized by the Income and Tax-Free Income Funds are identical to reverse repurchase agreements except for the fact that substantially similar securities may be repurchased. At the time a Fund enters into a reverse repurchase agreement or a dollar roll agreement, it will place in a segregated custodial account assets such as U.S. Government securities or other liquid high grade debt securities consistent with its investment restrictions having a value equal to the repurchase price (including accrued interest), and will subsequently continually monitor the account to ensure that such equivalent value is maintained at all times. Reverse repurchase agreements and dollar roll agreements involve the risk that the market value of securities sold by a Fund may decline below the price at which it is obligated to repurchase the securities. Reverse repurchase agreements and dollar roll agreements are considered to be borrowings by an investment company under the 1940 Act and therefore a form of leverage. A Fund may experience a negative impact on its net asset value if interest rates rise during the term of a reverse repurchase agreement or dollar roll agreement. A Fund generally will invest the proceeds of such borrowings only when such borrowings will enhance a Funds's liquidity or when the Fund reasonably expects that the interest income to be earned from the investment of the proceeds is greater than the interest expense of the transaction. For further information about reverse repurchase agreements and dollar roll agreements, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments--Reverse Repurchase Agreements and Dollar Roll Agreements" in the Statement of Additional Information.
Each of the Funds may purchase securities on a when-issued or delayed-delivery basis. Such Funds will engage in when-issued and delayed-delivery transactions only for the purpose of acquiring portfolio securities consistent with its investment objectives and policies, not for investment leverage although such transactions represent a form of leveraging. When-issued securities are securities purchased for delivery beyond the normal settlement date at a stated price and yield and thereby involve a risk that the yield obtained in the transaction will be less than those available in the market when delivery takes place. A Fund will not pay for such securities or start earning interest on them until they are received. When a Fund agrees to purchase such securities, its custodian will set aside cash or liquid securities equal to the amount of the commitment in a separate account. Securities purchased on a when-issued basis are recorded as an asset and are subject to changes in the value based upon changes in the general level of interest rates. In when-issued and delayed-delivery transactions, a Fund relies on the seller to complete the transaction; the seller's failure to do so may cause such Fund to miss a price or yield considered to be advantageous.
No Fund's commitments to purchase "when-issued" securities will exceed 25% of the value of its total assets under normal market conditions, and a commitment by a Fund to purchase "when-issued" securities will not exceed 60 days. In the event its commitments to purchase "when-issued" securities ever exceeded 25% of the value of its assets, a Fund's liquidity and the investment adviser's ability to manage it might be adversely affected. The Funds intend only to purchase "when-issued" securities for the purpose of acquiring portfolio securities, not for investment leverage although such transactions represent a form of leveraging.
The portfolio turnover rate for each Fund is calculated by dividing the lesser of a Fund's purchases or sales of portfolio securities for the year by the monthly average value of the portfolio securities. The Securities and Exchange Commission requires that the calculation exclude all securities whose remaining maturities at the time of acquisition are one year or less. The portfolio turnover rate for a Fund may vary greatly from year to year, as well as within a particular year, and may also be affected by cash requirements for redemptions of Shares. High portfolio turnover rates will generally result in higher transaction costs, including brokerage commissions, to a Fund and may result in additional tax consequences to a Fund's shareholders. Portfolio turnover will not be a limiting factor in making investment decisions.
Each Fund is subject to a number of investment restrictions that may be changed only by a vote of a majority of the outstanding Shares of that Fund (as defined in the Statement of Additional Information).
None of the Funds, with the exception of the Michigan Fund, may:
Purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if, immediately after such purchase, more than 5% of the value of the Fund's total assets would be invested in such issuer, or the Fund would hold more than 10% of the outstanding voting securities of the issuer, except that 25% or less of the value of such Fund's total assets may be invested without regard to such limitations. There is no limit to the percentage of assets that may be invested in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities.
The Michigan Fund may not:
Purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if, immediately after such purchase, (a) more than 5% of the value of the Fund's total assets (taken at current value) would be invested in such issuer (except that up to 50% of the value of the Fund's total assets may be invested without regard to such 5% limitation), and (b) more than 25% of its total assets (taken at current value) would be invested in the securities of a single issuer.
For purposes of the investment limitations above, a security is considered to be issued by the governmental entity (or entities) whose assets and revenues back the security and, with respect to a private activity bond that is backed only by the assets and revenues of a non-governmental user, a security is considered to be issued by such non-governmental user.
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the value of the Fund's total assets at the time of purchase to be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and repurchase agreements secured by obligations of the U.S. Government or its agencies or instrumentalities; (b) wholly owned finance companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of their parents; and (c) utilities will be divided according to their services. For example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry.
2. (a) Borrow money (not including reverse repurchase agreements or dollar roll agreements), except that the Funds may borrow from banks for temporary or emergency purposes and then only in amounts up to 30% of its total assets at the time of borrowing (and provided that such bank borrowings and reverse repurchase agreements and dollar roll agreements do not exceed in the aggregate one-third of the Fund's total assets less liabilities other than the obligations represented by the bank borrowings, reverse repurchase agreements and dollar roll agreements), or mortgage, pledge or hypothecate any assets except in connection with a bank borrowing in amounts not to exceed 30% of the Fund's net assets at the time of borrowing; (b) enter into reverse repurchase agreements, dollar roll agreements and other permitted borrowings in amounts exceeding in the aggregate one-third of the Fund's total assets less liabilities other than the obligations represented by such reverse repurchase and dollar roll agreements; and (c) issue senior securities except as permitted by the 1940 Act rule, order or interpretation thereunder.
3. Make loans, except that the Fund may purchase or hold debt instruments and lend portfolio securities in accordance with its investment objective and policies, make time deposits with financial institutions and enter into repurchase agreements.
For purposes only of investment limitation number 1 above, such limitation shall not apply to Municipal Securities or governmental guarantees of Municipal Securities, and industrial development bonds or private activity bonds that are backed only by the assets and revenues of a non-governmental user shall not be deemed to be Municipal Securities.
The following additional investment restriction may be changed without the vote of a majority of the outstanding Shares of a Fund.
1. Purchase or otherwise acquire any securities, if as a result, more than 15% of the Fund's net assets would be invested in securities that are illiquid.
In addition to the above investment restrictions, the Funds are subject to certain other investment restrictions set forth under "INVESTMENT OBJECTIVES AND POLICIES--Investment Restrictions" in the Statement of Additional Information.
Overall responsibility for management of the Group rests with its Board of Trustees, who are elected by the shareholders of all of the Group's Funds. The Group will be managed by the Trustees in accordance with the laws of the Commonwealth of Massachusetts governing business trusts. There are currently five Trustees, three of whom are not "interested persons" of the Group within the meaning of that term under the 1940 Act. The Trustees, in turn, elect the officers of the Group to supervise actively its day-to-day operations.
The Trustees of the Group are Stephen G. Mintos* (Chairman), George R. Landreth*, Robert M. Beam, Lawrence D. Bryan and Adrian Charles Edwards. The addresses, and principal occupations during the past five years of the Trustees are set forth in the Statement of Additional Information. Those Trustees designated with an asterisk (*) are considered to be "interested persons" of the Group as defined in the 1940 Act.
The Trustees of the Group receive quarterly fees and fees and expenses for each meeting of the Board of Trustees attended. However, no officer or employee of BISYS, The BISYS Group, Inc. or BISYS Fund Services Ohio, Inc. receives any compensation from the Group for acting as a Trustee of the Group. The officers of the Group receive no compensation directly from the Group for performing the duties of their offices. BISYS receives fees from the Group for acting as Administrator and may receive fees from each of the Funds pursuant to the Investor B Distribution and Shareholder Service Plan described below. BISYS Fund Services Ohio, Inc., an affiliate of BISYS, receives fees from the Group for acting as Transfer Agent and for providing certain fund accounting services. Mr. Mintos and Mr. Landreth are employees of BISYS.
First of America was established in 1932 and is the investment adviser of the Group. First of America, a registered investment adviser, is a wholly owned subsidiary of First of America Bank-Michigan, N.A., which is a wholly owned subsidiary of First of America Bank Corporation. First of America Bank Corporation currently has over $25 billion in assets and provides financial services to over 300 communities in Michigan, Indiana, Illinois and Florida. As of June 30, 1995, First of America managed over $10 billion on behalf of both taxable and tax-exempt clients, including pensions, endowments, corporations and individual portfolios. First of America also acts as investment adviser to the Trust Division of First of America Bank Corporation with respect to an additional $2.3 billion in discretionary assets, providing equity, fixed income, balanced and money management services.
Subject to such policies as the Group's Board of Trustees may determine, First of America, either directly or, with respect to the International Fund and the Balanced Fund, through one or more subadvisers, furnishes a continuous investment program for each Fund and makes investment decisions on behalf of each Fund.
First of America utilizes a team approach to the investment management of the Funds, with up to three professionals working as a team to ensure a disciplined investment process designed to result in long-term performance consistent with each Fund's investment objectives. Roger H. Stamper, Managing Director of First of America, is primarily responsible for the day-to-day management of each of the Growth Funds (except the International Fund) and the Growth and Income Funds. Mark R. Kummerer, Managing Director--Fixed Income of First of America, is primarily responsible for the day-to-day management of the Income Funds. Christian S. Swantek, Vice President of First of America, is primarily responsible for the day-to-day management of the Tax-Free Income Funds. Messrs. Stamper and Kummerer have held their respective positions with First of America since 1988 and 1986, respectively. Prior to June 1993, Mr. Swantek was a portfolio manager at PNC Investment Management & Research and its various investment management affiliates.
For the services provided and expenses assumed pursuant to its Investment Advisory Agreement with the Group, First of America receives a fee from each of the Equity, Small Capitalization, High Income Equity and Balanced Funds, computed daily and paid monthly, at the annual rate of one percent (1%) of that Fund's average daily net assets. For its services in connection with the International Fund, First of America's fee is computed daily and paid monthly at the annual rate of one and twenty-five hundredths percent (1.25%) of the first $50 Million of the International Fund's average daily net assets, one and twenty hundredths percent (1.20%) of average daily net assets between $50 Million and $100 Million, one and fifteen hundredths percent (1.15%) of average daily net assets between $100 Million and $400 Million and one and five hundredths percent (1.05%) of average daily net assets above $400 Million. For its services in connection with each Income Fund and Tax-Free Income Fund, First of America's fee is computed daily and paid monthly at the annual rate of seventy-four one-hundredths of one percent (.74%) of each Income Fund's and Tax-Free Income Fund's average daily net assets. For its services in connection with the Money Market Funds, First of America's fee is computed daily and paid monthly, at the annual rate of forty one-hundredths of one percent (.40%) of each Money Market Fund's average daily net assets. First of America may periodically voluntarily reduce all or a portion of its advisory fee with respect to a Fund to increase the net income of that Fund available for distribution as dividends. The voluntary fee reduction will cause the yield of that Fund to be higher than it would otherwise be in the absence of such a reduction.
Pursuant to the terms of its Investment Advisory Agreement with the Group, First of America has entered into a Sub-Investment Advisory Agreement with Gulfstream Global Investors, Ltd., 300 Crescent Court, Suite 1605, Dallas, Texas 75201 ("Gulfstream"). Pursuant to the terms of such Sub-Investment Advisory Agreement Gulfstream has been retained by First of America to manage the investment and reinvestment of the assets of the International Fund and to manage the investment and reinvestment of those assets of the Balanced Fund which are invested in foreign securities, subject to the direction and control of the Group's Board of Trustees.
Under this arrangement, Gulfstream is responsible for the day-to-day management of the International Fund's assets, reviews investment performance policies and guidelines and maintains certain books and records, and First of America is responsible for selecting and monitoring the performance of Gulfstream and for reporting the activities of Gulfstream in managing the International Fund to the Group's Board of Trustees. Gulfstream utilizes a team approach to the investment management of the International Fund to ensure a disciplined investment process designed to result in long-term performance consistent with its investment objective. No one person is responsible for the Fund's management. First of America may also render advice with respect to the International Fund's investments in the U.S.
For its services provided and expenses assumed pursuant to its Sub-Investment Advisory Agreement with First of America, Gulfstream receives from First of America a fee, computed daily and paid monthly, at the annual rate of one-half percent (.50%) of the first $50 million of the International Fund's average daily net assets and the average daily net assets of the Balanced Fund which are invested in foreign securities, forty-five one hundredths percent (.45%) of such average daily net assets between $50 million and $100 million, forty one hundredths percent (.40%) of such average daily net assets between $100 million and $400 million and thirty one hundredths percent (.30%) of such average daily net assets above $400 million, provided the minimum annual fee shall be $75,000.
Gulfstream, 300 Crescent Court, Suite 1605, Dallas, Texas 75201, was organized in 1991 as a Texas limited partnership by Tull, Doud, Marsh & Triltsch, Inc., a Texas corporation ("TDMT"). TDMT is the sole general partner of Gulfstream. TDMT is owned by C. Thomas Tull, Stephen C. Doud, James P. Marsh and Reiner M. Triltsch. Messrs. Tull, Doud and Triltsch are the portfolio managers and Mr. Marsh is responsible for client services with Gulfstream. First of America is the sole limited partner, holding a forty nine (49) percent interest in Gulfstream with options which would under certain circumstances permit it to acquire up to a seventy two (72) percent interest. Gulfstream has over $360 million in assets of institutional, investment company, governmental, pension fund and high net worth individual clients under its investment management. Gulfstream's portfolio management personnel average twenty (20) years of investment experience and nine (9) years of international investment experience. As of January 3, 1994, Gulfstream managed over $300 million in international investment portfolios.
Prior to January 1, 1995, Ivory & Sime International, Inc. ("ISI" and Ivory & Sime plc ("ISplc" together with ISI, "Ivory & Sime") served as subadvisers to the International Fund. The Trustees voted unanimously to terminate this arrangement and replace it with the current subadvisory arrangement with Gulfstream. As required by the 1940 Act, the Shareholders of the International Discovery Fund and the Balanced Fund each approved the appointment of Gulfstream as subadviser, as well as the related Sub-Investment Advisory Agreements, at a meeting held on February 28, 1995.
Under Gulfstream's partnership agreement, First of America possesses veto authority over the general budgetary affairs of Gulfstream. Because of its current 49 percent ownership interest and its possession of options enabling it to acquire up to a 72 percent ownership interest, First of America may be deemed to control Gulfstream for purposes of the 1940 Act.
For further information regarding the relationship between Gulfstream and First of America, see "MANAGEMENT OF THE GROUP--INVESTMENT ADVISER" in the Statement of Additional Information.
BISYS, 3435 Stelzer Road, Columbus, Ohio 43219, is the administrator for each fund of the Group, and also acts as the Group's principal underwriter and distributor (the "Administrator" or the "Distributor," as the context indicates). First of America serves as Sub-Administrator for each Fund of the Group and provides certain services as may be requested by BISYS from time to time. BISYS and its affiliated companies, including BISYS Fund Services Ohio, Inc. are wholly-owned by The BISYS Group, Inc., a publicly-held company which is a provider of information processing, loan servicing and 401(k) administration and recordkeeping services to and through banking and other financial organizations.
The Administrator generally assists in all aspects of the Funds' administration and operation. For expenses assumed and services provided as administrator pursuant to its Administration Agreement with the Group, the Administrator receives a fee from each Fund equal to the lesser of a fee, computed daily and paid periodically, at an annual rate of twenty one-hundredths of one percent (.20%) of the Fund's average daily net assets, or such other fee as may be agreed upon from time to time in writing by the Group and the Administrator. For its services as Subadministrator First of America receives, from the Administrator, pursuant to its Sub-Administration Agreement with BISYS, a fee not to exceed five one hundredths of one percent (.05%) of each Fund's average daily net assets. The Administrator may periodically voluntarily reduce all or a portion of its administrative fee with respect to a Fund to increase the net income of that Fund available for distribution as dividends. The voluntary fee reduction will cause the return of that Fund to be higher than it would otherwise be in the absence of such reduction.
The Distributor acts as agent for the Funds in the distribution of each of their Shares and, in such capacity, solicits orders for the sale of Shares, advertises, and pays the cost of advertising, office space and its personnel involved in such activities. The Distributor receives no compensation under its Distribution Agreement with the Group, but may retain some or all of any sales charge imposed upon the Investor Shares and may receive compensation under the Distribution and Shareholder Service Plans described below.
First of America, the Subadvisers and the Administrator each bear all expenses in connection with the performance of its services as investment adviser, subadviser and administrator, respectively, other than the cost of securities (including brokerage commissions) purchased for the Group. Each Fund will bear the following expenses relating to its operation: organizational expenses, taxes, interest, brokerage fees and commissions, fees of the Trustees of the Group, Securities and Exchange Commission fees, state securities qualification fees, costs of preparing and printing prospectuses for regulatory purposes and for distribution to current Shareholders, outside auditing and legal expenses, advisory and administration fees, fees and out-of-pocket expenses of the custodian, Transfer Agent and fund accountant, certain insurance premiums, costs of maintenance of the Group's existence, costs of Shareholders' reports and meetings, and any extraordinary expenses incurred in each Fund's operation. As a general matter, expenses are allocated to the Investor B Shares and the other Classes of Shares of the Funds on the basis of the relative net asset value of each class. The various Classes may bear certain additional retail transfer agency expenses and may also bear certain additional shareholder service and distribution costs incurred pursuant to a Distribution and Shareholder Service Plans.
The Trustees reserve the right, subject to the receipt of relevant regulatory approvals or rulings, if needed, to allocate certain other expenses to the Shareholders of a particular class, including Investor Shares, on a basis other than relative net asset value, as they deem appropriate ("Class Expenses"). In
Class Expenses would be limited to: transfer agency fees identified by the Transfer Agent as attributable to a specific class; printing and postage expenses related to preparing and distributing materials such as Shareholder reports, prospectuses and proxies to current Shareholders; Blue Sky registration fees incurred by a class of Shares; Securities and Exchange Commission registration fees incurred by a class of Shares; expenses related to administrative personnel and services as required to support the Shareholders of a specific class; litigation or other legal expenses relating solely to one class of Shares; and Trustees' fees incurred as a result of issues relating solely to one class of Shares.
DISTRIBUTION PLAN FOR INVESTOR B SHARES
Rule 12b-1 adopted by the Securities and Exchange Commission under the 1940 Act permits an investment company to pay directly or indirectly expenses associated with the distribution of its shares in accordance with a plan adopted by an investment company's trustees and approved by its shareholders. Pursuant to such Rule, the Group has adopted an Investor B Distribution and Shareholder Service Plan (the "Investor B Plan") with respect to the Investor B Shares of each Fund. Pursuant to the Investor B Plan, each Fund is authorized to pay or reimburse BISYS, as Distributor of the Investor B Shares, for certain expenses that are incurred in connection with Shareholder and distribution services. Pursuant to the Investor B Plan, a Fund is authorized to pay or reimburse BISYS, as Distributor of Investor B Shares, (a) a distribution fee in an amount not to exceed on an annual basis .75% of the average daily net asset value of Investor B Shares of a Fund (the "Distribution Fee") and (b) a service fee in an amount not to exceed on an annual basis .25% of the average daily net asset value of the Investor B Shares of a Fund (the "Service Fee"). Payments under the Investor B Plan will be calculated daily and paid monthly at a rate not to exceed the limits described above, which rates are set from time to time by the Board of Trustees. Payments of the Distribution Fee to the Distributor pursuant to the Investor B Plan will be used (i) to compensate Participating Organizations for providing distribution assistance relating to Investor B Shares, and (ii) for promotional activities intended to result in the sale of Investor B Shares such as to pay for the preparation, printing and distribution of prospectuses to other than current Shareholders, and payments of the Service Fee to the Distributor pursuant to the Investor B Plan will be used to compensate Participating Organizations for providing Shareholder services with respect to their Customers who are, from time to time, beneficial and record holders of Investor B Shares.
Fees paid pursuant to the Investor B Plan are accrued daily and paid monthly, and are charged as expenses of Investor B Shares of a Fund as accrued.
Pursuant to the Investor B Plan, the Distributor may enter into Rule 12b-1 Agreements with Participating Organizations for providing distribution assistance and shareholder services with respect to the Investor B Shares. Such Participating Organizations will be compensated at the annual rate of up to 1.00% of the average daily net asset value of the Investor B Shares held of record or beneficially by such Customers. The distribution services provided by Participating Organizations for which the Distribution Fee may be paid may include promoting the purchase of Investor B Shares of a Fund by their customers; processing purchase, exchange, and redemption requests from customers and placing orders with the Distributor or the Transfer Agent; processing dividend and distribution payments from a Fund on behalf of customers; providing information periodically to customers, including information showing their positions in Investor B Shares; responding to inquiries from customers concerning their investment in Investor B Shares; and providing other similar services as may be reasonably requested. The shareholder services provided by Participating Organizations for which the Service Fee may be paid may include providing sub-accounting with respect to Investor B Shares beneficially owned by customers or the information necessary for sub-accounting; arranging for bank wires; and other continuing personal services to holders of Investor B Shares.
Actual distribution expenses for Investor B Shares at any given time may exceed the Rule 12b-1 fees and payments received pursuant to contingent deferred sales charges. These unrecovered amounts plus interest thereon will be carried forward and paid from future Rule 12b-1 fees and payments received from contingent deferred sales charges. If the Investor B Plan were terminated or not continued, would not be contractually obligated to pay for any expenses not previously reimbursed by the Group or recovered through contingent deferred sales charges.
Conflicts of interest restrictions may apply to the receipt by Participating Organizations of compensation from BISYS in connection with the investment of fiduciary assets in Investor B Shares. Institutions, including banks regulated by the Comptroller of the Currency, the Federal Reserve Board, or the Federal Deposit Insurance Corporation, and investment advisers and other money managers subject to the jurisdiction of the Securities and Exchange Commission (the "Commission"), the Department of Labor, or state securities commissions, are urged to consult their legal advisers before investing such assets in Investor B Shares.
As required by Rule 12b-1, the Investor B Plan was approved by the Trustees of the Group, including a majority of the trustees who are not "interested persons" (as defined in the 1940 Act) of the Group and who have no direct or indirect financial interest in the operation of the Plans or in any agreements related to the Plan ("Independent Trustees"). The Investor B Plan continues in effect as long as such continuance is specifically approved at least annually by the Group's Trustees, including a majority of the Independent Trustees.
The Investor B Plan may be terminated by a vote of a majority of the Independent Trustees, or by a vote of a majority of the holders of the outstanding voting securities of the Investor B Shares. Any change in the Investor B Plan that would increase materially the distribution expenses paid by a Fund requires shareholder approval; otherwise, the Plans may be amended by the Trustees, including a majority of the Independent Trustees by a vote cast in person at a meeting called for the purpose of voting upon the amendment. As long as the Investor B Plan is in effect, the selection or nomination of the Independent Trustees is committed to the discretion of the Independent Trustees.
First of America believes that it may perform the investment advisory services for the Group's Funds contemplated by the Investment Advisory Agreement and by this Prospectus without violating applicable banking laws or regulations. Future changes in federal or state statutes and regulations relating to permissible activities of banks or bank holding companies and their subsidiaries and affiliates as well as further judicial or administrative decisions or interpretations of present and future statutes and regulations could change the manner in which First of America could continue to perform such services for the Group. See the Statement of Additional Information ("MANAGEMENT OF THE GROUP--Glass-Steagall Act") for further discussion.
HOW TO BUY INVESTOR B SHARES
Investor B Shares of each Fund are continuously offered and may be purchased directly either by mail, by telephone, or by wire. Investor B Shares may also be purchased through a broker-dealer who has established a dealer agreement with the Distributor. Except as otherwise discussed below under "Other Information Regarding Purchases" and "Auto Invest Plan," the minimum initial investment in a Fund, based upon the public offering price, is $1,000; however, there is no minimum subsequent purchase. Shareholders will pay the next calculated net asset value after the receipt by the Distributor of an order to purchase Investor B Shares, plus any applicable sales charge as described below (see "SALES CHARGES"). In the case of an order for the purchase of Shares placed through a broker-dealer, it is the responsibility of the broker-dealer to transmit the order to the Distributor promptly.
To purchase Investor B Shares of any of the Funds by mail, complete an Account Application Form and return it along with a check or money order made payable to The Parkstone Group of Funds at the following address:
The Parkstone Group of Funds
An Account Application Form can be obtained by calling the Group at (800) 451-8377.
BY TELEPHONE OR BY WIRE
To purchase Investor B Shares of any of the Funds by telephone or by wire, your Account Application Form must have been previously received by the Distributor. To place an order by telephone or by wire call the Group's toll-free number (800) 451-8377. Payment for such Investor B Shares ordered by telephone may be made by check and must be received by the Group's custodian within seven calendar days of the telephone order. If payment for such Investor B Shares is not received within seven days, or if a check timely received does not clear, the purchase may be canceled and the investor could be liable for any losses or fees incurred. When purchasing Investor B Shares by wire, contact the Distributor for wire instructions.
Investor B Shares may also be purchased through procedures established by the Distributor in connection with the requirements of qualified accounts maintained by or on behalf of certain persons ("Customers") by First of America Bank Corporation or one of its affiliates. Investor B Shares of the Funds sold to First of America Bank Corporation or the affiliate acting in a fiduciary, advisory, custodial, or other similar capacity on behalf of Customers will normally be held of record by First of America Bank Corporation or the affiliate. With respect to such Investor B Shares so sold, it is the responsibility of the holder of record to transmit purchase or redemption orders to the Distributor and to deliver funds for the purchase thereof on a timely basis. Beneficial ownership of such Investor B Shares of the Funds will be recorded by First of America Bank Corporation or one of its affiliates and reflected in the account statements provided to Customers. First of America Bank Corporation or one of its affiliates may exercise voting authority for those Investor B Shares for which it has been granted authority by the Customer.
Investor B Shares of the Funds are purchased at the net asset value per share (see "VALUATION OF SHARES") next determined after receipt by the Distributor of an order to purchase Shares plus any applicable sales charge as described below. Purchases of Investor B Shares in any of the Funds will be effected only on a Business Day (as defined in "VALUATION OF SHARES") of the Funds. An order received prior to the Valuation Time on any Business Day will be executed at the net asset value determined as of the Valuation Time on the date of receipt. An order received after the Valuation Time on any Business Day will be executed at the net asset value determined as of the next Valuation Time on the next Business Day of that Fund.
The minimum initial investment amount referred to above may be waived if purchases are made in connection with Individual Retirement Accounts (IRAs), Keoghs or similar plans. For information on IRAs, Keoghs or similar plans, contact First of America Bank Corporation at (800) 544-6155. Due to the relatively high cost of handling small investments, the Group reserves the right to redeem involuntarily, at net asset value, the Investor B Shares of any Shareholder if, because of redemptions of Investor B Shares by or on behalf of the Shareholder (but not as a result of a decrease in the market price of such Investor B Shares, the deduction of any sales charge or the establishment of an account with less than $1,000 using the Auto Invest Plan), the account of such Shareholder in that Fund has a value of less than $1,000. Accordingly, an investor purchasing Investor B Shares of a Fund in only the minimum investment amount may be subject to such involuntary redemption if the investor thereafter redeems any such Investor B
Shares. Before the Group exercises its right to redeem such Investor B Shares and to send the proceeds to the Shareholder, the Shareholder will be given notice that the value of the Investor B Shares in the Shareholder's account is less than the minimum amount and will be allowed 60 days to make an additional investment in the appropriate Fund in an amount which will increase the value of the account to at least $1,000.
Depending upon the terms of a particular Customer account, First of America Bank Corporation or one of its affiliates may charge a Customer account fees for services provided in connection with investment in a Fund. Information concerning these services and any charges may be obtained from First of America Bank Corporation or the affiliate. This Prospectus should be read in conjunction with any such information so received.
The Group reserves the right to reject any order for the purchase of its Shares in whole or in part.
Every Shareholder will receive a confirmation of each new transaction in the Shareholder's account, which will also show the total number of Investor B Shares of the respective Fund of the Group owned by the Shareholder. Confirmation of purchases and redemptions of Investor B Shares of the Funds by First of America Bank Corporation or one of its affiliates on behalf of a Customer may be obtained from First of America Bank Corporation or the affiliate. Shareholders may rely on these statements in lieu of certificates. Certificates representing Investor B Shares of the Funds will not be issued.
The Parkstone Group of Funds Auto Invest Plan enables Shareholders to make regular monthly or quarterly purchases of Investor B Shares through automatic deduction from their bank accounts. With Shareholder authorization, the Group's Transfer Agent will deduct the amount specified (subject to the applicable minimums) from the Shareholder's bank account which will automatically be invested in Shares at the public offering price on the date of such deduction (or the next Business Day thereafter, as defined under "VALUATION OF SHARES" below). The required minimum initial investment when opening an account using the Auto Invest Plan is $100; the minimum amount for subsequent investments in a Fund is $50. To participate in the Auto Invest Plan, Shareholders should complete the appropriate section of the account application or a supplemental Auto Invest application that can be acquired by calling the Group at (800) 451-8377. To participate in the Auto Invest Plan, Shareholders should complete the appropriate section of the account application or a supplemental Auto Invest application that can be acquired by calling the Group at (800) 451-8377. For a Shareholder to change the Auto Invest instructions, the request must be made in writing to the Group, c/o The Parkstone Group of Funds, 3435 Stelzer Road, Columbus, Ohio 43219 and may take up to 15 days to implement.
Investor B Shares may be purchased only in amounts of less than $250,000. There is no sales charge imposed upon purchases of Investor B Shares, but investors may be subject to a contingent deferred sales charge of up to 4.00% when Investor B Shares are redeemed within four years after purchase. See "CONTINGENT DEFERRED SALES CHARGE" below.
From time to time dealers who receive dealer discounts and brokerage commissions from the Distributor may reallow all or a portion of such dealer discounts and brokerage commissions to other dealers or brokers.
In addition to amounts paid to dealers as a dealer concession out of the sales charge paid by investors, if any, the Distributor may, from time to time, at its expense or as an expense for which it may be reimbursed under the Plans, pay a bonus or other consideration or incentive to dealers who sell a minimum dollar amount of shares of a Fund during a specified period of time. The Distributor also may, from time to time, arrange for the payment of additional consideration to dealers not to exceed 6.25% of the offering price per share on all sales of Investor B Shares as an expense of the Distributor or for which the Distributor may be reimbursed under the Investor B Plan or upon receipt of a contingent charge. Any such additional consideration or incentive program may be terminated at any time by the Distributor.
The Distributor, at its expense, may also provide additional compensation to dealers in connection with sales of Shares of any of the Funds and other Funds of the Group. Compensation may include financial assistance to dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising campaigns regarding one or more Funds of the Group, and/or other dealer-sponsored special events. In some instances, this compensation may be made available only to certain dealers whose representatives have sold or are expected to sell a significant amount of such shares. Compensation may include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their families to exotic locations within or outside of the United States for meetings or seminars of a business nature. The Distributor, at its expense, currently conducts an annual sales contest for dealers in connection with their sales of Shares of the Funds. Dealers may not use sales of a Fund's Shares to qualify for this compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc.
Investor B Shares which are redeemed within four years of purchase will be subject to a contingent deferred sales charge equal to a percentage of an amount equal to the lesser of the net asset value at the time of purchase of the Investor B Shares being redeemed or the net asset value of such Shares at the time of redemption, as set forth in the chart below:
Accordingly, a contingent deferred sales charge will not be imposed on amounts representing increases in net asset value above the net asset value at the time of purchase. In addition, a charge will not be assessed on Investor B Shares purchased through reinvestment of dividends or capital gains distributions.
Solely for purposes of determining the number of years which have elapsed from the time of purchase of any Investor B Shares, all purchases during a month will be aggregated and deemed to have been made on the last day of the month. In determining whether a contingent deferred sales charge is applicable to a redemption, the calculation will be made in the manner that results in the lowest possible charge being assessed. In this regard, it will be assumed that the redemption is first of Shares held for more than four years or Shares acquired pursuant to reinvestment of dividends or distributions. The charge will not be applied to dollar amounts representing an increase in the net asset value since the time of purchase.
For example, assume an investor purchased 100 Investor B Shares with a net asset value of $10 per share (i.e., at an aggregate net asset value of $1,000) and in the eleventh month after purchase, the net asset value per share is $12 and, during such time, the investor has acquired five additional Investor B Shares through dividend reinvestment. If at such time the investor makes his first redemption of 50 Investor B Shares (producing proceeds of $600), five of such Shares will not be subject to the charge because of dividend reinvestment. With respect to the remaining 45 Investor B Shares being redeemed, the charge will be applied only to the original cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $450 of the $600 redemption proceeds will be subject to the charge of 4.00% ($18.00).
The contingent deferred sales charge is waived on redemptions of Investor B Shares (i) following the death or disability (as defined in the Internal Revenue Code of 1986, as amended, (the "Code")) of a shareholder (both shareholders in the case of joint accounts), (ii) to the extent that the redemption represents a minimum required distribution from an IRA or a Custodial Account under Code
Section 403(b)(7) to a shareholder who has reached age 70 1/2, and (iii) to the extent the redemption represents the minimum distribution from retirement plans under Code Section 401(a) where such redemptions are necessary to make distributions to plan participants.
A Shareholder may elect to have all income dividends and capital gains distributions paid by check, reinvested in the Fund or reinvested in any of the Group's other Funds, without the payment of a sales charge (provided the other Fund is maintained at the minimum required balance).
The Directed Dividend Option may be modified or terminated by the Group at any time after notice to participating Shareholders. Participation in the Directed Dividend Option may be terminated or changed by the Shareholder at any time by writing the Distributor. The Directed Dividend Option is not available to participants in any of the Parkstone IRA's.
The exchange privilege enables Shareholders of Investor B Shares to acquire Investor B Shares that are offered by another fund of the Group with a different investment objective. This exchange privilege does not apply to other classes of Shares of a Fund. For example, holders of a Fund's Investor B Shares may not exchange their Shares for Investor A Shares, and holders of a Fund's Investor A Shares may not exchange their Shares for Investor B Shares.
Holders of Investor B Shares of one of the Group's Funds (including Investor B Shares acquired through reinvestment of dividends and distributions on such shares) may exchange those Investor B Shares at net asset value without any sales charge for Investor B Shares offered by any of the Group's other Funds, provided that the amount to be exchanged meets the applicable minimum investment requirements and the exchange is made in states where it is legally authorized.
An exchange is considered a sale of Shares and will result in a capital gain or loss for federal income tax purposes. A Shareholder may not include any sales charge on Shares of a Fund as a part of the cost of those Shares for purposes of calculating the gain or loss realized on an exchange of those Shares within 90 days of their purchase.
A Shareholder wishing to exchange his or her Shares may do so by contacting the Group at (800) 451-8377 or by providing written instructions to the Transfer Agent. Any Shareholder who wishes to make an exchange should obtain and review the current prospectus of the Fund of the Group in which the Shareholder wishes to invest before making the exchange. For a discussion of risks associated with unauthorized telephone exchanges, see "REDEEMING SHARES--By Telephone" below.
FACTORS TO CONSIDER WHEN SELECTING INVESTOR B SHARES
Before purchasing Investor B Shares of a Fund, investors should consider whether, during the anticipated life of their investment in the Fund, the accumulated Rule 12b-1 fee and potential contingent deferred sales charges on Investor B Shares prior to conversion (as described below) would be less than the initial sales charge and accumulated Rule 12b-1 fee on a traditionally-priced fund (the Group's Investor A Shares are an example of such a fund) purchased at the same time, and to what extent such differential would be offset by the higher yield of a traditionally-priced fund. In this regard, to the extent that the sales charge for the Investor A Shares is waived or reduced by one of the methods described above, investments in Investor A Shares become more desirable. The Group will refuse all purchase orders for Investor B Shares of over $250,000.
Although Investor A Shares are subject to a Rule 12b-1 fee, they are not subject to the higher Rule 12b-1 fee applicable to Investor B Shares. For this reason, Investor A Shares can be expected to pay correspondingly higher dividends per share. However, because initial sales charges are deducted at the time of purchase, purchasers of Investor A Shares that do not qualify for waivers of or initial sales charge would have less of their purchase price initially invested in a Fund than purchasers of Investor B Shares.
As described above, purchasers of Investor B Shares will have more of their initial purchase price invested. Any positive investment return on this additional invested amount would partially or wholly offset the expected higher annual expenses borne by Investor B Shares. Because the Group's future returns cannot be predicted, there can be no assurance that this will be the case. Investors in Investor B Shares would, however, own Shares that are subject to higher annual expenses and, for a four-year period, such Shares would be subject to a contingent deferred sales charge of up to 4.00% upon redemption, depending upon the year of redemption. Investors expecting to redeem during this four-year period should compare the cost of the contingent deferred sales charge plus the aggregate annual Investor B Shares' Rule 12b-1 fees to the cost of the initial sales charge and Rule 12b-1 fee on the Investor A Shares. Over time, the expense of the annual Rule 12b-1 fee on the Investor B Shares may equal or exceed the initial sales charge and annual Rule 12b-1 fee applicable to Investor A Shares. For example, if net asset value remains constant, the aggregate Rule 12b-1 fees with respect to Investor B Shares on the Funds would equal or exceed the initial sales charge and aggregate Rule 12b-1 fees of Investor A Shares approximately eight years after the purchase. In order to reduce such fees of investors that hold Investor B Shares for more than eight years, Investor B Shares will be automatically converted to Investor A Shares, as described below, at the end of such eight-year period. This example assumes that the initial purchase of Investor A Shares would be subject to the maximum initial sales charge of 4.50%. This example does not take into account the time value of money which reduces the impact of the Investor B Shares' administrative and Rule 12b-1 fee on the investment, the benefit of having the additional initial purchase price invested during the period before it is effectively paid out as an administrative and Rule 12b-1 fee, fluctuations in net asset value or the effect of different performance assumptions.
Investor B Shares which have been outstanding for eight years after the end of the month in which the Shares were initially purchased will automatically convert to Investor A Shares and, consequently, will no longer be subject to the higher Rule 12b-1 fee of the Investor B Plan. Such conversion will be on the basis of the relative net asset values of the two classes, without the imposition of any sales charge or other charge except that the Rule 12b-1 fees applicable to Investor A Shares shall thereafter be applied to such converted Shares. Such investors will then benefit from the lower Rule 12b-1 fees of Investor A Shares. Because the per share net asset value of the Investor A Shares may be higher than that of the Investor B Shares at the time of conversion, a Shareholder may receive fewer Investor A Shares than the number of Investor B Shares converted, although the dollar value will be the same. Reinvestments of dividends and distributions in Investor B Shares will not be considered a new purchase for purposes of the conversion feature.
The Investor A Shares into which the Investor B Shares will convert will differ only in the amount of the Rule 12b-1 fee assessed to the Shareholder. The Rule 12b-1 fee assessed to Investor A Shareholders is 0.25% of the average daily net assets of the Investor A Shares owned, rather than 1.00%.
If a Shareholder effects one or more exchanges among Investor B Shares of the Funds during the eight-year period, the holding period for Shares so exchanged will be counted toward such period.
Investor B Shares of the Fund are available to Shareholders on a tax-deferred basis through the following retirement plans:
A Parkstone IRA enables individuals, even if they participate in an employer-sponsored retirement plan, to establish their own retirement program. Parkstone IRA contributions may be tax-deductible and earnings are tax-deferred. Under the Tax Reform Act of 1986, the tax deductibility of IRA contributions is or eliminated for individuals who participate in certain employer pension plans and whose annual income exceeds certain limits. Existing IRA's and future contributions up to the IRA maximums, whether deductible or not, still earn income on a tax-deferred basis.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP/IRA")
A Parkstone SEP/IRA may be established on a group basis by an employer who wishes to sponsor a tax-sheltered retirement program by making contributions into IRA's on behalf of all eligible employees.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLAN ("SAR-SEP/IRA")
A Parkstone SAR-SEP/IRA offers employers with 25 or fewer eligible employees the ability to establish a SEP/IRA that permits salary reduction contributions.
All Parkstone IRA distribution requests must be made in writing to BISYS Fund Services Ohio, Inc. Any additional deposits to a Parkstone IRA must distinguish the type and year of the contribution.
For more information on any of the Parkstone IRA's or other retirement plan options available (401(k) Defined Contribution Plans, 403(b)(7) Defined Compensation Plans, etc.), call the Group at (800) 451-8377. Shareholders are advised to consult a tax adviser on Parkstone IRA contribution and withdrawal requirements and restrictions.
HOW TO REDEEM YOUR INVESTOR B SHARES
Shareholders may redeem their Investor B Shares, subject to the contingent deferred sales charge described above, on any day that net asset value is calculated (see "VALUATION OF SHARES"). Redemptions will be effected at the net asset value per share next determined after receipt of a redemption request. Redemptions may be requested by mail or by telephone.
A written request for redemption must be received by the Transfer Agent in order to honor the request. The Transfer Agent's address is: BISYS Fund Services Ohio, Inc., c/o The Parkstone Group of Funds Department L-1270, Columbus, Ohio 43260-1270. The Transfer Agent will require a signature guarantee by an eligible guarantor institution. The signature guarantee requirement will be waived if all of the following conditions apply: (1) the redemption check is payable to the Shareholder(s) of record, and (2) the redemption check is mailed to the Shareholder(s) at the address of record. The Shareholder may also have the proceeds mailed to a commercial bank account previously designated on the Account Application. There is no charge for having redemption proceeds mailed to a designated bank account. To change the address to which a redemption check is to be mailed, a written request therefor must be received by the Transfer Agent. In connection with such request, the Transfer Agent will require a signature guarantee by an eligible guarantor institution.
For purposes of this policy, the term "eligible guarantor institution" shall include banks, brokers, dealers, credit unions, securities exchanges and associations, clearing agencies and savings associations as those terms are defined in the Securities Exchange Act of 1934. The Transfer Agent reserves the right to reject any signature guarantee if (1) it has reason to believe that the signature is not genuine, (2) it has reason to believe that the transaction would otherwise be improper, or (3) the guarantor institution is a broker or dealer that is neither a member of a clearing corporation nor maintains net capital of at least $100,000.
Investor B Shares may be redeemed by telephone if the Account Application Form reflects that the Shareholder has that capability. The Shareholder may have the proceeds mailed to his or her address or mailed or sent electronically to a commercial bank account previously designated on the Account Application Form. Under most circumstances, payments will be transmitted on the next Business Day. Electronic payment requests may be made by the Shareholder by telephone to the
(800) 451-8377. While the Transfer Agent currently does not charge a wire redemption fee, the Transfer Agent reserves the right to impose such a fee in the future.
The Group's Account Application Form provides that none of BISYS, the Transfer Agent, the Group or any of their affiliates or agents will be liable for any loss, expense or cost when acting upon any oral, wired or electronically transmitted instructions or inquiries believed by them to be genuine. While precautions will be taken, Shareholders bear the risk of any loss as the result of unauthorized telephone redemptions or exchanges believed by the Transfer Agent to be genuine. If the telephone feature was not originally selected, the Shareholder must provide written instructions to the Group to add it. The Group will employ reasonable procedures to confirm that instructions communicated by telephone are genuine; if these procedures are not followed, the Group may be liable for any losses due to unauthorized or fraudulent instructions. These procedures include recording all phone conversations, sending confirmations to Shareholders within 72 hours of the telephone transaction, verifying the account name and a shareholder's account number or tax identification number and sending redemption proceeds only to the address of record or to a previously authorized bank account. If, due to temporary adverse conditions, investors are unable to effect telephone transactions, shareholders may mail the request to the Transfer Agent.
The Auto Withdrawal Plan enables Shareholders of a Fund to make regular monthly or quarterly redemptions of Investor B Shares. With Shareholder authorization, the Transfer Agent will automatically redeem such Investor Shares at the net asset value on the fifteenth day of the month or quarter (or the next Business Day thereafter) and have the amount specified transferred according to the written instructions of the Shareholder. Shareholders participating in this Plan must maintain a minimum account balance of $1,000. The required minimum withdrawal is $100, monthly or quarterly.
The Auto Withdrawal Plan may be modified or terminated without notice. In addition, the Group may suspend a Shareholder's withdrawal plan without notice if the account contains insufficient funds to effect a withdrawal or in the event that the account balance is less than the minimum $1,000 amount.
To participate in the Auto Withdrawal Plan, Shareholders should call (800) 451-8377 for more information. Purchases of additional Investor Shares concurrently with withdrawals may be disadvantageous to certain Shareholders because of tax liabilities and sales charges. For a Shareholder to change the Auto Withdrawal instructions, the request must be made in writing to the Distributor and may take up to 15 days to implement.
OTHER INFORMATION REGARDING REDEMPTION OF SHARES
All or part of a Customer's Investor B Shares may be redeemed in accordance with instructions and limitations pertaining to his or her account at First of America Bank Corporation or one of its affiliates.
All redemption orders are effected at the net asset value per share next determined after the Investor Shares are properly tendered for redemption, as described above. The proceeds paid upon redemption of such Investor Shares in the Funds, less any applicable contingent deferred sales charge, may be more or less than the amount invested. Payment to Shareholders for such Investor Shares redeemed will be made within seven days after receipt by the Transfer Agent of the request for redemption. However, to the greatest extent possible, requests from Shareholders for next day payments upon redemption of Investor Shares will be honored if received by the Transfer Agent before the last Valuation Time on a Business Day or, if received after the last Valuation Time, within two Business Days, unless it would be disadvantageous to that Fund or its Shareholders to sell or liquidate portfolio securities in an amount sufficient to satisfy requests for payments in that manner.
At various times, the Group may be requested to redeem Investor B Shares for which it has not yet received good payment. In such circumstances, the forwarding of proceeds may be delayed until payment has been collected for the purchase of such Investor Shares which delay may be for 15 days or more. Such delay may be avoided if such Investor Shares are purchased by wire transfer of
Group intends to pay cash for all Investor Shares redeemed, but under abnormal conditions which make payment in cash unwise, payment may be made wholly or partly in portfolio securities at their then market value equal to the redemption price. In such cases, an investor may incur brokerage costs in converting such securities to cash.
See the Statement of Additional Information ("ADDITIONAL PURCHASE AND REDEMPTION INFORMATION") for examples of when the right of redemption may be suspended.
The net asset value of each class of Shares of the Funds, with the exception of the Money Market Funds, is determined and their Shares are priced as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time) on each Business Day (the "Valuation Time"). The net asset value of each class of Shares of Money Market Funds is determined and their Shares are priced as of noon and as of the close of trading on the New York Stock Exchange on each Business Day (the "Valuation Time"). A "Business Day" is a day on which the New York Stock Exchange is open for trading and the Federal Reserve Bank of Chicago is open and any other day (other than a day on which no Shares are tendered for redemption and no order to purchase any Shares is received) during which there is sufficient trading in its portfolio instruments that its net asset value per share might be materially affected. Currently, the New York Stock Exchange or the Federal Reserve Bank of Chicago will not open in observance of the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran's Day, Thanksgiving and Christmas.
Net asset value per share for a particular class for purposes of pricing sales and redemptions is calculated by dividing the value of all securities and other assets belonging to a Fund allocable to such class, less the liabilities charged to that Fund allocable to such class and any liabilities charged directly to that class, by the number of outstanding Shares of such class.
The net asset value per share will fluctuate as the value of the investment portfolio of a Fund changes. However, the assets in each Money Market Fund are valued based upon the amortized cost method. Pursuant to the rules and regulations of the Securities and Exchange Commission regarding the use of the amortized cost method, each Money Market Fund will maintain a dollar-weighted average portfolio maturity of 90 days or less. Although the Group seeks to maintain each Money Market Fund's net asset value per share at $1.00, there can be no assurance that net asset value will not vary.
The securities in each Fund will be valued at market value. If market quotations are not available, the securities will be valued by a method which the Board of Trustees believes accurately reflects fair value. Foreign securities are valued based on quotations from the primary market in which they are traded and are translated from the local currency into U.S. dollars using current exchange rates. For further information about valuation of investments, see "NET ASSET VALUE" in the Statement of Additional Information.
Net income is declared monthly as a dividend to Shareholders at the close of business on the day of declaration and is generally paid monthly. Distributable net realized capital gains are distributed at least annually. A Shareholder will automatically receive all income dividends and capital gains distributions in additional full and fractional Shares at net asset value as of the date of declaration, unless the Shareholder elects to receive dividends or distributions in cash or elects to participate in the Parkstone Directed Dividend Option. Such election, or any revocation thereof, must be made in writing to the Transfer Agent at 3435 Stelzer Road, Columbus, Ohio 43219, and will become effective with respect to dividends and distributions having record dates after its receipt by the Transfer Agent.
Each Fund's net investment income available for distribution to the holders of Investor B Shares will be reduced by the amount of Rule 12b-1 fees payable to Participating Organizations under the Investor B
Plan. Each Fund's net investment income available for distribution to the holders of Investor B Shares may also be reduced by the amount of retail transfer agency fees payable to the Transfer Agent applicable to the Investor B Shares.
Each of the Funds of the Group is treated as a separate entity for Federal income tax purposes, intends to qualify as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"), for so long as such qualification is in the best interest of its shareholders and intends to distribute all of its net income and capital gains so that it is not required to pay Federal income taxes on amounts so distributed to shareholders.
To avoid Federal income tax, the Code requires each Fund to distribute each taxable year at least 90% of its investment company taxable income and at least 90% of its exempt-interest income. In addition, to avoid imposition of a nondeductible 4% excise tax, each Fund is required annually to distribute, prior to calendar year end, 98% of taxable ordinary income on a calendar year basis, 98% of capital gain net income realized in the twelve months preceding October 31, and the balance of undistributed taxable ordinary income and capital gain net income from the prior calendar year. Finally, in order to permit the Municipal Bond Fund and the Michigan Fund each to distribute exempt-interest dividends which Shareholders may exclude from their gross taxable income for federal income tax purposes, at least 50% of such Fund's total assets must consist of obligations the interest on which is exempt from federal income tax as of the close of each fiscal quarter of such Fund.
A Shareholder receiving a distribution of ordinary income and/or an excess of short-term capital gain over net long-term loss would treat it as a receipt of ordinary income. The dividends-received deduction for corporations will apply to the aggregate of such ordinary income distributions in the same proportion as the aggregate dividends from domestic corporations, if any, received by that Fund bear to its gross income. A Shareholder will not be able to take the dividends-received deduction unless that Shareholder holds the Shares for at least 46 days.
Distribution by a Fund of the excess of net long-term capital gain over net short-term capital loss is taxable to its Shareholders as long-term capital gain in the year in which it is received, regardless of how long the Shareholder has held Shares. Such distributions are not eligible for the dividends-received deduction.
Prior to purchasing Shares, the impact of dividends or capital gains distributions which are expected to be declared or have been declared, but have not been paid, should be carefully considered. Any such dividends or capital gains distributions paid shortly after a purchase of Shares prior to the record date will have the effect of reducing the per share net asset value of the Shares by the amount of the dividends or distributions. All or a portion of such dividends or distributions, although in effect a return of capital, is subject to tax.
Taxes may be imposed on the Funds, particularly the Balanced and International Funds, by foreign countries with respect to income received on foreign securities. If more than 50% of the value of a Fund's assets at the close of its taxable year consists of stocks or securities of foreign corporations, the Fund may elect to treat any foreign income taxes it paid as paid by its Shareholders. In this case, Shareholders generally will be required to include in income their pro rata share of such taxes, but will then be entitled to claim a credit or deduction for their share of such taxes. However, a particular Shareholder's ability to utilize such a credit will be subject to certain limitations imposed by the Code. The Funds will report to its Shareholders each year the amount, if any, of foreign taxes per share that it has elected to have treated as paid by its Shareholders.
Shareholders will be advised at least annually as to the Federal income tax consequences of distributions made during the year.
THE MUNICIPAL BOND FUND AND THE MICHIGAN FUND (THE "EXEMPT FUNDS")
Dividends derived from exempt-interest income may be treated by an Exempt Fund's Shareholders as items of interest excludable from their gross income. However, such dividends may be taxable to
Shareholders of the Municipal Bond Fund under state or local law as ordinary income even though all or a portion of the amounts may be derived from interest on tax-exempt obligations which, if realized directly, would be exempt from such taxes. In determining net exempt-interest income, expenses of the Exempt Fund are allocated to gross tax-exempt interest income in the proportion that the gross amount of such interest income bears to the Exempt Fund's total gross income, excluding net capital gains. (Shareholders are advised to consult a tax adviser with respect to whether exempt-interest dividends retain the exclusion if such Shareholder would be treated as a "substantial user" or a "related person" to such user under the Code.) Interest on indebtedness incurred or continued by a Shareholder to purchase or carry Shares is not deductible for federal income tax purposes if an Exempt Fund distributes exempt-interest dividends during the Shareholder's taxable year. It is anticipated that distributions from the Exempt Funds will not be eligible for the dividends received deduction for corporations.
Under the Code, if a Shareholder receives an exempt-interest dividend with respect to any Share and such Share is held for six months or less, any loss on the sale or exchange of such Share will be disallowed to the extent of the amount of such exempt-interest dividend, although the Treasury Department is authorized to issue regulations reducing the period to not less than 31 days for regulated investment companies that regularly distribute at least 90% of their net tax-exempt interest. No such regulations have been issued as of the date of this Prospectus. In addition, dividends attributable to interest on certain private activity bonds may have to be included in Shareholders' income for purposes of calculating alternative minimum tax. See "ADDITIONAL INFORMATION--Additional Tax Information Concerning the Tax-Free Fund, the Municipal Bond Fund and the Michigan Fund" in the Statement of Additional Information for more information regarding the federal alternative minimum tax.
To the extent dividends paid to Shareholders are derived from taxable income (for example, from interest on certificates of deposit or repurchase agreements) or from long-term or short-term capital gains, such dividends will be subject to federal income tax. A Shareholder should consult his or her own tax adviser for any special advice.
Distributions by the Michigan Fund to holders of Shares who are subject to the Michigan personal income tax and/or single business tax will not be subject to the Michigan personal income tax, single business tax or any Michigan city income tax to the extent that the distributions are attributable to income received by the Michigan Fund as interest from Michigan Municipal Securities or to the extent that the distributions are attributable to interest income and gains from the sale or disposal of United States obligations exempted from state taxation by the United States Constitution, treaties, and statutes. However, some or all of the other distributions by the Michigan Fund may be taxable by the State of Michigan or subject to applicable city income taxes, even if the distributions are attributable to income of the Michigan Fund derived from obligations of the United States or its agencies and instrumentalities. In addition, to the extent that a Shareholder of the Michigan Fund is obligated to pay state or local taxes outside of Michigan, dividends earned by an investment in the Michigan Fund may represent taxable income. Investments held in the Michigan Fund by a Michigan resident are not subject to the Michigan intangible personal property tax to the extent that the investments are attributable to bonds or other similar obligations of the State of Michigan or a political subdivision thereof, or obligations of the United States.
The Michigan Department of Treasury in a 1986 Revenue Administrative Bulletin has taken the position that the tax attributes of the securities held by a mutual fund flow through to the investors. Based on this position, the Michigan Department of Treasury has stated that mutual fund distributions attributable to interest from the fund's investment in direct U.S. government securities, as well as Municipal Securities, will not be subject to the Michigan personal income tax. The Michigan Department of Treasury also has stated that an owner of a share of a mutual fund will not be subject to intangible personal property tax to the extent that the pro rata share of the securities underlying the mutual fund would be exempt.
For Michigan personal income tax and intangible personal property tax purposes, taxable distributions from investment income and short term capital gains, if any, are taxable as ordinary income, whether received in cash or additional Shares, and are subject to the Michigan intangible personal property tax and to applicable Michigan city income taxes. The Michigan single business tax, a modified value added tax, is computed by applying the tax rate to a tax base determined by making certain adjustments to federal taxable income. Taxable distributions from investment income and gains, if any, may be included in federal taxable income or may comprise one of the adjustments made to the tax base. Distributions of cash, other property or additional Shares by the Michigan Fund to a Michigan single business taxpayer attributable to any gain realized from the sale, exchange or other disposition of Michigan Municipal Securities are includable in the Michigan single business taxpayer's adjusted tax base for purposes of the Michigan single business tax to the extent included in federal taxable income. Distributions of cash, other property or additional Shares by the Michigan Fund to a Michigan single business taxpayer are not subject to the Michigan single business tax to the extent that the distributions are attributable to interest income from and any gain realized from the sale, exchange or other disposition of U.S. Securities. Taxable long-term capital gains distributions are taxable as long-term capital gains for Michigan purposes irrespective of how long a Shareholder has held the Shares, except that such distributions reinvested in Shares of the Michigan Fund are exempt from the Michigan intangible personal property tax.
The foregoing is intended only as a brief summary of some of the important tax considerations generally affecting the Funds and their Shareholders. Potential investors are advised to consult their tax advisers concerning state and local taxes, which may differ from the Federal income taxes described above.
From time to time performance information for the Funds showing their average annual total return, aggregate total return and/or yield may be presented in advertisements, sales literature and shareholder reports. Such performance figures are based on historical earnings and are not intended to indicate future performance. Average annual total return of a class of Shares in a Fund will be calculated for the period since the establishment of the Funds and will reflect the imposition of the maximum sales charge, if any. Average annual total return is measured by comparing the value of an investment in a class of Shares in a Fund at the beginning of the relevant period to the redemption value of the investment at the end of the period (assuming immediate reinvestment of any dividends or capital gains distributions) and annualizing the result. Aggregate total return is calculated similarly to average annual total return except that the return figure is aggregated over the relevant period instead of annualized. Yield of a class of Shares will be computed by dividing a class of Shares' net investment income per share earned during a recent one-month period by that class of Shares' per share maximum offering price (reduced by any undeclared earned income expected to be paid shortly as a dividend) on the last day of the period and annualizing the result. Each Fund may also present its average annual total return, aggregate total return and yield, as the case may be, excluding the effect of a sales charge, if any.
In addition, from time to time the Funds may present their respective distribution rates for a class of Shares in supplemental sales literature which is accompanied or preceded by a prospectus and in Shareholder reports. Distribution rates will be computed by dividing the distribution per share of a class made by a Fund over a twelve-month period by the maximum offering price per share. The calculation of income in the distribution rate includes both income and capital gain dividends and does not reflect unrealized gains or losses, although a Fund may also present a distribution rate excluding the effect of capital gains. The distribution rate differs from the yield, because it includes capital gains which are often non-recurring in nature, whereas yield does not include such items. Distribution rates may also be presented excluding the effect of a sales charge, if any.
Standardized yield and total return quotations will be computed separately for Investor B Shares and the other classes of the Funds. Because of differences in the fees and/or expenses borne by different classes of Shares of the Funds, the net yield and total return on Investor B Shares may be different from that for another class of the same Fund. For example, net yield and total return on Investor B Shares is expected, at any given time, to be lower than the net yield and total return on Institutional Shares for the same period.
Investors may also judge the performance of any class of Shares or Fund by comparing or referencing it to the performance of other mutual funds with comparable investment objectives and policies through various mutual fund or market indices such as those prepared by various services which indices may be published by such services or by other services or publications, including, but published by Morningstar, Inc. In addition to performance information, general information about the Funds that appears in such publications may be included in advertisements, in sales literature and in reports to Shareholders. For further information regarding such services and publications, see "ADDITIONAL INFORMATION--Performance Comparisons" in the Statement of Additional Information.
Total return and yield are functions of the type and quality of instruments held in the portfolio, operating expenses, and market conditions. Consequently, total return and yield will fluctuate and are not necessarily representative of future results. Any fees charged by First of America Bank Corporation or any of its affiliates with respect to customer accounts for investing in shares of the Funds will not be included in performance calculations; such fees, if charged, will reduce the actual performance from that quoted. In addition, if First of America and BISYS voluntarily reduce all or a part of their respective fees, as further discussed below, the total return of such Fund will be higher than it would otherwise be in the absence of such voluntary fee reductions.
Shareholders of the Group may obtain current price, yield and other performance information on any of the Group's funds through FUNDATA(R), an Automated Voice Response System, 24 hours a day by calling (800) 451-8377 from any touch-tone phone. Shareholders may also speak directly with a Group representative, employed by BISYS, during regular business hours.
The Group was organized as a Massachusetts business trust in 1987 and currently offers sixteen Funds. The shares of each of the Funds of the Group, other than its four Money Market Funds, are offered in four separate classes: Investor A Shares, Investor B Shares, Investor C Shares and Institutional Shares. Shares of each of the four Money Market Funds of the Group are offered in two separate classes: Investor A Shares and Institutional Shares. Each Share represents an equal proportionate interest in a fund with other shares of the same fund, and is entitled to such dividends and distributions out of the income earned on the assets belonging to that Fund as are declared at the discretion of the Trustees. Shares are without par value.
Shareholders are entitled to one vote for each dollar of value invested and a proportionate fractional vote for any fraction of a dollar invested. Shareholders will vote in the aggregate and not by fund except as otherwise expressly required by law. For example, Shareholders of the Funds will vote in the aggregate with other shareholders of the Group with respect to the election of trustees and ratification of the selection of independent accountants. However, Shareholders of a Fund will vote as a fund, and not in the aggregate with other shareholders of the Group, for purposes of approval of that Fund's investment advisory agreement. In addition, holders of Investor B Shares of a Fund will vote as a class and not with holders of another class of that Fund with respect to the approval of its Investor B Plan.
An annual or special meeting of shareholders to conduct necessary business is not required by the Declaration of Trust, the 1940 Act or other authority except, under certain circumstances, to elect Trustees, amend the Declaration of Trust, approve an investment and sub-investment advisory agreements and to satisfy certain other requirements. To the extent that such a meeting is not required, the Group may elect not to have an annual or special meeting.
The Group has represented to the Commission that the Trustees will call a special meeting of shareholders for purposes of considering the removal of one or more Trustees upon written request therefor from shareholders holding not less than 10% of the outstanding votes of the Group. At such a meeting, a quorum of shareholders (constituting a majority of votes attributable to all outstanding shares of the Group), by majority vote, has the power to remove one or more Trustees.
As of June 30, 1995, First of America Bank Corporation, through its wholly owned subsidiaries, possessed on behalf of its underlying accounts voting or investment power with respect to more than
25% of the Shares of each of the Funds, and therefore may be presumed to control each Fund within the meaning of the 1940 Act.
In addition to Investor B Shares, the Group also offers Investor A, Investor C and Institutional Shares of the Funds under an exemptive order granted by the Commission. A salesperson or other person entitled to receive compensation for selling or servicing the Shares may receive different compensation with respect to one particular class of Shares over another in the same Fund. The amount of dividends payable with respect to other Classes of Shares will differ from dividends on Investor B Shares as a result of the different Investor B Plan fees applicable to Investor B Shares and because Investor B Shares may bear different retail transfer agency expenses. For further details regarding these other Classes of Shares, call the Group at (800) 451-8377.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
BISYS Fund Services Ohio, Inc., formerly known as The Winsbury Service Corporation, 3435 Stelzer Road, Columbus, Ohio 43219, serves as the Group's Transfer Agent pursuant to a Transfer Agency Agreement with the Group and receives a fee for such services. BISYS Fund Services Ohio, Inc. also provides certain accounting services for each of the Funds and receives a fee for such services. See "MANAGEMENT OF THE GROUP--Custodian, Transfer Agent and Fund Accounting Services" in the Statement of Additional Information for further information.
While BISYS Fund Services Ohio, Inc. is a distinct legal entity from BISYS (the Group's administrator and distributor), BISYS Fund Services Ohio, Inc. is considered to be an affiliated person of BISYS under the 1940 Act due to, among other things, the fact that BISYS Fund Services Ohio, Inc. and BISYS are both owned by The BISYS Group, Inc.
Shareholders will receive unaudited semi-annual reports and annual reports audited by independent public accountants.
Inquiries regarding the Group may be directed in writing to The Parkstone Group of Funds at 3435 Stelzer Road, Columbus, Ohio 43219, or by calling toll free (800) 451-8377.
No person has been authorized to give any information or to 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 Funds or their Distributor. This Prospectus does not constitute an offering by the Funds or by their Distributor in any jurisdiction in which such offering may not lawfully be made.
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THE PARKSTONE GROUP OF FUNDS
First of America Investment Corporation
SUB-INVESTMENT ADVISER (INTERNATIONAL AND BALANCED FUNDS) Gulfstream Global Investors, Ltd.
BISYS Fund Services Ohio, Inc.
The Bank of California, N.A.
Howard & Howard Attorneys, P.C.
PARKSTONE HIGH INCOME EQUITY FUND
PARKSTONE LIMITED MATURITY BOND FUND PARKSTONE INTERMEDIATE GOVERNMENT OBLIGATIONS FUND PARKSTONE U.S. GOVERNMENT INCOME FUND
PARKSTONE MICHIGAN MUNICIPAL BOND FUND
Prospectus dated October 13, 1995
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THE PARKSTONE GROUP OF FUNDS
INVESTOR C SHARES PROSPECTUS DATED OCTOBER 13, 1995
The Funds listed above are each of the eleven currently-offered series of The Parkstone Group of Funds (the "Group") which offer Investor C Shares. This Prospectus explains concisely what you should know before investing in the Investor C Shares of the Funds listed above. Please read it carefully and keep it for future reference. You can find more detailed information about the Fund in the October 13, 1995 Statement of Additional Information, as amended from time to time. For a free copy of the Statement of Additional Information or other information, contact the Group at the number specified above. The Statement of Additional Information has been filed with the Securities and Exchange Commission and is incorporated into this Prospectus by reference.
THE SHARES OF THE THE PARKSTONE GROUP OF FUNDS ARE NOT OBLIGATIONS OR DEPOSITS OF FIRST OF AMERICA INVESTMENT CORPORATION OR ITS PARENT, AND THE INVESTMENTS DESCRIBED IN THIS PROSPECTUS ARE NOT ENDORSED, INSURED OR GUARANTEED BY FIRST OF AMERICA INVESTMENT CORPORATION, ITS PARENT OR THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY. INVESTMENTS IN THE PARKSTONE GROUP OF FUNDS INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVOLVED.
For information about the following subjects, consult the pages indicated on the table below.
The Parkstone Group of Funds (the "Group") is an open-end management investment company which offers to the public fifteen separate investment portfolios, fourteen of which are diversified portfolios and one of which is a non-diversified portfolio, each with different investment objectives. These Funds enable the Group to meet a wide range of investment needs.
This Prospectus relates only to the Investor C Shares of the following Funds:
Parkstone Equity Fund (the "Equity Fund") Parkstone Small Capitalization Fund (the "Small Capitalization Fund") Parkstone International Discovery Fund (the "International Fund") Parkstone Balanced Fund (the "Balanced Fund") Parkstone High Income Equity Fund (the "High Income Equity Fund") Parkstone Bond Fund (the "Bond Fund") Parkstone Limited Maturity Bond Fund (the "Limited Maturity Bond Fund") Parkstone Intermediate Government Obligations Fund (the "Intermediate Parkstone U.S. Government Income Fund (the "Government Income Fund") Parkstone Municipal Bond Fund (the "Municipal Bond Fund") Parkstone Michigan Municipal Bond Fund (the "Michigan Fund")
For convenience of reference, the above Funds are sometimes referred to as part of a general grouping. The Equity, Small Capitalization and International Funds are collectively referred to as the "Growth Funds". The Balanced and High Income Equity Funds are collectively referred to as the "Growth and Income Funds". The Bond, Limited Maturity Bond, Intermediate Government Obligations and Government Income Funds are collectively referred to as the Income Funds. Finally, the Municipal Bond and Michigan Funds are collectively referred to as "Tax-Free Income Funds".
The Trustees of the Group have divided each of the Funds' beneficial ownership into an unlimited number of transferable units called shares (the "Shares"). Each Fund of the Group offers multiple classes of
Shares. This Prospectus describes one class of Shares of each Fund-Institutional Shares. Interested persons who wish to obtain a copy of the Prospectus of the other Classes of Shares of the Funds or a copy of the Group's most recent annual report may contact the Group at the telephone number shown above.
The investment objectives of each of the Funds are described in this Prospectus and are summarized in the Prospectus Summary. First of America Investment Corporation, Kalamazoo, Michigan ("First of America"), acts as the investment adviser to each of the Funds of the Group. To provide investment advisory services for the International and Balanced Funds for investments in foreign securities, First of America has entered into a sub-investment advisory agreement with Gulfstream Global Investors, Ltd., Dallas, Texas ("Gulfstream" or "Subadviser").
This Prospectus relates to Investor C Shares of the following funds of the Group:
These Funds represent eleven separate investment portfolios of The Parkstone Group of Funds, a Massachusetts business trust (the "Group") which is registered as an open-end, management investment company.
Offering Price and Sales Charges
The public offering price of Investor C Shares of each Fund is equal to the net asset value per share, but investors may be subject to a contingent deferred sales charge of up to 1.00% when Investor C Shares are redeemed within one year of purchase.
$1,000 minimum initial purchase (based upon the public offering price) per Fund with no minimum subsequent investments. Such minimum initial investment may be waived for certain purchasers and is reduced to $100 for investors using the Auto Invest Plan described herein, although such investors are subject to a $50 minimum for each subsequent investment in such Fund.
Under normal market conditions, each Fund will invest as described in the following table:
Risk Factors and Special Considerations
An investment in a mutual fund such as any of the Funds involves a certain amount of risk and may not be suitable for all investors. In addition, some investment policies of the Funds may entail certain risks (see "RISK FACTORS AND INVESTMENT TECHNIQUES").
First of America Investment Corporation ("First of America") serves as investment adviser, and, with respect to the International Fund and a portion of the Balanced Fund, Gulfstream Global Investors, Ltd. ("Gulfstream") or "Subadviser" serves as subadviser.
Dividends from net income are declared and paid monthly. Net realized capital gains are distributed at least annually.
BISYS Fund Services, formerly known as The Winsbury Company, ("BISYS") a partnership owned by The BISYS Group, Inc.
BISYS Fund Services Ohio, Inc., formerly known as The Winsbury Service Corporation (the "Transfer Agent"), a subsidiary of The BISYS Group, Inc.
FEE TABLES (INVESTOR C SHARES)
(1) A Contingent Deferred Sales Load is charged only with respect to Investor C Shares redeemed within one year of the date of purchase. (See "CONTINGENT
(2) Although no such fee currently is in place, the Transfer Agent has reserved the right in the future to charge a fee for wire transfers of redemption proceeds.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)*
(1) Pursuant to the Investor C Distribution and Shareholder Service Plan, each Fund is authorized to make payments under such Plan of up to an annual rate of 1.00% of the average daily net asset value of such Fund's Investor C Shares.
Absent the voluntary reduction of advisory fees and Other Expenses, Management Fees, Other Expenses and Total Expenses as a percentage of average net assets for the Balanced Fund would have been 1.00%, 1.00% and 2.75%, respectively. Absent the voluntary reduction of administration fees and advisory fees, Management Fees, Other Expenses and Total Expenses as a percentage of average net assets for the Bond Fund would have been .74%, .62% and 2.36%, respectively. For the Limited Maturity Bond Fund they would have been .74%, .59% and 2.33%, respectively. For the Intermediate Government Obligations Fund they would have been .74%, .64% and 2.38%, respectively. For the Government Income Fund they are estimated to be .74%, .68% and 2.42%, respectively. For the Municipal Bond Fund they would have been .74%, .60% and 2.34%, respectively. For the Michigan Fund they would have been .74%, .58% and 2.32%, respectively. Absent the voluntary reduction of Other Expenses, Other Expenses and Total Expenses for the Equity Fund would have been .54% and 2.54%, respectively. For the Small Capitalization Fund they would have been .58% and 2.58%, respectively. For the High Income Fund they would have been .57% and 2.57%, respectively. (See "MANAGEMENT OF THE FUNDS--Investment Adviser and Subadviser" and "Administrator, Sub-Administrator
You would pay the following expenses on a $1,000 investment in Investor C Shares, assuming (1) 5% annual return and (2) redemption at the end of each time period:
You would pay the following expenses on a $1,000 investment in Investor C Shares, assuming (1) 5% annual return and (2) no redemption at the end of each time period:
The information set forth in the foregoing Fee Tables and examples relates only to Investor C Shares of the Funds. Each of the Funds also may offer other classes of Shares. The other classes of Shares of the Funds are subject to the same expenses except that the sales charges and level of Rule 12b-1 fees paid by holders of the different classes will differ.
As a result of the payment of sales charges and 12b-1 fees, long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charge permitted by the National Association of Securities Dealers, Inc. (the "NASD"). The NASD has adopted rules effective July 7, 1993, which generally limit the aggregate sales charges and payments under the Group's Investor C Distribution and Shareholder Service Plan to a certain percent of total new gross share sales, plus interest. The Funds would stop accruing 12b-1 fees if, to the extent, and for as long as, such limit would otherwise be exceeded.
The purpose of the above tables is to assist a potential purchaser of Investor C Shares of any Fund in understanding the various costs and expenses that an investor in a Fund will bear directly or indirectly. Such expenses do not include any fees charged by First of America or any of its affiliates to its customer accounts which may have invested in Investor C Shares of the Funds. See "MANAGEMENT OF THE FIXED INCOME FUNDS," "GENERAL INFORMATION" and "SALES CHARGES" for a more complete discussion of the Shareholder transaction expenses and annual operating expenses of each of the Funds. The expense information for Investor C Shares is based on estimates for the current fiscal year. THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The table below sets forth certain information concerning the investment results of the Investor C Shares of each of the Funds since its inception. Further financial information is included in the Statement of Additional Information and the Group's June 30, 1995 Annual Report to Shareholders.
The Financial Highlights for the periods presented below have been derived from financial statements audited by Coopers & Lybrand L.L.P. (Limited Liability Partnership), independent accountants for the Group, whose report thereon is included in the Annual Report.
Also included for the information of Shareholders is information concerning the investment results of the Investor A Shares of the Group. This information is made available to allow Shareholders to evaluate the Investor A Shares into which the Investor C Shares will convert. See "CONVERSION FEATURE" below. With respect to the financial information regarding the Investor A Shares, on March 31, 1993, the Shareholders of all of the then-outstanding Funds of the Group approved the reclassification of such Fund's outstanding Shares into Investor A Shares and Institutional Shares. The financial information provided below with respect to the Investor A Shares and in the Annual Report include periods prior to such reclassification.
EQUITY FUND - INVESTOR C SHARES
SMALL CAPITALIZATION FUND - INVESTOR C SHARES
INTERNATIONAL DISCOVERY FUND - INVESTOR C SHARES
BALANCED FUND - INVESTOR C SHARES
HIGH INCOME EQUITY FUND - INVESTOR C SHARES
BOND FUND - INVESTOR C SHARES
LIMITED MATURITY BOND FUND - INVESTOR C SHARES
INTERMEDIATE GOVERNMENT OBLIGATIONS FUND - INVESTOR C SHARES
GOVERNMENT INCOME FUND - INVESTOR C SHARES
MUNICIPAL BOND FUND - INVESTOR C SHARES
MICHIGAN FUND - INVESTOR C SHARES
EQUITY FUND - INVESTOR A SHARES
SMALL CAPITALIZATION FUND - INVESTOR A SHARES
INTERNATIONAL DISCOVERY FUND - INVESTOR A SHARES
BALANCED FUND - INVESTOR A SHARES
HIGH INCOME EQUITY FUND - INVESTOR A SHARES
BOND FUND - INVESTOR A SHARES
LIMITED MATURITY BOND FUND - INVESTOR A SHARES
INTERMEDIATE GOVERNMENT OBLIGATIONS FUND - INVESTOR A SHARES
GOVERNMENT INCOME FUND - INVESTOR A SHARES
MUNICIPAL BOND FUND - INVESTOR A SHARES
MICHIGAN FUND - INVESTOR A SHARES
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) On April 1, 1993 the shareholders of the Group exchanged their shares for either the Group's Investor A Shares or Institutional Shares. For the year ended June 30, 1993 the Financial Highlights ratios of expenses, ratios of net investment income, total return and the per share investment activities and distributions are presented on the basis whereby the Fund's net investment income, expenses, and distributions for the period July 1, 1992 through March 31, 1993 were allocated to each class of shares based upon the relative net assets of each class of shares as of April 1, 1993 and the results combined therewith the results of operations and distributions for each applicable class for the period April 1, 1993 through June 30, 1993.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued.
(f) Period from commencement of offering of Investor C shares.
(g) Represents total return for the Institutional Shares for the period from July 1, 1994 to November 15, 1994 plus the total return for the Investor C Shares for the period from November 16, 1994 to June 30, 1995.
(h) There was only one share outstanding for the Investor C shares at June 30, 1995.
The investment objectives of each of the Funds is set forth below under the headings describing the Funds. The investment objectives of each Fund are fundamental policies and may not be changed without a vote of the holders of a majority of the outstanding Shares of that Fund (as defined in the Statement of Additional Information). Other policies of a Fund may be changed without a vote of the holders of a majority of outstanding Shares of that Fund unless the policy is expressly deemed to be a fundamental policy or changeable only by such majority vote. There can be no assurance that the investment objectives of any Fund will be achieved. Depending upon the performance of a Fund's investments, the net asset value per share of that Fund may decrease instead of increase.
During temporary defensive periods as determined by First of America or the Subadviser, as the case may be, each of the Funds may hold up to 100% of its total assets in short-term obligations including domestic bank certificates of deposit, bankers' acceptances and repurchase agreements secured by bank instruments. However, to the extent that a Fund is so invested, its investment objective may not be achieved during that time. Uninvested cash reserves will not earn income.
THE EQUITY FUND AND SMALL CAPITALIZATION FUND
The investment objective of the Equity Fund is to seek growth of capital by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks. The investment objective of the Small Capitalization Fund is to seek growth of capital by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks of small to medium-sized companies.
Under normal market conditions, each of the Equity and Small Capitalization Funds will invest at least 80% of the value of its total assets in common stocks and securities convertible into common stocks of companies believed by First of America to be characterized by sound management and the ability to finance expected long-term growth. In addition, under normal market conditions, the Small Capitalization Fund will invest at least 65% of the value of its total assets in common stocks and securities convertible into common stocks of companies considered by First of America to have a market capitalization of less than $1 billion. Each of the Equity and Small Capitalization Funds may also invest up to 20% of the value of its total assets in preferred stocks, corporate bonds, notes, units of real estate investment trusts, warrants, and short-term obligations (with maturities of 12 months or less) consisting of commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit, repurchase agreements, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and demand and time deposits of domestic and foreign banks and savings and loan associations. Each of the Equity and Small Capitalization Funds may also hold securities of other investment companies and depositary or custodial receipts representing beneficial interests in any of the foregoing securities.
Subject to the foregoing policies, each of the Equity and Small Capitalization Funds may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper. For a discussion of risks associated with foreign securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Foreign Securities" herein.
The Equity Fund anticipates investing in growth-oriented, medium capitalization companies. These companies have typically exhibited consistent, above average growth in revenues and earnings, strong management, and sound and improving financial fundamentals. Often, these companies are market or industry leaders, have excellent products and/or services, and exhibit the potential for growth. Core holdings of the Equity Fund are in companies that participate in long-term growth industries, although these will be supplemented by holdings in non-growth industries that exhibit the desired characteristics.
The Small Capitalization Fund anticipates investing in dynamic small- to medium-sized companies that exhibit outstanding potential for superior growth. For purposes of the foregoing sentence, small-sized companies are considered to be those with capitalization of less than $1 billion and medium-sized companies are considered to be those with capitalization of $1 billion or more but less than $5 billion. The Small Capitalization Fund will limit its investment in securities of medium-sized companies to not more than 35% of the value of its total assets. Companies that participate in sectors that are identified as having long-term growth potential generally make up a substantial portion of such Fund's holdings. These companies often have established a market niche or have developed unique products or technologies that are expected to produce superior growth in revenues and earnings. As smaller capitalization stocks are quite volatile and subject to wide fluctuations in both the short and medium term, the Small Capitalization Fund may be fairly characterized more aggressive than a general equity fund such as the Equity Fund.
Consistent with the foregoing, each of the Equity and Small Capitalization Funds will focus its investments in those companies and types of companies that First of America believes will enable such Fund to achieve its investment objective.
The investment objective of the International Fund is the long-term growth of capital.
Under normal market conditions the International Fund will invest at least 65% of its total assets in an internationally diversified portfolio of equity securities which trade on markets in countries other than the United States and which are issued by companies (i) domiciled in countries other than the United States, or (ii) that derive at least 50% of either their revenues or pre-tax income from activities outside of the United States, and (iii) which are small- or medium-sized companies on the basis of their capitalization.
Equity securities include common and preferred stock, securities (bonds and preferred stock) convertible into common stock, warrants and securities representing underlying international securities such as ADRs and EDRs.
Companies are deemed to be small- or medium-sized which at the time of purchase are of a size which would rank them in the lower half of a major market index in each country by weighted market capitalization and all equity securities listed in recognized secondary markets where such markets exist. In addition, in countries with less well-developed stock markets, where the range of investment opportunities is more restrictive, the equity securities of all listed companies will be eligible for investment. In major markets issuers could have capitalizations of up to approximately $10 billion while in smaller markets issuers would be eligible with capitalizations as low as approximately $200 million.
The International Fund may invest in securities of issuers in, but not limited to, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Korea, Malaysia, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and United Kingdom. Normally the International Fund will invest at least 65% of its total assets in securities traded in at least three foreign countries, including the countries listed above. It is possible, although not currently anticipated, that up to 35% of the International Fund's assets could be invested in U.S. companies. In addition, the International Fund temporarily may invest cash in short-term debt instruments of U.S. and foreign issuers for cash management purposes or pending investment.
The investment objectives of the Balanced Fund are to seek current income, long-term capital growth and conservation of capital.
The Balanced Fund may invest in any type or class of security. Under normal market conditions the Balanced Fund will invest in common stocks, fixed income securities and securities convertible into common stocks (i.e., warrants, convertible preferred stock, fixed rate preferred stock, convertible fixed- income securities, options and rights). At least 25% of the value of the Balanced Fund's total assets will be invested in fixed income senior securities. Up to 15% of the value of the Balanced Fund's total assets may be invested in foreign securities.
The Balanced Fund's common stocks are held for the purpose of providing dividend income and long-term growth of capital. The Balanced Fund will invest in the common and preferred stocks of companies with capitalization of at least $100 million and which are traded either in established over-the-counter markets or on national exchanges. The Balanced Fund intends to invest primarily in those companies which are growth oriented and have exhibited consistent, above average growth in revenues and earnings. When choosing such stocks, the potential for long term capital appreciation will be the primary basis for selection.
The Balanced Fund's fixed income senior securities consist of bonds, debentures, notes, zero-coupon securities, mortgage-related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, certificates of deposit, time deposits, high quality commercial paper, bankers' acceptances and variable amount master demand notes. In addition, a portion of the Balanced Fund may from time to time be invested in first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Some of the securities in which the Balanced Fund invests may have warrants or options attached. The Balanced Fund may also invest in repurchase agreements.
The Balanced Fund expects to invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, as well as "stripped" U.S. Treasury obligations such as Treasury Receipts issued by the U.S. Treasury representing either future interest or principal payments ("Stripped Treasury Obligations"), and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. See "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations" below.
The Balanced Fund also expects to invest in bonds, notes and debentures of a wide range of U.S. corporate issuers. Such obligations, in the case of debentures, will represent unsecured promises to pay, in the case of notes and bonds, may be secured by mortgages on real property or security interests in personal property and will in most cases differ in their interest rates, maturities and times of issuance.
The Balanced Fund will invest only in corporate fixed income securities which are rated at the time of purchase within the four highest rating groups assigned by a nationally-recognized statistical rating organization ("NRSRO") or, if unrated, which First of America deems present attractive opportunities and are of comparable quality. For a description of the rating symbols of the NRSROs, see the Appendix to the Statement of Additional Information. For a discussion of fixed income securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES-- Medium Grade Securities" herein.
The Balanced Fund may hold some short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper, variable amount master demand notes, bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase agreements. The Balanced Fund may also invest in securities of other investment companies.
The Balanced Fund may also invest in obligations of the Export-Import Bank of the United States, in U.S. dollar denominated international bonds for which the primary trading market is in the United States ("Yankee Bonds"), or for which the primary trading market is abroad ("Eurodollar Bonds"), and in Canadian Bonds and bonds issued by institutions, such as the World Bank and the European Economic Community, organized for a specific purpose by two or more sovereign governments ("Supranational Agency Bonds"). The Balanced Fund's investments in foreign securities may be made either directly or through the purchase of American Depositary Receipts ("ADRs") and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in Canadian commercial paper ("CCP"), and in Europaper (U.S. dollar denominated commercial paper of a foreign issuer).
The amount invested in stock, bonds and cash reserves may be varied from time to time, depending upon First of America's assessment of business, economic and market conditions, including any potential advantage of price shifts between the stock market and the bond market. The Balanced Fund reserves the right to hold short-term securities in whatever proportion deemed desirable for temporary defensive periods during adverse market conditions as determined by First of America. However, to the extent that the Balanced Fund is so invested, its investment objectives may not be achieved during that time.
Like any investment program, the Balanced Fund entails certain risks. As a Fund investing primarily in common stocks the Balanced Fund is subject to stock market risk, i.e., the possibility that stock prices in general will decline over short or even extended periods.
Since the Balanced Fund also invests in bonds, investors in the Balanced Fund are also exposed to bond market risk, i.e., fluctuations in the market value of bonds. Bond prices are influenced primarily by changes in the level of interest rates. When interest rates rise, the prices of bonds generally fall; conversely, when interest rates fall, bond prices generally rise. While bonds normally fluctuate less in price than stock, there have been extended periods of cyclical increases in interest rates that have caused significant declines in bond prices.
From time to time, the stock and bond markets may fluctuate independently of one another. In other words, a decline in the stock market may in certain instances be offset by a rise in the bond market, or vice versa. As a result the Balanced Fund, with its balance of common stock and bond investments, is expected to entail less investment risk (and a potentially smaller investment return) than a mutual fund investing exclusively in common stocks.
THE HIGH INCOME EQUITY FUND
The investment objective of the High Income Equity Fund is to seek current income by investing in a diversified portfolio of high quality, dividend-paying common stocks and securities convertible into common stocks. A secondary investment objective of High Income Equity Fund is growth of capital.
The High Income Equity Fund, under normal market conditions, will invest at least 80% of the value of its total assets in common stocks and securities convertible into common stocks of companies believed by First of America to be characterized by sound management, the ability to finance expected growth and the ability to pay above average dividends. The High Income Equity Funds may also invest up to 20% of the value of its total assets in preferred stocks, corporate bonds, notes, units of real estate investment trusts, warrants, and short-term obligations (with maturities of 12 months or less) consisting of commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit, repurchase agreements, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and demand and time deposits of domestic and foreign banks and savings and loan associations. The High Income Equity Funds may also hold securities of other investment companies and depositary or custodial receipts representing beneficial interests in any of the foregoing securities.
Subject to the foregoing policies, the High Income Equity Funds may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper. For a discussion of risks associated with foreign securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Foreign Securities" herein.
The High Income Equity Fund anticipates investing in securities that currently have a high dividend yield, with the anticipation that the dividend will remain constant or be increased in the future. These securities generally represent the core holdings of this Fund. However, these holdings are balanced with lower yielding but higher growth-oriented securities to achieve portfolio balance. All securities must provide current income. Given its bias towards income, the High Income Equity Fund may be considered the more conservative than growth-oriented equity funds such as the Group's Equity and Small Capitalization Funds.
Consistent with the foregoing, the High Income Equity Fund will focus its investments in those companies and types of companies that First of America believes will enable such Fund to achieve its investment objective.
THE BOND FUND AND LIMITED MATURITY BOND FUND
The investment objective of the Bond Fund is to seek current income as well as preservation of capital by investing in a portfolio of high and medium grade fixed-income securities. The investment objective of the Limited Maturity Bond Fund is to seek current income as well as preservation of capital by investing in a portfolio of high and medium grade fixed-income securities with remaining maturities of six years or less.
Under normal market conditions, the Bond Fund will invest at least 80% of the value of its total assets in bonds, debentures, notes with remaining maturities at the time of purchase of one year or more, zero-coupon securities, mortgage-related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, debt securities convertible into, or exchangeable for, common stocks, first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Bond Fund will invest in state and municipal securities when, in the opinion of First of America, their yields are competitive with comparable taxable debt obligations. In addition, up to 20% of the value of the Bond Fund's total assets may be invested in preferred stocks, notes with remaining maturities at the time of purchase of less than one year, short-term debt obligations consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, repurchase agreements, securities of other investment companies, and Guaranteed Investment Contracts ("GICs") issued by insurance companies, as more fully described below. The Bond Fund intends that under normal market conditions its portfolio will maintain an average weighted maturity of approximately eight to twelve years. However, the Bond Fund may extend or shorten the average weighted maturity of its portfolio depending upon anticipated changes in interest rates or other relevant market factors. Some of the securities in which the Bond Fund invests may have warrants or options attached.
Under normal market conditions, the Limited Maturity Bond Fund will invest at least 80% of the value of its total assets in the following securities which have remaining maturities of six years or less: bonds, debentures, notes with remaining maturities at the time of purchase of one year or more, zero-coupon securities, mortgage related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, debt securities convertible into, or exchangeable for, common stocks, first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Limited Maturity Bond Fund will invest in state and municipal securities when, in the opinion of First of America, their yields are competitive with comparable taxable debt obligations. In addition, up to 20% of the value of the Limited Maturity Bond Fund's total assets may be invested in the debt securities listed above without regard to maturity, preferred stocks, notes with remaining maturities at the time of purchase of less than one year, short-term debt obligations consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, repurchase agreements, securities of other investment companies and GICs. Under normal market conditions, the Limited Maturity Bond Fund expects to maintain a dollar-weighted average portfolio maturity of its debt securities of three years or less. Some of the securities in which the Limited Maturity Bond Fund invests may have warrants or options attached.
The Bond Fund and Limited Maturity Bond Fund each expects to invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, as well as Stripped Treasury Obligations, and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. See "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations" below.
The Bond Fund and the Limited Maturity Bond Fund each also expects to invest in bonds, notes and debentures of a wide range of U.S. corporate issuers. Such obligations, in the case of debentures, will represent unsecured promises to pay, in the case of notes and bonds, may be secured by mortgages on real property or security interests in personal property and will in most cases differ in their interest rates, maturities and times of issuance.
The Bond Fund and the Limited Maturity Bond Fund each will invest only in corporate debt securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or, if unrated, which First of America deems present attractive opportunities and are of comparable quality. For a discussion of debt securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium-Grade Securities" herein.
The Bond Fund and the Limited Maturity Bond Fund each may hold some short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase agreements. The Bond Fund and the Limited Maturity Bond Fund each may also invest in securities of other investment companies or in GICs.
The Bond Fund and the Limited Maturity Bond Fund each may also invest in obligations of the Export-Import Bank of the United States, in Yankee Bonds, in Eurodollar Bonds, in Canadian Bonds and in Supranational Agency Bonds. Each of the Bond Fund and Limited Maturity Bond Fund may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper.
An increase in interest rates will generally reduce the value of the investments in the Bond Fund and the Limited Maturity Bond Fund and a decline in interest rates will generally increase the value of those investments. Depending upon the prevailing market conditions, First of America may purchase debt securities at a discount from face value, which produces a yield greater than the coupon rate. Conversely, if debt securities are purchased at a premium over face value, the yield will be lower than the coupon rate. In making investment decisions for the Bond Fund, First of America will consider many factors other than current yield, including the preservation of capital, the potential for realizing capital appreciation, maturity, and yield to maturity. In making investment decisions for the Limited Maturity Bond Fund, First of America will consider many factors other than current yield, including the preservation of capital, maturity, and yield to maturity.
By seeking to maintain a dollar-weighted average portfolio maturity of three years or less, the Limited Maturity Bond Fund attempts to minimize the fluctuation in its Shares' net asset value relative to those funds which invest in longer term obligations.
THE INTERMEDIATE GOVERNMENT OBLIGATIONS FUND
The investment objective of the Intermediate Government Obligations Fund is to seek current income with preservation of capital by investing in U.S. Government securities with remaining maturities of twelve years or less.
Under normal market conditions, the Intermediate Government Obligations Fund will invest at least 80% of its total assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and with remaining maturities of twelve years or less, although up to 20% of the value of its total assets may be invested in debt securities, preferred stocks and other investments without regard to maturity, except as set forth below. Under normal market conditions, the Intermediate Government Obligations Fund expects to maintain a dollar-weighted average portfolio maturity of its debt securities of three to ten years.
The types of U.S. Government obligations invested in by the Intermediate Government Obligations Fund will include obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Treasury, such as Treasury bills, notes, bonds and certificates of indebtedness, and Government Securities, as described below in "RISK FACTORS AND INVESTMENT TECHNIQUES-- Government Obligations."
The Intermediate Government Obligations Fund may also invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, as more fully described below under "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations."
By seeking to maintain a dollar-weighted average portfolio maturity of three to ten years, the Intermediate Government Obligations Fund attempts to minimize the fluctuation in its Shares' net asset value relative to those funds which invest in longer term obligations.
The investment objective of the Government Income Fund is to provide shareholders with a high level of current income consistent with prudent investment risk.
Under normal market conditions, the Government Income Fund will invest at least 65% of its total assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, although up to 35% of the value of its total assets may be invested in debt securities and preferred stocks of nongovernmental issuers. Consistent with the foregoing, under current market conditions, the Government Income Fund intends to invest up to 80% of the value of its total assets in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Government Income Fund also may invest up to 35% of its total assets in mortgage-related securities issued by nongovernmental entities and in other securities described below. For more information, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Mortgage-Related Securities," below.
The types of U.S. Government obligations, including mortgage-related securities, invested in by the Government Income Fund will include obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Treasury, such as Treasury bills, notes and bonds, Stripped Treasury Obligations and Government Securities, as described below in "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations".
The Government Income Fund may also hold short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper rated at the time of purchase within the top two categories by an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase and reverse repurchase agreements. The Government Income Fund may also invest in corporate debt securities which are rated at the time of purchase within the top three categories of an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality.
The investment objective of the Municipal Bond Fund is to seek current interest income which is exempt from federal income taxes as well as preservation of capital. The investment objectives of the Michigan Fund are to seek income which is exempt from federal income tax and Michigan state income and intangibles tax, although such income may be subject to the federal alternative minimum tax when received by certain Shareholders, and to seek preservation of capital.
Under normal market conditions and as a fundamental policy, at least 80% of the net assets of the Municipal Bond Fund will be invested in a diversified portfolio of Municipal Securities and at 80% of the net assets of the Michigan Fund will be invested in a portfolio of Michigan Municipal Securities.
"Municipal Securities" include obligations consisting of bonds, notes and commercial paper, issued by or on behalf of states, territories and possessions of the United States, the District of Columbia and other political subdivisions, agencies, instrumentalities and authorities, the interest on which is both exempt from federal income taxes and not treated as a preference item for individuals for purposes of the federal alternative minimum tax. "Michigan Municipal Securities" include debt obligations, consisting of notes, bonds and commercial paper, issued by or on behalf of the State of Michigan, its political subdivisions, municipalities and public authorities, the interest on which is, in the opinion of bond counsel to the issuer, exempt from federal income tax and Michigan state income and intangibles taxes (but may be treated as a preference item for individuals for purposes of the federal alternative minimum tax) and debt obligations issued by the Government of Puerto Rico or the U.S. territories and possessions of Guam and the U.S. Virgin Islands and such other governmental entities whose debt obligations, either by law or treaty, generate interest income which is exempt from federal and Michigan state income and intangibles taxes. For more information regarding Municipal Securities and Michigan Municipal Securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Municipal Securities," below.
Under normal market conditions, at least 65% of the net assets of each of the Municipal Bond Fund and the Michigan Fund will be invested in Municipal Securities (Michigan Municipal Securities in the case of the Michigan Fund) consisting of bonds and notes with remaining maturities at the time of purchase of one year or more. Quality is the primary consideration in selecting Michigan Municipal Securities for investment by the Michigan Fund.
The Municipal Bond Fund also intends that under normal market conditions its portfolio will maintain an average weighted maturity of approximately eight to ten years and an average weighted rating of AA/Aa. The Michigan Fund, under normal market conditions, will be invested in long-term Michigan Municipal Securities and that the average weighted maturity of such investments will be 5 to 12 years, although the Michigan Fund may invest in Michigan Municipal Securities of any maturity. However, First of America may extend or shorten the average weighted maturity of its portfolio depending upon anticipated changes in interest rates or other relevant market factors. In addition, the average weighted rating of a Tax-Free Income Fund's portfolio may vary depending upon the availability of suitable Municipal Securities or other relevant market factors.
The Michigan Fund invests in Michigan Municipal Securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or rated within the two highest rating groups assigned by an NRSRO in the case of notes, tax-exempt commercial paper or variable rate demand obligations. The Michigan Fund may also purchase Michigan Municipal Securities which are unrated at the time of purchase but are determined to be of comparable quality by First of America pursuant to guidelines approved by the Group's Board of Trustees. The applicable Michigan Municipal Securities ratings are described in the Appendix to the Statement of Additional Information. For a description of debt securities rated within the fourth highest rating group assigned by the NRSROs, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium-Grade Securities" herein.
Interest income from certain types of municipal securities may be subject to federal alternative minimum tax. The Tax-Free Income Funds will not treat these bonds as "Municipal Securities" or "Michigan Municipal Securities" for purposes of measuring compliance with the 80% tests described above. To the extent the Tax-Free Income Funds invests in these bonds, individual shareholders, depending on their own tax status, may be subject to alternative minimum tax on that part of the Tax-Free Income Fund's distributions derived from these bonds. For further information relating to the types of municipal securities which will be included in income subject to alternative minimum tax, see "ADDITIONAL INFORMATION-- Additional Tax Information Concerning the Tax-Free Fund, the Municipal Bond Fund and the Michigan Fund" in the Statement of Additional Information.
In addition, investments may be made in taxable obligations if, for example, suitable tax-exempt obligations are unavailable or if acquisition of U.S. Government or other taxable securities is deemed appropriate for temporary defensive purposes as determined by First of America to be warranted due to market conditions. Such taxable obligations consist of Government Securities, certificates of deposit, time deposits and bankers' acceptances of selected banks, commercial paper meeting the Tax-Free Income Fund's quality standards (as described above) for tax-exempt commercial paper, and such taxable obligations as may be subject to repurchase agreements. These obligations are described further in the Statement of Additional Information. Under such circumstances and during the period of such investment, the affected Tax-Free Income Fund may not achieve its stated investment objectives.
Although the Municipal Bond Fund may invest more than 25% of its net assets in (i) Municipal Securities whose issuers are in the same state, (ii) Municipal Securities the interest on which is paid solely from revenues of similar projects, and (iii) private activity bonds, it does not presently intend to do so on a regular basis. To the extent the Municipal Bond Fund's assets are concentrated in Municipal Securities that are payable from the revenues of similar projects or are issued by issuers located in the same state, or are concentrated in private activity bonds, the Municipal Bond Fund will be subject to the peculiar risks presented by the laws and economic conditions relating to such states, projects and bonds to a greater extent than it would be if its assets were not so concentrated.
SPECIAL CONSIDERATIONS RELATING TO THE MICHIGAN FUND
Because the Michigan Fund invests primarily in securities issued by the State of Michigan and its political subdivisions, municipalities and public authorities, the Michigan Fund's performance is closely tied to the general economic conditions within the State as a whole and to the economic conditions within particular industries and geographic areas represented or located within the State. However, the Michigan Fund attempts to diversify, to the extent First of America deems appropriate, among issuers and geographic areas in the State of Michigan.
The Michigan Fund's classification as a "non-diversified" investment company means that the proportion of the Michigan Fund's assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. However, the Michigan Fund intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended, which requires the Michigan Fund generally to invest, with respect to 50% of its total assets, not more than 5% of such assets in the obligations of a single issuer; as to the remaining 50% of its total assets, the Michigan Fund is not so restricted. In no event, however, may the Michigan Fund invest more than 25% of its total assets in the obligations of any one issuer. Compliance with this requirement is measured at the close of each quarter of the Michigan Fund's taxable year. Since a relatively high percentage of the Michigan Fund's assets may be invested in the obligations of a limited number of issuers, some of which may be within the same economic sector, the Michigan Fund's portfolio securities may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company.
RISK FACTORS AND INVESTMENT TECHNIQUES
Like any investment program, an investment in a Fund entails certain risks. The Funds will not acquire portfolio securities issued by, make savings deposits in, or enter into repurchase, reverse repurchase or dollar roll agreements with First of America Bank-Michigan, N.A. (the parent corporation of First of America), BISYS, or their affiliates, and will not give preference to First of America Bank-Michigan, N.A.'s correspondents with respect to such transactions, securities, savings deposits, repurchase agreements, reverse repurchase agreements and dollar roll agreements.
Some of the investment techniques utilized by First of America and, in the case of the International and Balanced Funds, the Subadviser in the management of each of the Funds (with the exception of the Treasury Fund) involve complex securities sometimes referred to as "derivatives." Among such securities are put and call options, foreign currency transactions and futures contracts, all of which are described below. The Adviser and Subadviser believe that such complex securities may, in some circumstances, play a valuable role in successfully implementing each Fund's investment strategy and achieving its goals. However, because complex securities and the strategies for which they are used, are by their nature complicated, they present substantial opportunities for misunderstanding and misuse. To guard against these risks, the Adviser and Subadviser will utilize complex securities primarily for hedging, not speculative, purposes and only after careful review of the unique risk factors associated with each such security.
The International Fund invests primarily in the securities of foreign issuers. The Balanced Fund may invest up to 15% of its total assets in foreign securities. The Equity, Small Capitalization and High Income Equity Funds may also invest in foreign securities as permitted by their respective investment policies. Each of the Bond Fund and Limited Maturity Bond Fund may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper.
Investment in foreign securities is subject to special investment risks that differ in some respects from those related to investments in securities of U.S. domestic issuers. Such risks include political, social or economic instability in the country of the issuer, the difficulty of predicting international trade patterns, the possibility of the imposition of exchange controls, expropriation, limits on removal of currency or other assets, nationalization of assets, foreign withholding and income taxation, and foreign trading practices (including higher trading commissions, custodial charges and delayed be subject to greater fluctuations in price than securities issued by U.S. corporations or issued or guaranteed by the U.S. government, its agencies or instrumentalities. The markets on which such securities trade may have less volume and liquidity, and may be more volatile than securities markets in the U.S. In addition, there may be less publicly available information about a foreign company than about a U.S. domiciled company. Foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to U.S. domestic companies. There is generally less government regulation of securities exchanges, brokers and listed companies abroad than in the U.S. Confiscatory taxation or diplomatic developments could also affect investment in those countries. In addition, foreign branches of U.S. banks, foreign banks and foreign issuers may be subject to less stringent reserve requirements and to different accounting, auditing, reporting, and recordkeeping standards than those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
In many instances, foreign debt securities may provide higher yields than securities of domestic issuers which have similar maturities and quality. Under certain market conditions these investments may be less liquid than the securities of U.S. corporations and are certainly less liquid than securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. Finally, in the event of a default of any such foreign debt obligations, it may be more difficult for a Fund to obtain or to enforce a judgment against the issuers of such securities. If a security is denominated in foreign currency, the value of the security to the Fund will be affected by changes in currency exchange rates and in exchange control regulations, and costs will be incurred in connection with conversions between currencies. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of a Fund's securities denominated in that currency. Such changes will also affect a Fund's income and distributions to shareholders. In addition, although a Fund will receive income on foreign securities in such currencies, such Fund will be required to compute and distribute its income in U.S. dollars. Therefore, if the exchange rate for any such currency declines materially after such Fund's income has been accrued and translated into U.S. dollars, the Fund could be required to liquidate portfolio securities to make required distributions. Similarly, if an exchange rate declines between the time a Fund incurs expenses in U.S. dollars and the time such expenses are paid, the amount of such currency required to be converted into U.S. dollars in order to pay such expenses in U.S. dollars will be greater.
For many foreign securities, U.S. dollar-denominated American Depositary Receipts, or ADR's, which are traded in the United States on exchanges or over-the-counter, are issued by domestic banks. ADR's represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADR's do not eliminate all the risk inherent in investing in the securities of foreign issuers. However, by investing in ADR's rather than directly in foreign issuers' stock, a Fund can avoid currency risks during the settlement period for either purchases or sales. In general, there is a large, liquid market in the United States for many ADR's. The information available for ADR's is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject. The International and Balanced Funds may also invest in European Depository Receipts, or EDR's, which are receipts evidencing an arrangement with a European bank similar to that for ADR's and are designed for use in the European securities markets. EDR's are not necessarily denominated in the currency of the underlying security.
Certain of the ADR's and EDR's, typically those denominated as unsponsored, require the holders thereof to bear most of the costs of such facilities while issuers of sponsored facilities normally pay more of the costs thereof. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through the voting rights to facility holders in respect to the deposited securities, whereas the depository of a sponsored facility typically distributes shareholder communications and passes through the voting rights.
Subject to its applicable investment policies, each of the Growth Funds and Growth and Income Funds may invest in debt securities denominated in the ECU, which is a "basket" consisting of specified amounts of the currencies of certain of the twelve member states of the European Community. The specific amounts of currencies comprising the ECU may be adjusted by the Council of Ministers of the European Community to reflect changes in relative values of the underlying may adversely affect holders of ECU-denominated obligations or the marketability of such securities. European governments and supranationals, in particular, issue ECU-denominated obligations.
Each of the Funds, with the exception of the Michigan Fund, may utilize foreign currency transactions in its portfolio. The value of the assets of a Fund as measured in United States dollars may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and a Fund may incur costs in connection with conversions between various currencies. A Fund will conduct its 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. A forward foreign currency exchange contract ("forward currency contracts") involves 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. These forward currency contracts are traded directly between currency traders (usually large commercial banks) and their customers. The Funds may enter into forward currency contracts in order to hedge against adverse movements in exchange rates between currencies.
For example, when a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may want to establish the United States dollar cost or proceeds, as the case may be. By entering into a forward currency contract in United States dollars for the purchase or sale of the amount of foreign currency involved in an underlying security transaction, such Fund is able to protect itself against a possible loss between trade and settlement dates resulting from an adverse change in the relationship between the United States dollar and such foreign currency. Additionally, for example, when a Fund believes that a foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a forward currency sale contract to sell an amount of that foreign currency approximating the value of some or all of that Fund's portfolio securities or other assets denominated in such foreign currency, or when a Fund believes that the U.S. dollar may suffer a substantial decline against a foreign currency, it may enter into a forward currency purchase contract to buy that foreign currency for a fixed U.S. dollar amount. However, this tends to limit potential gains which might result from a positive change in such currency relationships. A Fund may also hedge its foreign currency exchange rate risk by engaging in currency financial futures and options transactions. The forecasting of short-term currency market movement is extremely difficult and whether such a short-term hedging strategy will be successful is highly uncertain.
It is impossible to forecast with precision the market value of portfolio securities at the expiration of a forward currency contract. Accordingly, it may be necessary for a Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency such Fund is obligated to deliver when a decision is made to sell the security and make delivery of the foreign currency in settlement of a forward contract. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency such Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting transaction, such Fund will incur a gain or a loss (as described below) to the extent that there has been movement in forward currency contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward currency contract to sell the foreign currency. Should forward prices decline during the period between a Fund's entering into a forward currency contract for the sale of foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, such Fund would realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, such Fund would suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. Although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which might result should the value of such currency increase.
will have to convert their holdings of foreign currencies into United States dollars from time to time. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies.
The International Fund does not intend to enter into forward currency contracts if the International Fund would have more than 15% of the value of its total assets committed to such contracts on a regular or continuous basis. The International Fund does not intend to enter into forward currency contracts or maintain a net exposure in such contracts where the International Fund would be obligated to deliver an amount of foreign currency in excess of the value of the Fund's portfolio securities or other assets denominated in that currency.
For further information about the characteristics, risks and possible benefits of options, futures and foreign currency transactions, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments" in the Statement of Additional Information.
The Growth Funds, the Growth and Income Funds, the Bond Fund, the Limited Maturity Bond Fund, the Intermediate Government Government Obligations Fund, the Municipal Bond Fund and the Parkstone Government Income Fund may also enter into contracts for the future delivery of securities or foreign currencies and futures contracts based on a specific security, class of securities, foreign currency or an index, purchase or sell options on any such futures contracts and engage in related closing transactions. A futures contract on a securities index is an agreement obligating either party to pay, and entitling the other party to receive, while the contract is outstanding, cash payments based on the level of a specified securities index.
A Fund may engage in such futures contracts in an effort to hedge against market risks. For example, when interest rates are expected to rise or market values of portfolio securities are expected to fall, a Fund can seek through the sale of futures contracts to offset a decline in the value of its portfolio securities. When interest rates are expected to fall or market values are expected to rise, a Fund, through the purchase of such contracts, can attempt to secure better rates or prices for the Fund than might later be available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will, respectively, give a Fund the right (but not the obligation), for a specified price, to sell or to purchase the underlying futures contract, upon exercise of the option, at any time during the option period.
Aggregate initial margin deposits for futures contracts, and premiums paid for related options, may not exceed five percent of a Fund's total assets, and the value of securities that are the subject of such futures and options (both for receipt and delivery) may not exceed one-third of the market value of a Fund's total assets. Futures transactions will be limited to the extent necessary to maintain each Fund's qualification as a regulated investment company.
Futures transactions involve brokerage costs and require a Fund to segregate assets to cover contracts that would require it to purchase securities or currencies. A Fund may lose the expected benefit of futures transactions if interest rates, exchange rates or securities prices move in an unanticipated manner. Such unanticipated changes may also result in poorer overall performance than if the Fund had not entered into any futures transactions. In addition, the value of a Fund's futures positions may not prove to be perfectly or even highly correlated with the value of its portfolio securities or foreign currencies, limiting the Fund's ability to hedge effectively against interest rate, exchange rate and/or market risk and giving rise to additional risks. There is no assurance of liquidity in the secondary market for purposes of closing out futures positions.
Subject to the investment parameters described above, each of the Funds may invest in government obligations. The types of U.S. Government obligations in which each these Funds may invest include
U.S. Treasury notes, bills, bonds, and any other securities directly issued by the U.S. Government that are available for public investment, which differ only in their interest rates, maturities, and times of issuance, as well as "stripped" U.S. Treasury obligations, such as Treasury Receipts issued by the U.S. Treasury and representing either future interest or principal payments, and, except for the Treasury Fund, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Stripped securities are issued at a discount to their "face value" and may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors. The stripped Treasury obligations in which the Money Market Funds may invest do not include certificates of accrual on treasury securities (CATS) or treasury income growth receipts (TIGRs).
Obligations of certain agencies and instrumentalities of the U.S. Government, such as the Government National Mortgage Association, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Student Loan Marketing Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law. The Funds which may invest in these government obligations will invest in the obligations of such agencies or instrumentalities only when First of America believes that the credit risk with respect thereto is minimal.
The Bond Fund and the Limited Maturity Bond Fund may invest in guaranteed investment contracts (GICs). When investing in GICs, the Bond Fund and the Limited Maturity Bond Fund make cash contributions to a deposit fund of an insurance company's general account. The insurance company then credits to the deposit fund on a monthly basis guaranteed interest. The GICs provide that this guaranteed interest will not be less than a certain minimum rate. The insurance company may assess periodic charges against a GIC for expense and service costs allocable to it, and the charges will be deducted from the value of the deposit fund. The Bond Fund and the Limited Maturity Bond Fund may invest in GICs of insurance companies without regard to the ratings, if any, assigned to such insurance companies' outstanding debt securities. Because a Fund may not receive the principal amount of a GIC from the insurance company on seven days notice or less, the GIC is considered an illiquid investment, and, together with other instruments in that Income Fund which are deemed to be illiquid, will not exceed 15% of its total assets. In determining average portfolio maturity, GICs will be deemed to have a maturity equal to the period of time remaining until the next readjustment of the guaranteed interest rate.
In order to generate additional income, each Fund may, from time to time, lend its portfolio securities to broker-dealers, banks, or institutional borrowers of securities. A Fund must receive 100% collateral in the form of cash or U.S. Government securities. This collateral will be valued daily by First of America or by the Subadvisers, as the case may be. Should the market value of the loaned securities increase, the borrower must furnish additional collateral to that Fund. During the time portfolio securities are on loan, the borrower pays that Fund any dividends or interest received on such securities. Loans are subject to termination by the Fund or the borrower at any time. While a Fund does not have the right to vote securities on loan, each Fund intends to terminate the loan and regain the right to vote if that is considered important with respect to the investment. In the event the borrower defaults in its obligation to a Fund, such Fund bears the risk of delay in the recovery of its portfolio securities and the risk of loss of rights in the collateral. The Funds will enter into loan agreements only with broker-dealers, banks, or other institutions that the Advisers or the Subadvisers, as the case may be, have determined are creditworthy under guidelines established by the Group's Board of Trustees.
As described above, the Balanced, Bond, Limited Maturity Bond, Municipal Bond and the Michigan Funds may invest in fixed income securities within the fourth highest rating group assigned by an NRSRO (i.e., BBB or Baa by S&P and Moody's, respectively) and comparable unrated securities. These types of fixed income securities are considered by the NRSROs to have some speculative characteristics, and are more vulnerable to changes in economic conditions, higher interest rates or adverse issuer-specific developments which are more likely to lead to a weaker capacity to make principal and interest payments than comparable higher rated debt securities.
Should subsequent events cause the rating of a fixed income security purchased by any of the Funds listed above to fall below the fourth highest rating, First of America will consider such an event in determining whether the Fund should continue to hold that security. In no event, however, would the Fund be required to liquidate any such portfolio security where the Fund would suffer a loss on the sale of such security.
As indicated above, the Government Income Fund intends to invest up to 80% of the value of its total assets and the Balanced Fund, Bond Fund, Limited Maturity Bond Fund and Intermediate Government Obligations Fund may invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Such agencies or instrumentalities include the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), and in mortgage-related securities issued by nongovernmental entities which are rated, at the time of purchase, within the three highest bond rating categories assigned by an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality. However, the Government Income Fund may invest greater amounts as conditions warrant.
The mortgage-related securities in which the these Funds may invest have mortgage obligations backing such securities, consisting of conventional thirty year fixed rate mortgage obligations, graduated payment mortgage obligations, fifteen year mortgage obligations and adjustable rate mortgage obligations. All of these mortgage obligations can be used to create pass-through securities. A pass-through security is created when mortgage obligations are pooled together and undivided interests in the pool or pools are sold. The cash flow from the mortgage obligations is passed through to the holders of the securities in the form of periodic payments of interest, principal and prepayments (net of a service fee). Prepayments occur when the holder of an individual mortgage obligation prepays the remaining principal before the mortgage obligation's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, mortgage-backed securities are often subject to more rapid prepayment of principal than their stated maturity would indicate. Because the prepayment characteristics of the underlying mortgage obligations vary, it is not possible to predict accurately the realized yield or average life of a particular issue of pass-through certificates. Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments have an adverse impact on yields for pass-throughs purchased at a premium (i.e., a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may not have been fully amortized at the time the obligation is repaid. The opposite is true for pass-throughs purchased at a discount. The Fund may purchase mortgage-related securities at a premium or at a discount.
If a Fund purchases a mortgage-related 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-related 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, thereby shortening the average life of the security and shortening the period of time over which income at the higher rate is received. When interest rates are rising, though, the rate of prepayment tends to decrease, thereby lengthening the period of time over which income at the lower rate is received. For these and other reasons, a mortgage-related security's average maturity may be shortened or lengthened as a result of interest rate fluctuations and, therefore, it is not possible to predict accurately the security's return to the Fund. In addition, regular payments received with respect to mortgage-related securities include both interest and principal. No assurance can be given as to the return a Fund will receive when these amounts are reinvested.
The principal governmental (i.e., backed by the full faith and credit of the United States Government) guarantor of mortgage-related securities is GNMA. GNMA is a wholly-owned United States Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the United States Government) guarantors include FNMA and FHLMC. FNMA is a government-sponsored corporation owned entirely by private stockholders. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the United States Government. FHLMC is a corporate instrumentality of the United States Government whose stock is owned by the twelve Federal Home Loan Banks. Participation certificates issued by FHLMC are guaranteed as to the timely payment of interest and ultimate collection of principal but are not backed by the full faith and credit of the United States Government.
The Government Income Fund also may invest up to 35% of its total assets in mortgage-related securities issued by nongovernmental entities and in other securities described below. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issues also create pass-through pools of conventional residential mortgage loans. Such issuers may also be the originators of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such nongovernmental issuers generally offer a higher rate of interest than government and government-related pools because there are not direct or indirect government guarantees of payments in the former pools. However, timely payment of interest and principal of these pools is supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers and the mortgage poolers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets a Fund's investment quality standards. There can be no assurance that the private insurers can meet their obligations under the policies. The Government Income Fund may buy mortgage-related securities without insurance or guarantees if through an examination of the loan experience and practices of the poolers First of America determines that the securities meet the Government Income Fund's quality standards. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. The Government Income Fund will not purchase mortgage-related securities or any other assets which in First of America's opinion are illiquid, if as a result, more than 15% of the value of the Government Income Fund's total assets will be illiquid.
Mortgage-related securities in which the above-named Funds may invest may also include collateralized mortgage obligations ("CMOs"). CMOs are debt obligations issued generally by finance subsidiaries or trusts that are secured by mortgage-backed certificates, including, in many cases, certificates issued by government-related guarantors, including GNMA, FNMA and FHLMC, together with certain funds and other collateral. Although payment of the principal of and interest on the mortgage-backed certificates pledged to secure the CMOs may be guaranteed by GNMA, FNMA or FHLMC, the CMOs represent obligations solely of the issuer and are not insured or guaranteed by GNMA, FHLMC, FNMA or any other governmental agency, or by any other person or entity. The issuers of the CMOs typically have no significant assets other than those pledged as collateral for the obligations.
The Government Income Fund expects that governmental, government-related or private entities may create mortgage loan pools offering pass-through investments in addition to those described above. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments may vary or whose terms to maturity may differ from customary long-term fixed rate mortgages. As new types of mortgage-related securities are developed and offered to investors, First of America will, consistent with the Government Income Fund's investment objective, policies and quality standards, consider making investments in such new types of securities.
The two principal classifications of Municipal Securities (Michigan Municipal Securities, in the case of the Michigan Fund) which may be held by the Bond, Limited Maturity Bond, Municipal Bond Fund and Michigan Fund are "general obligation" securities and "revenue" securities. General obligation securities are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from proceeds of a special excise tax or other specific revenue source such as the user of the facility being financed. Private activity bonds held by the Municipal Bond and Michigan Fund are in most cases revenue securities and are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved.
The above-named Funds may also invest in "moral obligation" securities, which are normally issued by special purpose public authorities. If the issuer of moral obligation securities is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.
Each of the above-named Funds invests primarily in Municipal Securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or in the highest rating group assigned by an NRSRO in the case of notes, tax-exempt commercial paper or variable rate demand obligations. The Funds may also purchase Municipal Securities which are unrated at the time of purchase but are determined to be of comparable quality by First of America pursuant to guidelines approved by the Group's Board of Trustees. The applicable Municipal Securities ratings are described in the Appendix to the Statement of Additional Information. For a discussion of debt securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium Grade Securities" herein.
Opinions relating to the validity of Municipal Securities and to the exemption of interest thereon from federal income tax are rendered by bond counsel to the respective issuers at the time of issuance. No Fund nor First of America will review the proceedings relating to the issuance of Municipal Securities or the basis for such opinions.
Municipal Securities and Michigan Municipal Securities purchased by the Tax-Free Income Funds may include rated and unrated variable and floating rate tax-exempt notes. A variable rate note is one whose terms provide for the adjustment of its interest rate on set dates and which, upon such adjustment, can reasonably be expected to have a market value that approximates its par value. A floating rate note is one whose terms provide for the adjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value. Such notes are frequently not rated by credit rating agencies; however, unrated variable and floating rate notes purchased by the Tax-Free Income Funds will be determined by First of America, under guidelines established by the Group's Board of Trustees, to be of comparable quality at the time of purchase to rated instruments eligible for purchase under the Fund's investment policies. In making such determinations, First of America will consider the earning power, cash flow and other liquidity ratios of the issuers of such notes (such issuers include financial, merchandising, bank holding and other companies) and will continuously monitor their financial condition. There may be no active secondary market with respect to a particular variable or floating rate note. Nevertheless, the periodic readjustments of their interest rates tend to assure that their value to the Tax-Free Income Fund will approximate their par value.
Income Funds will not purchase variable and floating rate notes or any other securities which in First of America's opinion are illiquid, if as a result, more than 15% of the Tax-Free Income Fund's total assets will be illiquid.
Each of the Funds may invest up to 5% of the value of its total assets in the securities of any one money market mutual fund (including shares of the Parkstone Prime Obligations Fund, the Parkstone U.S. Government Obligations Fund, the Parkstone Tax-Free Fund, the Parkstone Municipal Investor Fund, and the Parkstone Treasury Fund), provided that no more than 10% of the Fund's total assets may be invested in the securities of mutual funds in the aggregate. In order to avoid the imposition of additional fees as a result of investments by a Fund in Shares of the money market funds of the Group, the Investment Adviser, Administrator and their affiliates (See "MANAGEMENT OF THE FUNDS--Investment Adviser and Subadvisers" and "Administrator, Sub-Administrator and Distributor" and "GENERAL INFORMATION--Transfer Agency and Fund Accounting Services") will not retain any portion of their usual asset-based service fees from a Fund that are attributable to investments by the Fund in Shares of those money market mutual funds if the fee is being taken in the Fund. The Investment Adviser and the Administrator will promptly forward such fees to the appropriate Fund. Each Fund will incur additional expenses due to the duplication of expenses as a result of any investment in securities of unaffiliated mutual funds. Additional restrictions regarding the Funds' investments in securities of unaffiliated mutual funds and/or money market funds of the Group are contained in the Statement of Additional Information.
The Tax-Free Income Funds may also invest in private activity bonds. It should be noted that the Tax Reform Act of 1986 substantially revised provisions of prior federal law affecting the issuance and use of proceeds of certain tax-exempt obligations. A new definition of private activity bonds applies to many types of bonds, including those which were industrial development bonds under prior law. Any reference herein to private activity bonds includes industrial development bonds. Interest on private activity bonds is tax-exempt (and such bonds will be considered Municipal Securities for purposes of this Prospectus) only if the bonds fall within certain defined categories of qualified private activity bonds and meet the requirements specified in those respective categories. If the Tax-Free Income Funds invest in private activity bonds which fall outside these categories, Shareholders may become subject to the alternative minimum tax on that part of the Tax-Free Income Fund's distributions derived from interest on such bonds. The Tax Reform Act generally does not change the federal tax treatment of bonds issued to finance government operations. For further information relating to the types of private activity bonds which will be included in income subject to the alternative minimum tax, see "ADDITIONAL INFORMATION--Additional Tax Information Concerning the Tax-Free Fund and the Municipal Bond Fund" in the Statement of Additional Information.
Each of the Growth Funds, the Growth and Income Funds, the Income Funds and the Tax-Free Income Funds may purchase put and call options on securities and on foreign currencies, subject to its applicable investment policies, for the purposes of hedging against market risks related to its portfolio securities and adverse movements in exchange rates between currencies, respectively. Purchasing options is a specialized investment technique that entails a substantial risk of a complete loss of the amounts paid as premiums to writers of options. Each Fund may also engage in writing call options from time to time as First of America or the Subadvisers, as the case may be with respect to the International Fund, deem appropriate. The Funds will write only covered call options (options on securities or currencies owned by the particular Fund). In order to close out a call option it has written, the Fund will enter into a "closing purchase transaction", the purchase of a call option on the same security or currency with the same exercise price and expiration date as the call option which such Fund previously has written. When a portfolio security or currency subject to a call option is sold, the Fund will effect a closing purchase transaction to close out any existing call option on that security or currency. If such Fund is effect a closing purchase transaction, it will not be able to sell the underlying security or currency until the option expires or that Fund delivers the underlying security or currency upon exercise. In addition, upon the exercise of a call option by the holder thereof, the Fund will forego the potential benefit represented by market appreciation over the exercise price. Under normal conditions, it is not expected that the Funds will cause the underlying value of portfolio securities and currencies subject to such options to exceed 50% of its net assets, and with respect to each of the Balanced and International Funds, 20% of its net assets.
Each of the Growth Funds, the Growth and Income Funds and the Government Income Fund, as part of its option transactions, also may purchase index put and call options and write index options. As with options on individual securities, a Fund will write only covered index call options. Through the writing or purchase of index options a Fund can achieve many of the same objectives as through the use of options on individual securities. Options on securities indices are similar to options on a security except that, rather than the right to take or make delivery of a security at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option.
Price movements in securities which a Fund owns or intends to purchase probably will not correlate perfectly with movements in the level of an index and, therefore, a Fund bears the risk of a loss on an index option that is not completely offset by movements in the price of such securities. Because index options are settled in cash, a call writer cannot determine the amount of its settlement obligations in advance and, unlike call writing on specific securities, cannot provide in advance for, or cover, its potential settlement obligations by acquiring and holding the underlying securities. A Fund may be required to segregate assets or provide an initial margin to cover index options that would require it to pay cash upon exercise.
In addition, the Tax-Free Income Funds may each acquire "puts" with respect to Municipal Securities or Michigan Municipal Securities, as the case may be, held in its portfolio. Under a put, such a Fund would have the right to sell a specified Municipal Security (or Michigan Municipal Security, as the case may be) within a specified period of time at a specified price. A put would be sold, transferred, or assigned only with the underlying security. The Tax-Free Income Funds will acquire puts solely to either facilitate portfolio liquidity, shorten the maturity of the underlying securities, or permit the investment of its funds at a more favorable rate of return. Each of the Tax-Free Income Funds expects that it will generally acquire puts only where the puts are available without the payment of any direct or indirect consideration. However, if necessary or advisable, such Fund may pay for a put either separately in cash or by paying a higher price for portfolio securities which are acquired subject to the puts (thus reducing the yield to maturity otherwise available for the same securities).
Securities held by a Fund may be subject to repurchase agreements. Under the terms of a repurchase agreement, a Fund would acquire securities from financial institutions such as member banks of the Federal Deposit Insurance Corporation or registered broker-dealers which First of America or the Subadvisers, as the case may be, deem creditworthy under guidelines approved by the Group's Board of Trustees, subject to the seller's agreement to repurchase such securities at a mutually agreed upon date and price. The repurchase price would generally equal the price paid by the Fund plus interest negotiated on the basis of current short-term rates, which may be more or less than the rate on the underlying portfolio securities. Securities subject to repurchase agreements will be held in a segregated account. If the seller were to default on its repurchase obligation or become insolvent, the Fund would suffer a loss to the extent that the proceeds from a sale of the underlying portfolio securities were less than the repurchase price under the agreement, or to the extent that the disposition of such securities by that Fund were delayed pending court action. Repurchase agreements are considered to be loans by an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). For further information about repurchase agreements, see "INVESTMENT OBJECTIVES AND
Information on Portfolio Instruments--Repurchase Agreements" in the Statement of Additional Information.
Securities in which each of the Funds may invest include securities issued by corporations without registration under the Securities Act of 1933, as amended (the "1933 Act"), in reliance on the exemption from such registration afforded by Section 3(a)(3) thereof, and securities issued in reliance on the so-called "private placement" exemption from registration which is afforded by Section 4(2) of the 1933 Act ("Section 4(2) securities"). Section 4(2) securities are restricted as to disposition under the Federal securities laws, and generally are sold to institutional investors such as the Funds who agree that they are purchasing the securities for investment and not with a view to public distribution. Any resale must also generally be made in an exempt transaction. Section 4(2) securities are normally resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in such Section 4(2) securities, thus providing liquidity. Pursuant to procedures adopted by the Board of Trustees of the Group, First of America may determine Section 4(2) securities to be liquid if such securities are eligible for resale under Rule 144A under the 1933 Act and are readily saleable.
Thus, subject to the limitations described above, the Funds may acquire investments that are illiquid or of limited liquidity, such as private placements or investments that are not registered under the 1993 Act. An illiquid investment is any investment that cannot be disposed of within seven (7) days in the normal course of business at approximately the amount at which it is valued by a Fund. The price a Fund pays for illiquid securities or receives upon resale may be lower than the price paid or received for similar securities with a more liquid market. Accordingly, the valuation of these securities will reflect any limitations on their liquidity. A Fund may not invest in additional illiquid securities if, as a result, more than 15% of the market value of its net assets would be invested in illiquid securities.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
Each of the Funds may borrow funds by entering into reverse repurchase agreements and, in the case of the Income and the Tax-Free Income Funds, dollar roll agreements in accordance with the investment restrictions described below. Pursuant to such agreements, a Fund would sell certain of its securities to financial institutions such as banks and broker-dealers, and agree to repurchase the securities, or substantially similar securities in the case of a dollar roll agreement, at a mutually agreed upon date and price. Dollar roll agreements utilized by the Income and Tax-Free Income Funds are identical to reverse repurchase agreements except for the fact that substantially similar securities may be repurchased. At the time a Fund enters into a reverse repurchase agreement or a dollar roll agreement, it will place in a segregated custodial account assets such as U.S. Government securities or other liquid high grade debt securities consistent with its investment restrictions having a value equal to the repurchase price (including accrued interest), and will subsequently continually monitor the account to ensure that such equivalent value is maintained at all times. Reverse repurchase agreements and dollar roll agreements involve the risk that the market value of securities sold by a Fund may decline below the price at which it is obligated to repurchase the securities. Reverse repurchase agreements and dollar roll agreements are considered to be borrowings by an investment company under the 1940 Act and therefore a form of leverage. A Fund may experience a negative impact on its net asset value if interest rates rise during the term of a reverse repurchase agreement or dollar roll agreement. A Fund generally will invest the proceeds of such borrowings only when such borrowings will enhance a Funds's liquidity or when the Fund reasonably expects that the interest income to be earned from the investment of the proceeds is greater than the interest expense of the transaction. For further information about reverse repurchase agreements and dollar roll agreements, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments--Reverse Repurchase Agreements and Dollar Roll Agreements" in the Statement of Additional Information.
Each of the Funds may purchase securities on a when-issued or delayed-delivery basis. Such Funds will engage in when-issued and delayed-delivery transactions only for the purpose of acquiring portfolio securities consistent with its investment objectives and policies, not for investment leverage although such transactions represent a form of leveraging. When-issued securities are securities purchased for delivery beyond the normal settlement date at a stated price and yield and thereby involve a risk that the yield obtained in the transaction will be less than those available in the market when delivery takes place. A Fund will not pay for such securities or start earning interest on them until they are received. When a Fund agrees to purchase such securities, its custodian will set aside cash or liquid securities equal to the amount of the commitment in a separate account. Securities purchased on a when-issued basis are recorded as an asset and are subject to changes in the value based upon changes in the general level of interest rates. In when-issued and delayed-delivery transactions, a Fund relies on the seller to complete the transaction; the seller's failure to do so may cause such Fund to miss a price or yield considered to be advantageous.
No Fund's commitments to purchase "when-issued" securities will exceed 25% of the value of its total assets under normal market conditions, and a commitment by a Fund to purchase "when-issued" securities will not exceed 60 days. In the event its commitments to purchase "when-issued" securities ever exceeded 25% of the value of its assets, a Fund's liquidity and the investment adviser's ability to manage it might be adversely affected. The Funds intend only to purchase "when-issued" securities for the purpose of acquiring portfolio securities, not for investment leverage although such transactions represent a form of leveraging.
The portfolio turnover rate for each Fund is calculated by dividing the lesser of a Fund's purchases or sales of portfolio securities for the year by the monthly average value of the portfolio securities. The Securities and Exchange Commission requires that the calculation exclude all securities whose remaining maturities at the time of acquisition are one year or less. The portfolio turnover rate for a Fund may vary greatly from year to year, as well as within a particular year, and may also be affected by cash requirements for redemptions of Shares. High portfolio turnover rates will generally result in higher transaction costs, including brokerage commissions, to a Fund and may result in additional tax consequences to a Fund's shareholders. Portfolio turnover will not be a limiting factor in making investment decisions.
Each Fund is subject to a number of investment restrictions that may be changed only by a vote of a majority of the outstanding Shares of that Fund (as defined in the Statement of Additional Information).
None of the Funds, with the exception of the Michigan Fund, may:
Purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if, immediately after such purchase, more than 5% of the value of the Fund's total assets would be invested in such issuer, or the Fund would hold more than 10% of the outstanding voting securities of the issuer, except that 25% or less of the value of such Fund's total assets may be invested without regard to such limitations. There is no limit to the percentage of assets that may be invested in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities.
The Michigan Fund may not:
Purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if, immediately after such purchase, (a) more than 5% of the value of the Fund's total assets (taken at current value) would be invested in such issuer (except that up to 50% of the value of the Fund's total assets may
to such 5% limitation), and (b) more than 25% of its total assets (taken at current value) would be invested in the securities of a single issuer.
For purposes of the investment limitations above, a security is considered to be issued by the governmental entity (or entities) whose assets and revenues back the security and, with respect to a private activity bond that is backed only by the assets and revenues of a non-governmental user, a security is considered to be issued by such non-governmental user.
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the value of the Fund's total assets at the time of purchase to be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and repurchase agreements secured by obligations of the U.S. Government or its agencies or instrumentalities; (b) wholly owned finance companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of their parents; and (c) utilities will be divided according to their services. For example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry.
2. (a) Borrow money (not including reverse repurchase agreements or dollar roll agreements), except that the Funds may borrow from banks for temporary or emergency purposes and then only in amounts up to 30% of its total assets at the time of borrowing (and provided that such bank borrowings and reverse repurchase agreements and dollar roll agreements do not exceed in the aggregate one-third of the Fund's total assets less liabilities other than the obligations represented by the bank borrowings, reverse repurchase agreements and dollar roll agreements), or mortgage, pledge or hypothecate any assets except in connection with a bank borrowing in amounts not to exceed 30% of the Fund's net assets at the time of borrowing; (b) enter into reverse repurchase agreements, dollar roll agreements and other permitted borrowings in amounts exceeding in the aggregate one-third of the Fund's total assets less liabilities other than the obligations represented by such reverse repurchase and dollar roll agreements; and (c) issue senior securities except as permitted by the 1940 Act rule, order or interpretation thereunder.
3. Make loans, except that the Fund may purchase or hold debt instruments and lend portfolio securities in accordance with its investment objective and policies, make time deposits with financial institutions and enter into repurchase agreements.
For purposes only of investment limitation number 1 above, such limitation shall not apply to Municipal Securities or governmental guarantees of Municipal Securities, and industrial development bonds or private activity bonds that are backed only by the assets and revenues of a non-governmental user shall not be deemed to be Municipal Securities.
The following additional investment restriction may be changed without the vote of a majority of the outstanding Shares of a Fund.
1. Purchase or otherwise acquire any securities, if as a result, more than 15% of the Fund's net assets would be invested in securities that are illiquid.
In addition to the above investment restrictions, the Funds are subject to certain other investment restrictions set forth under "INVESTMENT OBJECTIVES AND POLICIES--Investment Restrictions" in the Statement of Additional Information.
Overall responsibility for management of the Group rests with its Board of Trustees, who are elected by the shareholders of all of the Group's Funds. The Group will be managed by the Trustees in accordance with the laws of the Commonwealth of Massachusetts governing business trusts. There are currently five Trustees, three of whom are not "interested persons" of the Group within the meaning of that term under the 1940 Act. The Trustees, in turn, elect the officers of the Group to supervise actively its day-to-day operations.
The Trustees of the Group are Stephen G. Mintos* (Chairman), George R. Landreth*, Robert M. Beam, Lawrence D. Bryan and Adrian Charles Edwards. The addresses, and principal occupations during the past five years of the Trustees are set forth in the Statement of Additional Information. Those Trustees designated with an asterisk (*) are considered to be "interested persons" of the Group as defined in the 1940 Act.
The Trustees of the Group receive quarterly fees and fees and expenses for each meeting of the Board of Trustees attended. However, no officer or employee of BISYS, The BISYS Group, Inc. or BISYS Fund Services Ohio, Inc. receives any compensation from the Group for acting as a Trustee of the Group. The officers of the Group receive no compensation directly from the Group for performing the duties of their offices. BISYS receives fees from the Group for acting as Administrator and may receive fees from each of the Funds pursuant to the Investor C Distribution and Shareholder Service Plan described below. BISYS Fund Services Ohio, Inc., an affiliate of BISYS, receives fees from the Group for acting as Transfer Agent and for providing certain fund accounting services. Mr. Mintos and Mr. Landreth are employees of BISYS.
First of America was established in 1932 and is the investment adviser of the Group. First of America, a registered investment adviser, is a wholly owned subsidiary of First of America Bank-Michigan, N.A., which is a wholly owned subsidiary of First of America Bank Corporation. First of America Bank Corporation currently has over $25 billion in assets and provides financial services to over 300 communities in Michigan, Indiana, Illinois and Florida. As of June 30, 1995, First of America managed over $10 billion on behalf of both taxable and tax-exempt clients, including pensions, endowments, corporations and individual portfolios. First of America also acts as investment adviser to the Trust Division of First of America Bank Corporation with respect to an additional $2.3 billion in discretionary assets, providing equity, fixed income, balanced and money management services.
Subject to such policies as the Group's Board of Trustees may determine, First of America, either directly or, with respect to the International Fund and the Balanced Fund, through one or more subadvisers, furnishes a continuous investment program for each Fund and makes investment decisions on behalf of each Fund.
First of America utilizes a team approach to the investment management of the Funds, with up to three professionals working as a team to ensure a disciplined investment process designed to result in long-term performance consistent with each Fund's investment objectives. Roger H. Stamper, Managing Director of First of America, is primarily responsible for the day-to-day management of each of the Growth Funds (except the International Fund) and the Growth and Income Funds. Mark R. Kummerer, Managing Director--Fixed Income of First of America, is primarily responsible for the day-to-day management of the Income Funds. Christian S. Swantek, Vice President of First of America, is primarily responsible for the day-to-day management of the Tax-Free Income Funds. Messrs. Stamper and Kummerer have held their respective positions with First of America since 1988 and 1986, respectively. Prior to June 1993, Mr. Swantek was a portfolio manager at PNC Investment Management & Research and its various investment management affiliates.
For the services provided and expenses assumed pursuant to its Investment Advisory Agreement with the Group, First of America receives a fee from each of the Equity, Small Capitalization, High Income Equity and Balanced Funds, computed daily and paid monthly, at the annual rate of one percent (1%) of that Fund's average daily net assets. For its services in connection with the International Fund, First of America's fee is computed daily and paid monthly at the annual rate of one and twenty-five hundredths percent (1.25%) of the first $50 Million of the International Fund's average daily net assets, one and twenty hundredths percent (1.20%) of average daily net assets between $50 Million and $100 Million, one and fifteen hundredths percent (1.15%) of average daily net assets between $100 Million and $400 Million and one and five hundredths percent (1.05%) of average daily net assets above $400 Million. For its services in connection with each Income Fund and Tax-Free Income Fund, First of America's fee is computed daily and paid monthly at the annual rate of seventy-four one-hundredths of one percent (.74%) of each Income Fund's and Tax-Free Income Fund's average daily net assets. For its services in connection with the Money Market Funds, First of America's fee is computed daily and paid monthly, at the annual rate of forty one-hundredths of one percent (.40%) of each Money Market Fund's average daily net assets. First of America may periodically voluntarily reduce all or a portion of its advisory fee with respect to a Fund to increase the net income of that Fund available for distribution as dividends. The voluntary fee reduction will cause the yield of that Fund to be higher than it would otherwise be in the absence of such a reduction.
Pursuant to the terms of its Investment Advisory Agreement with the Group, First of America has entered into a Sub-Investment Advisory Agreement with Gulfstream Global Investors, Ltd., 300 Crescent Court, Suite 1605, Dallas, Texas 75201 ("Gulfstream"). Pursuant to the terms of such Sub-Investment Advisory Agreement Gulfstream has been retained by First of America to manage the investment and reinvestment of the assets of the International Fund and to manage the investment and reinvestment of those assets of the Balanced Fund which are invested in foreign securities, subject to the direction and control of the Group's Board of Trustees.
Under this arrangement, Gulfstream is responsible for the day-to-day management of the International Fund's assets, reviews investment performance policies and guidelines and maintains certain books and records, and First of America is responsible for selecting and monitoring the performance of Gulfstream and for reporting the activities of Gulfstream in managing the International Fund to the Group's Board of Trustees. Gulfstream utilizes a team approach to the investment management of the International Fund to ensure a disciplined investment process designed to result in long-term performance consistent with its investment objective. No one person is responsible for the Fund's management. First of America may also render advice with respect to the International Fund's investments in the U.S.
For its services provided and expenses assumed pursuant to its Sub-Investment Advisory Agreement with First of America, Gulfstream receives from First of America a fee, computed daily and paid monthly, at the annual rate of one-half percent (.50%) of the first $50 million of the International Fund's average daily net assets and the average daily net assets of the Balanced Fund which are invested in foreign securities, forty-five one hundredths percent (.45%) of such average daily net assets between $50 million and $100 million, forty one hundredths percent (.40%) of such average daily net assets between $100 million and $400 million and thirty one hundredths percent (.30%) of such average daily net assets above $400 million, provided the minimum annual fee shall be $75,000.
Gulfstream, 300 Crescent Court, Suite 1605, Dallas, Texas 75201, was organized in 1991 as a Texas limited partnership by Tull, Doud, Marsh & Triltsch, Inc., a Texas corporation ("TDMT"). TDMT is the sole general partner of Gulfstream. TDMT is owned by C. Thomas Tull, Stephen C. Doud, James P. Marsh and Reiner M. Triltsch. Messrs. Tull, Doud and Triltsch are the portfolio managers and Mr. Marsh is responsible for client services with Gulfstream. First of America is the sole limited partner, holding a forty nine (49) percent interest in Gulfstream with options which would under certain circumstances permit it to acquire up to a seventy two (72) percent interest. Gulfstream has over $360 million in assets of institutional, investment company, governmental, pension fund and high net worth individual clients under its investment management. Gulfstream's portfolio management personnel average twenty (20) years of investment experience and nine (9) years of international investment experience. As of January 3, 1994, Gulfstream managed over $300 million in international investment portfolios.
Prior to January 1, 1995, Ivory & Sime International, Inc. ("ISI" and Ivory & Sime plc ("ISplc" together with ISI, "Ivory & Sime") served as subadvisers to the International Fund. The Trustees voted unanimously to terminate this arrangement and replace it with the current subadvisory arrangement with Gulfstream. As required by the 1940 Act, the Shareholders of the International Discovery Fund and the Balanced Fund each approved the appointment of Gulfstream as subadviser, as well as the related Sub-Investment Advisory Agreements, at a meeting held on February 28, 1995.
Under Gulfstream's partnership agreement, First of America possesses veto authority over the general budgetary affairs of Gulfstream. Because of its current 49 percent ownership interest and its possession of options enabling it to acquire up to a 72 percent ownership interest, First of America may be deemed to control Gulfstream for purposes of the 1940 Act.
For further information regarding the relationship between Gulfstream and First of America, see "MANAGEMENT OF THE GROUP--INVESTMENT ADVISER" in the Statement of Additional Information.
BISYS, 3435 Stelzer Road, Columbus, Ohio 43219, is the administrator for each fund of the Group, and also acts as the Group's principal underwriter and distributor (the "Administrator" or the "Distributor," as the context indicates). First of America serves as Sub-Administrator for each Fund of the Group and provides certain services as may be requested by BISYS from time to time. BISYS and its affiliated companies, including BISYS Fund Services Ohio, Inc. are wholly-owned by The BISYS Group, Inc., a publicly-held company which is a provider of information processing, loan servicing and 401(k) administration and recordkeeping services to and through banking and other financial organizations.
The Administrator generally assists in all aspects of the Funds' administration and operation. For expenses assumed and services provided as administrator pursuant to its Administration Agreement with the Group, the Administrator receives a fee from each Fund equal to the lesser of a fee, computed daily and paid periodically, at an annual rate of twenty one-hundredths of one percent (.20%) of the Fund's average daily net assets, or such other fee as may be agreed upon from time to time in writing by the Group and the Administrator. For its services as Subadministrator First of America receives, from the Administrator, pursuant to its Sub-Administration Agreement with BISYS, a fee not to exceed five one hundredths of one percent (.05%) of each Fund's average daily net assets. The Administrator may periodically voluntarily reduce all or a portion of its administrative fee with respect to a Fund to increase the net income of that Fund available for distribution as dividends. The voluntary fee reduction will cause the return of that Fund to be higher than it would otherwise be in the absence of such reduction.
The Distributor acts as agent for the Funds in the distribution of each of their Shares and, in such capacity, solicits orders for the sale of Shares, advertises, and pays the cost of advertising, office space and its personnel involved in such activities. The Distributor receives no compensation under its Distribution Agreement with the Group, but may retain some or all of any sales charge imposed upon the Investor Shares and may receive compensation under the Distribution and Shareholder Service Plans described below.
First of America, the Subadvisers and the Administrator each bear all expenses in connection with the performance of its services as investment adviser, subadviser and administrator, respectively, other than the cost of securities (including brokerage commissions) purchased for the Group. Each Fund will bear the following expenses relating to its operation: organizational expenses, taxes, interest, brokerage fees and commissions, fees of the Trustees of the Group, Securities and Exchange Commission fees, state securities qualification fees, costs of preparing and printing prospectuses for regulatory purposes and for distribution to current Shareholders, outside auditing and legal expenses, advisory and administration fees, fees and out-of-pocket expenses of the custodian, Transfer Agent and fund accountant, certain insurance premiums, costs of maintenance of the Group's existence, costs of Shareholders' reports and meetings, and any extraordinary expenses incurred in each Fund's operation. As a general matter, expenses are allocated to the Investor C Shares and the other Classes of Shares of the Funds on the basis of the relative net asset value of each class. The various Classes may bear certain additional retail transfer agency expenses and may also bear certain additional shareholder service and distribution costs incurred pursuant to a Distribution and Shareholder Service Plans.
The Trustees reserve the right, subject to the receipt of relevant regulatory approvals or rulings, if needed, to allocate certain other expenses to the Shareholders of a particular class, including Investor Shares, on a basis other than relative net asset value, as they deem appropriate ("Class Expenses"). In such event, Class Expenses would be limited to: transfer agency fees identified by the Transfer Agent as attributable to a specific class; printing and postage expenses related to preparing and distributing materials such as Shareholder reports, prospectuses and proxies to current Shareholders; Blue Sky registration fees incurred by a class of Shares; Securities and Exchange Commission registration fees incurred by a class of Shares; expenses related to administrative personnel and services as required to support the Shareholders of a specific class; litigation or other legal expenses relating solely to one class of Shares; and Trustees' fees incurred as a result of issues relating solely to one class of Shares.
DISTRIBUTION PLAN FOR INVESTOR C SHARES
Rule 12b-1 adopted by the Securities and Exchange Commission under the 1940 Act permits an investment company to pay directly or indirectly expenses associated with the distribution of its shares in accordance with a plan adopted by an investment company's trustees and approved by its shareholders. Pursuant to such Rule, the Group has adopted an Investor C Distribution and Shareholder Service Plan (the "Investor C Plan") with respect to the Investor C Shares of each Fund. Pursuant to the Investor C Plan, each Fund is authorized to pay or reimburse BISYS, as Distributor of the Investor C Shares, for certain expenses that are incurred in connection with Shareholder and distribution services. Pursuant to the Investor C Plan, a Fund is authorized to pay or reimburse BISYS, as Distributor of Investor C Shares, (a) a distribution fee in an amount not to exceed on an annual basis .75% of the average daily net asset value of Investor C Shares of a Fund (the "Distribution Fee") and (b) a service fee in an amount not to exceed on an annual basis .25% of the average daily net asset value of the Investor C Shares of a Fund (the "Service Fee"). Payments under the Investor C Plan will be calculated daily and paid monthly at a rate not to exceed the limits described above, which rates are set from time to time by the Board of Trustees. Payments of the Distribution Fee to the Distributor pursuant to the Investor C Plan will be used (i) to compensate Participating Organizations for providing distribution assistance relating to Investor C Shares, and (ii) for promotional activities intended to result in the sale of Investor C Shares such as to pay for the preparation, printing and distribution of prospectuses to other than current Shareholders, and payments of the Service Fee to the Distributor pursuant to the Investor C Plan will be used to compensate Participating Organizations for providing Shareholder services with respect to their Customers who are, from time to time, beneficial and record holders of Investor C Shares.
Fees paid pursuant to the Investor C Plan are accrued daily and paid monthly, and are charged as expenses of Investor C Shares of a Fund as accrued.
Pursuant to the Investor C Plan, the Distributor may enter into Rule 12b-1 Agreements with Participating Organizations for providing distribution assistance and shareholder services with respect to the Investor C Shares. Such Participating Organizations will be compensated at the annual rate of up to 1.00% of the average daily net asset value of the Investor C Shares held of record or beneficially by such Customers. The distribution services provided by Participating Organizations for which the Distribution Fee may be paid may include promoting the purchase of Investor C Shares of a Fund by their customers; processing purchase, exchange, and redemption requests from customers and placing orders with the Distributor or the Transfer Agent; processing dividend and distribution payments from a Fund on behalf of customers; providing information periodically to customers, including information showing their positions in Investor C Shares; responding to inquiries from customers concerning their investment in Investor C Shares; and providing other similar services as may be reasonably requested. The shareholder services provided by Participating Organizations for which the Service Fee may be paid may include accounting with respect to Investor C Shares beneficially owned by customers or the information necessary for sub-accounting; arranging for bank wires; and other continuing personal services to holders of Investor C Shares.
Actual distribution expenses for Investor C Shares at any given time may exceed the Rule 12b-1 fees and payments received pursuant to contingent deferred sales charges. These unrecovered amounts plus interest thereon will be carried forward and paid from future Rule 12b-1 fees and payments received from contingent deferred sales charges. If the Investor C Plan were terminated or not continued, the Group would not be contractually obligated to pay for any expenses not previously reimbursed by the Group or recovered through contingent deferred sales charges.
Conflicts of interest restrictions may apply to the receipt by Participating Organizations of compensation from BISYS in connection with the investment of fiduciary assets in Investor C Shares. Institutions, including banks regulated by the Comptroller of the Currency, the Federal Reserve Board, or the Federal Deposit Insurance Corporation, and investment advisers and other money managers subject to the jurisdiction of the Securities and Exchange Commission (the "Commission"), the Department of Labor, or state securities commissions, are urged to consult their legal advisers before investing such assets in Investor C Shares.
As required by Rule 12b-1, the Investor C Plan was approved by the Trustees of the Group, including a majority of the trustees who are not "interested persons" (as defined in the 1940 Act) of the Group and who have no direct or indirect financial interest in the operation of the Plans or in any agreements related to the Plan ("Independent Trustees"). The Investor C Plan continues in effect as long as such continuance is specifically approved at least annually by the Group's Trustees, including a majority of the Independent Trustees.
The Investor C Plan may be terminated by a vote of a majority of the Independent Trustees, or by a vote of a majority of the holders of the outstanding voting securities of the Investor C Shares. Any change in the Investor C Plan that would increase materially the distribution expenses paid by a Fund requires shareholder approval; otherwise, the Plans may be amended by the Trustees, including a majority of the Independent Trustees by a vote cast in person at a meeting called for the purpose of voting upon the amendment. As long as the Investor C Plan is in effect, the selection or nomination of the Independent Trustees is committed to the discretion of the Independent Trustees.
First of America believes that it may perform the investment advisory services for the Group's Funds contemplated by the Investment Advisory Agreement and by this Prospectus without violating applicable banking laws or regulations. Future changes in federal or state statutes and regulations relating to permissible activities of banks or bank holding companies and their subsidiaries and affiliates as well as further judicial or administrative decisions or interpretations of present and future statutes and regulations could change the manner in which First of America could continue to perform such services for the Group. See the Statement of Additional Information ("MANAGEMENT OF THE GROUP--Glass-Steagall Act") for further discussion.
HOW TO BUY INVESTOR C SHARES
Investor C Shares of each Fund are continuously offered and may be purchased directly either by mail, by telephone, or by wire. Investor C Shares may also be purchased through a broker-dealer who has established a dealer agreement with the Distributor. Except as otherwise discussed below under "Other Information Regarding Purchases" and "Auto Invest Plan," the minimum initial investment in a Fund, based upon the public offering price, is $1,000; however, there is no minimum subsequent purchase. Shareholders will pay the next calculated net asset value after the receipt by the Distributor of an order to purchase Investor C Shares. In the case of an order for the purchase of Shares placed through a broker-dealer, it is the responsibility of the broker-dealer to transmit the order to the Distributor promptly.
To purchase Investor C Shares of any of the Funds by mail, complete an Account Application Form and return it along with a check or money order made payable to The Parkstone Group of Funds at the following address:
The Parkstone Group of Funds
An Account Application Form can be obtained by calling the Group at (800) 451-8377.
BY TELEPHONE OR BY WIRE
To purchase Investor C Shares of any of the Funds by telephone or by wire, your Account Application Form must have been previously received by the Distributor. To place an order by telephone or by wire call the Group's toll-free number (800) 451-8377. Payment for such Investor C Shares ordered by telephone may be made by check and must be received by the Group's custodian within seven calendar days of the telephone order. If payment for such Investor C Shares is not received within seven days, or if a check timely received does not clear, the purchase may be canceled and the investor could be liable for any losses or fees incurred. When purchasing Investor C Shares by wire, contact the Distributor for wire instructions.
Investor C Shares may also be purchased through procedures established by the Distributor in connection with the requirements of qualified accounts maintained by or on behalf of certain persons ("Customers") by First of America Bank Corporation or one of its affiliates. Investor C Shares of the Funds sold to First of America Bank Corporation or the affiliate acting in a fiduciary, advisory, custodial, or other similar capacity on behalf of Customers will normally be held of record by First of America Bank Corporation or the affiliate. With respect to such Investor C Shares so sold, it is the responsibility of the holder of record to transmit purchase or redemption orders to the Distributor and to deliver funds for the purchase thereof on a timely basis. Beneficial ownership of such Investor C Shares of the Funds will be recorded by First of America Bank Corporation or one of its affiliates and reflected in the account statements provided to Customers. First of America Bank Corporation or one of its affiliates may exercise voting authority for those Investor C Shares for which it has been granted authority by the Customer.
Investor C Shares of the Funds are purchased at the net asset value per share (see "VALUATION OF SHARES") next determined after receipt by the Distributor of an order to purchase Shares plus any applicable sales charge as described below. Purchases of Investor C Shares in any of the Funds will be effected only on a Business Day (as defined in "VALUATION OF SHARES") of the Funds. An order received prior to the Valuation Time on any Business Day will be executed at the net asset value determined as of the Valuation Time on the date of receipt. An order received after the Valuation Time on any Business Day will be executed at the net asset value determined as of the next Valuation Time on the next Business Day of that Fund.
The minimum initial investment amount referred to above may be waived if purchases are made in connection with Individual Retirement Accounts (IRAs), Keoghs or similar plans. For information on IRAs, Keoghs or similar plans, contact First of America Bank Corporation at (800) 544-6155. Due to the relatively high cost of handling small investments, the Group reserves the right to redeem involuntarily, at net asset value, the Investor C Shares of any Shareholder if, because of redemptions of Investor C Shares by or on behalf of the Shareholder (but not as a result of a decrease in the market price of such Investor C Shares, the deduction of any sales charge or the establishment of an account with less than $1,000 using the Auto Invest Plan), the account of such Shareholder in that Fund has a value of less than $1,000. Accordingly, an investor purchasing Investor C Shares of a Fund in only the minimum investment amount may be subject to such involuntary redemption if the investor thereafter redeems any such Investor C Shares. Before the Group exercises its right to redeem such Investor C Shares and to send the proceeds to the Shareholder, the Shareholder will be given notice that the value of the Investor C Shares in the Shareholder's account is less than the minimum amount and will be allowed 60 days to make an additional investment in the appropriate Fund in an amount which will increase the value of the account to at least $1,000.
Depending upon the terms of a particular Customer account, First of America Bank Corporation or one of its affiliates may charge a Customer account fees for services provided in connection with investment in a Fund. Information concerning these services and any charges may be obtained from First of America Bank Corporation or the affiliate. This Prospectus should be read in conjunction with any such information so received.
The Group reserves the right to reject any order for the purchase of its Shares in whole or in part.
Every Shareholder will receive a confirmation of each new transaction in the Shareholder's account, which will also show the total number of Investor C Shares of the respective Fund of the Group owned by the Shareholder. Confirmation of purchases and redemptions of Investor C Shares of the Funds by First of America Bank Corporation or one of its affiliates on behalf of a Customer may be obtained from First of America Bank Corporation or the affiliate. Shareholders may rely on these statements in lieu of certificates. Certificates representing Investor C Shares of the Funds will not be issued.
The Parkstone Group of Funds Auto Invest Plan enables Shareholders to make regular monthly or quarterly purchases of Investor C Shares through automatic deduction from their bank accounts. With Shareholder authorization, the Group's Transfer Agent will deduct the amount specified (subject to the applicable minimums) from the Shareholder's bank account which will automatically be invested in Shares at the public offering price on the date of such deduction (or the next Business Day thereafter, as defined under "VALUATION OF SHARES" below). The required minimum initial investment when opening an account using the Auto Invest Plan is $100; the minimum amount for subsequent investments in a Fund is $50. To participate in the Auto Invest Plan, Shareholders should complete the appropriate section of the account application or a supplemental Auto Invest application that can be acquired by calling the Group at (800) 451-8377. For a Shareholder to change the Auto Invest instructions, the request must be made in writing to the Group, c/o The Parkstone Group of Funds, 3435 Stelzer Road, Columbus, Ohio 43219 and may take up to 15 days to implement.
There is no sales charge imposed upon purchases of Investor C Shares, but investors may be subject to a contingent deferred sales charge of up to 4.00% when Investor C Shares are redeemed within four years after purchase. See "CONTINGENT DEFERRED SALES CHARGE" below.
From time to time dealers who receive dealer discounts and brokerage commissions from the Distributor may reallow all or a portion of such dealer discounts and brokerage commissions to other dealers or brokers.
In addition to amounts paid to dealers as a dealer concession out of the sales charge paid by investors, if any, the Distributor may, from time to time, at its expense or as an expense for which it may be reimbursed under the Plans, pay a bonus or other consideration or incentive to dealers who sell a minimum dollar amount of shares of a Fund during a specified period of time. The Distributor also may, from time to time, arrange for the payment of additional consideration to dealers not to exceed 6.25% of the offering price per share on all sales of Investor C Shares as an expense of the Distributor or for which the Distributor may be reimbursed under the Investor C Plan or upon receipt of a contingent deferred sales charge. Any such additional consideration or incentive program may be terminated at any time by the Distributor.
The Distributor, at its expense, may also provide additional compensation to dealers in connection with sales of Shares of any of the Funds and other Funds of the Group. Compensation may include financial assistance to dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising campaigns regarding one or more Funds of the Group, and/or other dealer-sponsored special events. In some instances, this compensation may be made available only to certain dealers whose representatives have sold or are expected to sell a significant amount of such shares. Compensation may include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their families to exotic locations within or outside of the United States for meetings or seminars of a business nature. The Distributor, at its expense, currently conducts an annual sales contest for dealers in connection with their sales of Shares of the Funds. Dealers may not use sales of a Fund's Shares to qualify for this compensation to the extent such may be prohibited by the laws of any state or any self-regulatory agency, such as the National Association of Securities Dealers, Inc.
Investor C Shares which are redeemed within one year of purchase will be subject to a contingent deferred sales charge equal to one percent of an amount equal to the lesser of the net asset value at the time of purchase of the Investor C Shares being redeemed or the net asset value of such Shares at the time of redemption.
Accordingly, a contingent deferred sales charge will not be imposed on amounts representing increases in net asset value above the net asset value at the time of purchase. In addition, a charge will not be assessed on Investor C Shares purchased through reinvestment of dividends or capital gains distributions.
Solely for purposes of determining the number of years which have elapsed from the time of purchase of any Investor C Shares, all purchases during a month will be aggregated and deemed to have been made on the last day of the month. In determining whether a contingent deferred sales charge is applicable to a redemption, the calculation will be made in the manner that results in the lowest possible charge being assessed. In this regard, it will be assumed that the redemption is first of Shares held for more than one year or Shares acquired pursuant to reinvestment of dividends or distributions. The charge will not be applied to dollar amounts representing an increase in the net asset value since the time of purchase.
For example, assume an investor purchased 100 Investor C Shares with a net asset value of $10 per share (i.e., at an aggregate net asset value of $1,000) and in the eleventh month after purchase, the net asset value per share is $12 and, during such time, the investor has acquired five additional Investor C Shares through dividend reinvestment. If at such time the investor makes his first redemption of 50 Investor C Shares (producing proceeds of $600), five of such Shares will not be subject to the charge because of dividend reinvestment. With respect to the remaining 45 Investor C Shares being redeemed, the charge will be applied only to the original cost of $10 per share and not to the increase in net asset value of $2 per share. Therefore, $450 of the $600 redemption proceeds will be subject to the charge of 1.00% ($4.50).
The contingent deferred sales charge is waived on redemptions of Investor C Shares (i) following the death or disability (as defined in the Internal Revenue Code of 1986, as amended, (the "Code")) of a shareholder (both shareholders in the case of joint accounts), (ii) to the extent that the redemption represents a minimum required distribution from an IRA or a Custodial Account under Code Section 403(b)(7) to a shareholder who has reached age 70 1/2, and (iii) to the extent the redemption represents the minimum distribution from retirement plans under Code Section 401(a) where such redemptions are necessary to make distributions to plan participants.
A Shareholder may elect to have all income dividends and capital gains distributions paid by check, reinvested in the Fund or reinvested in any of the Group's other Funds, without the payment of a sales charge (provided the other Fund is maintained at the minimum required balance).
The Directed Dividend Option may be modified or terminated by the Group at any time after notice to participating Shareholders. Participation in the Directed Dividend Option may be terminated or changed by the Shareholder at any time by writing the Distributor. The Directed Dividend Option is not available to participants in any of the Parkstone IRA's.
The exchange privilege enables Shareholders of Investor C Shares to acquire Investor C Shares that are offered by another fund of the Group with a different investment objective. This exchange privilege does not apply to other classes of Shares of a Fund. For example, holders of a Fund's Investor C Shares may not exchange their Shares for Investor A Shares, and holders of a Fund's Investor A Shares may not exchange their Shares for Investor C Shares.
Holders of Investor C Shares of one of the Group's Funds (including Investor C Shares acquired through reinvestment of dividends and distributions on such shares) may exchange those Investor C Shares at net asset value without any sales charge for Investor C Shares offered by any of the Group's other Funds, provided that the amount to be exchanged meets the applicable minimum investment requirements and the exchange is made in states where it is legally authorized.
An exchange is considered a sale of Shares and will result in a capital gain or loss for federal income tax purposes. A Shareholder may not include any sales charge on Shares of a Fund as a part of the cost of those Shares for purposes of calculating the gain or loss realized on an exchange of those Shares within 90 days of their purchase.
A Shareholder wishing to exchange his or her Shares may do so by contacting the Group at (800) 451-8377 or by providing written instructions to the Transfer Agent. Any Shareholder who wishes to make an exchange should obtain and review the current prospectus of the Fund of the Group in which the Shareholder wishes to invest before making the exchange. For a discussion of risks associated with unauthorized telephone exchanges, see "REDEEMING SHARES--By Telephone" below.
FACTORS TO CONSIDER WHEN SELECTING INVESTOR C SHARES
Before purchasing Investor C Shares of a Fund, investors should consider whether, during the anticipated life of their investment in the Fund, the accumulated Rule 12b-1 fee and potential contingent deferred sales charges on Investor C Shares prior to conversion (as described below) would be less than the initial sales charge and accumulated Rule 12b-1 fee on a traditionally-priced fund (the Group's Investor A Shares are an example of such a fund) purchased at the same time, and to what extent such differential would be offset by the higher yield of of a traditionally-priced fund. In this regard, to the extent that the sales charge for the Investor A Shares is waived or reduced by one of the methods described above, investments in Investor A Shares become more desirable.
Although Investor A Shares are subject to a Rule 12b-1 fee, they are not subject to the higher Rule 12b-1 fee applicable to Investor C Shares. For this reason, Investor A Shares can be expected to pay correspondingly higher dividends per share. However, because initial sales charges are deducted at the time of purchase, purchasers of Investor A Shares that do not qualify for waivers of or reductions in the initial sales charge would have less of their purchase price initially invested in a Fund than purchasers of Investor C Shares.
As described above, purchasers of Investor C Shares will have more of their initial purchase price invested. Any positive investment return on this additional invested amount would partially or wholly offset the expected higher annual expenses borne by Investor C Shares. Because the Group's future returns cannot be predicted, there can be no assurance that this will be the case. Investors in Investor C Shares would, however, own Shares that are subject to higher annual expenses and, for a one-year period, such Shares would be subject to a contingent deferred sales charge of 1.00% upon redemption. Investors expecting to redeem during this one-year period should compare the cost of the contingent deferred sales charge plus the aggregate annual Investor C Shares' Rule 12b-1 fees to the cost of the initial sales charge and Rule 12b-1 fee on the Investor A Shares. Over time, the expense of the annual Rule 12b-1 fee on the Investor C Shares may equal or exceed the initial sales charge and annual Rule 12b-1 fee applicable to Investor A Shares. For example, if net asset value remains constant, the aggregate Rule 12b-1 fees with respect to Investor C Shares on the Funds would equal or exceed the initial sales charge and aggregate Rule 12b-1 fees of Investor A Shares approximately eight years after the purchase. In order to reduce such fees of investors that hold Investor C Shares for more than nine years, Investor C Shares will be automatically converted to Investor A Shares, as described below, at the end of such nine-year period. This example assumes that the initial purchase of Investor A Shares would be subject to the maximum initial sales charge of 4.50%. This example does not take into account the time value of money which reduces the impact of the Investor B Shares' administrative and Rule 12b-1 fee on the investment, the benefit of having the additional initial purchase price invested during the period before it is effectively paid out as an administrative and Rule 12b-1 fee, fluctuations in net asset value or the effect of different performance assumptions.
Investor C Shares which have been outstanding for nine years after the end of the month in which the Shares were initially purchased will automatically convert to Investor A Shares and, consequently, will no longer be subject to the higher Rule 12b-1 fee. Such conversion will be on the basis of the relative net asset values of the two classes, without the imposition of any sales charge or other charge except that the Rule 12b-1 fees applicable to Investor A Shares shall thereafter be applied to such converted Shares. Such investors will then benefit from the lower Rule 12b-1 fees of Investor A Shares. Because the per share net asset value of the Investor A Shares may be higher than that of the Investor C Shares at the time of conversion, a Shareholder may receive fewer Investor A Shares than the number of Investor C Shares converted, although the dollar value will be the same. Reinvestments of dividends and distributions in Investor C Shares will not be considered a new purchase for purposes of the conversion feature.
The Investor A Shares into which the Investor C Shares will convert will differ only in the amount of the Rule 12b-1 fee assessed to the Shareholder. The Rule 12b-1 fee assessed to Investor A Shareholders is 0.25% of the average daily net assets of the Investor A Shares owned, rather than 1.00%.
If a Shareholder effects one or more exchanges among Investor C Shares of the Funds during the nine-year period, the holding period for Shares so exchanged will be counted toward such period.
HOW TO REDEEM YOUR INVESTOR C SHARES
Shareholders may redeem their Investor C Shares, subject to the contingent deferred sales charge described above, on any day that net asset value is calculated (see "VALUATION OF SHARES"). Redemptions will be effected at the net asset value per share next determined after receipt of a redemption request. Redemptions may be requested by mail or by telephone.
A written request for redemption must be received by the Transfer Agent in order to honor the request. The Transfer Agent's address is: BISYS Fund Services Ohio, Inc., c/o The Parkstone Group of Funds Department L-1270, Columbus, Ohio 43260-1270. The Transfer Agent will require a signature guarantee by an eligible guarantor institution. The signature guarantee requirement will be waived if all of the following conditions apply: (1) the redemption check is payable to the Shareholder(s) of record, and (2) the redemption check is mailed to the Shareholder(s) at the address of record. The Shareholder may also have the proceeds mailed to a commercial bank account previously designated on the Account Application. There is no charge for having redemption proceeds mailed to a designated bank account. To change the address to which a redemption check is to be mailed, a written request therefor must be received by the Transfer Agent. In connection with such request, the Transfer Agent will require a signature guarantee by an eligible guarantor institution.
For purposes of this policy, the term "eligible guarantor institution" shall include banks, brokers, dealers, credit unions, securities exchanges and associations, clearing agencies and savings associations as those terms are defined in the Securities Exchange Act of 1934. The Transfer Agent reserves the right to reject any signature guarantee if (1) it has reason to believe that the signature is not genuine, (2) it has reason to believe that the transaction would otherwise be improper, or (3) the guarantor institution is a broker or dealer that is neither a member of a clearing corporation nor maintains net capital of at least $100,000.
Investor C Shares may be redeemed by telephone if the Account Application Form reflects that the Shareholder has that capability. The Shareholder may have the proceeds mailed to his or her address or mailed or sent electronically to a commercial bank account previously designated on the Account Application Form. Under most circumstances, payments will be transmitted on the next Business Day. Electronic payment requests may be made by the Shareholder by telephone to the Group at (800) 451-8377. While the Transfer Agent currently does not charge a wire redemption fee, the Transfer Agent reserves the right to impose such a fee in the future.
The Group's Account Application Form provides that none of BISYS, the Transfer Agent, the Group or any of their affiliates or agents will be liable for any loss, expense or cost when acting upon any oral, wired or electronically transmitted instructions or inquiries believed by them to be genuine. While precautions will be taken, Shareholders bear the risk of any loss as the result of unauthorized telephone redemptions or exchanges believed by the Transfer Agent to be genuine. If the telephone feature was not originally selected, the Shareholder must provide written instructions to the Group to add it. The Group will employ reasonable procedures to confirm that instructions communicated by telephone are genuine; if these procedures are not followed, the Group may be liable for any losses due to unauthorized or fraudulent instructions. These procedures include recording all phone conversations, sending confirmations to Shareholders within 72 hours of the telephone transaction, verifying the account name and a shareholder's account number or tax identification number and sending redemption proceeds only to the address of record or to a previously authorized bank account. If, due to temporary adverse conditions, investors are unable to effect telephone transactions, shareholders may mail the request to the Transfer Agent.
The Auto Withdrawal Plan enables Shareholders of a Fund to make regular monthly or quarterly redemptions of Investor C Shares. With Shareholder authorization, the Transfer Agent will automatically redeem such Investor Shares at the net asset value on the fifteenth day of the month or quarter (or the next Business Day thereafter) and have the amount specified transferred according to the written instructions of the Shareholder. Shareholders participating in this Plan must maintain a minimum account balance of $1,000. The required minimum withdrawal is $100, monthly or quarterly.
The Auto Withdrawal Plan may be modified or terminated without notice. In addition, the Group may suspend a Shareholder's withdrawal plan without notice if the account contains insufficient funds to effect a withdrawal or in the event that the account balance is less than the minimum $1,000 amount.
To participate in the Auto Withdrawal Plan, Shareholders should call (800) 451-8377 for more information. Purchases of additional Investor Shares concurrently with withdrawals may be disadvantageous to certain Shareholders because of tax liabilities and sales charges. For a Shareholder to change the Auto Withdrawal instructions, the request must be made in writing to the Distributor and may take up to 15 days to implement.
OTHER INFORMATION REGARDING REDEMPTION OF SHARES
All or part of a Customer's Investor C Shares may be redeemed in accordance with instructions and limitations pertaining to his or her account at First of America Bank Corporation or one of its affiliates.
All redemption orders are effected at the net asset value per share next determined after the Investor Shares are properly tendered for redemption, as described above. The proceeds paid upon redemption of such Investor Shares in the Funds, less any applicable contingent deferred sales charge, may be more or less than the amount invested. Payment to Shareholders for such Investor Shares redeemed will be made within seven days after receipt by the Transfer Agent of the request for redemption. However, to the greatest extent possible, requests from Shareholders for next day payments upon redemption of Investor Shares will be honored if received by the Transfer Agent before the last Valuation Time on a Business Day or, if received after the last Valuation Time, within two Business Days, unless it would be disadvantageous to that Fund or its Shareholders to sell or liquidate portfolio securities in an amount sufficient to satisfy requests for payments in that manner.
At various times, the Group may be requested to redeem Investor C Shares for which it has not yet received good payment. In such circumstances, the forwarding of proceeds may be delayed until payment has been collected for the purchase of such Investor Shares which delay may be for 15 days or more. Such delay may be avoided if such Investor Shares are purchased by wire transfer of federal funds. The Group intends to pay cash for all Investor Shares redeemed, but under abnormal conditions which make payment in cash unwise, payment may be made wholly or partly in portfolio securities at their then market value equal to the redemption price. In such cases, an investor may incur brokerage costs in converting such securities to cash.
See the Statement of Additional Information ("ADDITIONAL PURCHASE AND REDEMPTION INFORMATION") for examples of when the right of redemption may be suspended.
The net asset value of each class of Shares of the Funds is determined and their Shares are priced as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time) on each Business Day (the "Valuation Time"). A "Business Day" is a day on which the New York Stock Exchange is open for trading and the Federal Reserve Bank of Chicago is open and any other day (other than a day on which no Shares are tendered for redemption and no order to purchase any Shares is received) during which there is sufficient trading in its portfolio instruments that its net asset value per share might be materially affected. Currently, the New York Stock Exchange or the Federal Reserve Bank of Chicago will not open in observance of the following holidays: New Year's Day, Martin Luther King , Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran's Day, Thanksgiving and Christmas.
Net asset value per share for a particular class for purposes of pricing sales and redemptions is calculated by dividing the value of all securities and other assets belonging to a Fund allocable to such class, less the liabilities charged to that Fund allocable to such class and any liabilities charged directly to that class, by the number of outstanding Shares of such class.
The securities in each Fund will be valued at market value. If market quotations are not available, the securities will be valued by a method which the Board of Trustees believes accurately reflects fair value. Foreign securities are valued based on quotations from the primary market in which they are traded and are translated from the local currency into U.S. dollars using current exchange rates. For further information about valuation of investments, see "NET ASSET VALUE" in the Statement of Additional Information.
Net income is declared monthly as a dividend to Shareholders at the close of business on the day of declaration and is generally paid monthly. Distributable net realized capital gains are distributed at least annually. A Shareholder will automatically receive all income dividends and capital gains distributions in additional full and fractional Shares at net asset value as of the date of declaration, unless the Shareholder elects to receive dividends or distributions in cash or elects to participate in the Parkstone Directed Dividend Option. Such election, or any revocation thereof, must be made in writing to the Transfer Agent at 3435 Stelzer Road, Columbus, Ohio 43219, and will become effective with respect to dividends and distributions having record dates after its receipt by the Transfer Agent.
Each Fund's net investment income available for distribution to the holders of Investor A Shares will be reduced by the amount of Rule 12b-1 fees payable to Participating Organizations under the Investor A
Plan. Each Fund's net investment income available for distribution to the holders of Investor A Shares may also be reduced by the amount of retail transfer agency fees payable to the Transfer Agent applicable to the Investor A Shares.
Each of the Funds of the Group is treated as a separate entity for Federal income tax purposes, intends to qualify as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"), for so long as such qualification is in the best interest of its shareholders and intends to distribute all of its net income and capital gains so that it is not required to pay Federal income taxes on amounts so distributed to shareholders.
To avoid Federal income tax, the Code requires each Fund to distribute each taxable year at least 90% of its investment company taxable income and at least 90% of its exempt-interest income. In addition, to avoid imposition of a nondeductible 4% excise tax, each Fund is required annually to distribute, prior to calendar year end, 98% of taxable ordinary income on a calendar year basis, 98% of capital gain net income realized in the twelve months preceding October 31, and the balance of undistributed taxable ordinary income and capital gain net income from the prior calendar year. Finally, in order to permit the Municipal Bond Fund and the Michigan Fund each to distribute exempt-interest dividends which Shareholders may exclude from their gross taxable income for federal income tax purposes, at least 50% of such Fund's total assets must consist of obligations the interest on which is exempt from federal income tax as of the close of each fiscal quarter of such Fund.
A Shareholder receiving a distribution of ordinary income and/or an excess of short-term capital gain over net long-term loss would treat it as a receipt of ordinary income. The dividends-received deduction for corporations will apply to the aggregate of such ordinary income distributions in the same proportion as the aggregate dividends from domestic corporations, if any, received by that Fund bear to its gross income. A Shareholder will not be able to take the dividends-received deduction unless that Shareholder holds the Shares for at least 46 days.
Distribution by a Fund of the excess of net long-term capital gain over net short-term capital loss is taxable to its Shareholders as long-term capital gain in the year in which it is received, regardless of how long the Shareholder has held Shares. Such distributions are not eligible for the dividends-received deduction.
Prior to purchasing Shares, the impact of dividends or capital gains distributions which are expected to be declared or have been declared, but have not been paid, should be carefully considered. Any such dividends or capital gains distributions paid shortly after a purchase of Shares prior to the record date will have the effect of reducing the per share net asset value of the Shares by the amount of the dividends or distributions. All or a portion of such dividends or distributions, although in effect a return of capital, is subject to tax.
Taxes may be imposed on the Funds, particularly the Balanced and International Funds, by foreign countries with respect to income received on foreign securities. If more than 50% of the value of a Fund's assets at the close of its taxable year consists of stocks or securities of foreign corporations, the Fund may elect to treat any foreign income taxes it paid as paid by its Shareholders. In this case, Shareholders generally will be required to include in income their pro rata share of such taxes, but will then be entitled to claim a credit or deduction for their share of such taxes. However, a particular Shareholder's ability to utilize such a credit will be subject to certain limitations imposed by the Code. The Funds will report to its Shareholders each year the amount, if any, of foreign taxes per share that it has elected to have treated as paid by its Shareholders.
Shareholders will be advised at least annually as to the Federal income tax consequences of distributions made during the year.
THE MUNICIPAL BOND FUND AND THE MICHIGAN FUND (THE "EXEMPT FUNDS")
Dividends derived from exempt-interest income may be treated by an Exempt Fund's Shareholders as items of interest excludable from their gross income. However, such dividends may be taxable to
Shareholders of the Municipal Bond Fund under state or local law as ordinary income even though all or a portion of the amounts may be derived from interest on tax-exempt obligations which, if realized directly, would be exempt from such taxes. In determining net exempt-interest income, expenses of the Exempt Fund are allocated to gross tax-exempt interest income in the proportion that the gross amount of such interest income bears to the Exempt Fund's total gross income, excluding net capital gains. (Shareholders are advised to consult a tax adviser with respect to whether exempt-interest dividends retain the exclusion if such Shareholder would be treated as a "substantial user" or a "related person" to such user under the Code.) Interest on indebtedness incurred or continued by a Shareholder to purchase or carry Shares is not deductible for federal income tax purposes if an Exempt Fund distributes exempt-interest dividends during the Shareholder's taxable year. It is anticipated that distributions from the Exempt Funds will not be eligible for the dividends received deduction for corporations.
Under the Code, if a Shareholder receives an exempt-interest dividend with respect to any Share and such Share is held for six months or less, any loss on the sale or exchange of such Share will be disallowed to the extent of the amount of such exempt-interest dividend, although the Treasury Department is authorized to issue regulations reducing the period to not less than 31 days for regulated investment companies that regularly distribute at least 90% of their net tax-exempt interest. No such regulations have been issued as of the date of this Prospectus. In addition, dividends attributable to interest on certain private activity bonds may have to be included in Shareholders' income for purposes of calculating alternative minimum tax. See "ADDITIONAL INFORMATION--Additional Tax Information Concerning the Tax-Free Fund, the Municipal Bond Fund and the Michigan Fund" in the Statement of Additional Information for more information regarding the federal alternative minimum tax.
To the extent dividends paid to Shareholders are derived from taxable income (for example, from interest on certificates of deposit or repurchase agreements) or from long-term or short-term capital gains, such dividends will be subject to federal income tax. A Shareholder should consult his or her own tax adviser for any special advice.
Distributions by the Michigan Fund to holders of Shares who are subject to the Michigan personal income tax and/or single business tax will not be subject to the Michigan personal income tax, single business tax or any Michigan city income tax to the extent that the distributions are attributable to income received by the Michigan Fund as interest from Michigan Municipal Securities or to the extent that the distributions are attributable to interest income and gains from the sale or disposal of United States obligations exempted from state taxation by the United States Constitution, treaties, and statutes. However, some or all of the other distributions by the Michigan Fund may be taxable by the State of Michigan or subject to applicable city income taxes, even if the distributions are attributable to income of the Michigan Fund derived from obligations of the United States or its agencies and instrumentalities. In addition, to the extent that a Shareholder of the Michigan Fund is obligated to pay state or local taxes outside of Michigan, dividends earned by an investment in the Michigan Fund may represent taxable income. Investments held in the Michigan Fund by a Michigan resident are not subject to the Michigan intangible personal property tax to the extent that the investments are attributable to bonds or other similar obligations of the State of Michigan or a political subdivision thereof, or obligations of the United States.
The Michigan Department of Treasury in a 1986 Revenue Administrative Bulletin has taken the position that the tax attributes of the securities held by a mutual fund flow through to the investors. Based on this position, the Michigan Department of Treasury has stated that mutual fund distributions attributable to interest from the fund's investment in direct U.S. government securities, as well as Municipal Securities, will not be subject to the Michigan personal income tax. The Michigan Department of Treasury also has stated that an owner of a share of a mutual fund will not be subject to intangible personal property tax to the extent that the pro rata share of the securities underlying the mutual fund would be exempt.
For Michigan personal income tax and intangible personal property tax purposes, taxable distributions from investment income and short term capital gains, if any, are taxable as ordinary income, whether received in cash or additional Shares, and are subject to the Michigan intangible personal property tax and to applicable Michigan city income taxes. The Michigan single business tax, a modified value added tax, is computed by applying the tax rate to a tax base determined by making certain adjustments to federal taxable income. Taxable distributions from investment income and gains, if any, may be included in federal taxable income or may comprise one of the adjustments made to the tax base. Distributions of cash, other property or additional Shares by the Michigan Fund to a Michigan single business taxpayer attributable to any gain realized from the sale, exchange or other disposition of Michigan Municipal Securities are includable in the Michigan single business taxpayer's adjusted tax base for purposes of the Michigan single business tax to the extent included in federal taxable income. Distributions of cash, other property or additional Shares by the Michigan Fund to a Michigan single business taxpayer are not subject to the Michigan single business tax to the extent that the distributions are attributable to interest income from and any gain realized from the sale, exchange or other disposition of U.S. Securities. Taxable long-term capital gains distributions are taxable as long-term capital gains for Michigan purposes irrespective of how long a Shareholder has held the Shares, except that such distributions reinvested in Shares of the Michigan Fund are exempt from the Michigan intangible personal property tax.
The foregoing is intended only as a brief summary of some of the important tax considerations generally affecting the Funds and their Shareholders. Potential investors are advised to consult their tax advisers concerning state and local taxes, which may differ from the Federal income taxes described above.
From time to time performance information for the Funds showing their average annual total return, aggregate total return and/or yield may be presented in advertisements, sales literature and shareholder reports. Such performance figures are based on historical earnings and are not intended to indicate future performance. Average annual total return of a class of Shares in a Fund will be calculated for the period since the establishment of the Funds and will reflect the imposition of the maximum sales charge, if any. Average annual total return is measured by comparing the value of an investment in a class of Shares in a Fund at the beginning of the relevant period to the redemption value of the investment at the end of the period (assuming immediate reinvestment of any dividends or capital gains distributions) and annualizing the result. Aggregate total return is calculated similarly to average annual total return except that the return figure is aggregated over the relevant period instead of annualized. Yield of a class of Shares will be computed by dividing a class of Shares' net investment income per share earned during a recent one-month period by that class of Shares' per share maximum offering price (reduced by any undeclared earned income expected to be paid shortly as a dividend) on the last day of the period and annualizing the result. Each Fund may also present its average annual total return, aggregate total return and yield, as the case may be, excluding the effect of a sales charge, if any.
In addition, from time to time the Funds may present their respective distribution rates for a class of Shares in supplemental sales literature which is accompanied or preceded by a prospectus and in Shareholder reports. Distribution rates will be computed by dividing the distribution per share of a class made by a Fund over a twelve-month period by the maximum offering price per share. The calculation of income in the distribution rate includes both income and capital gain dividends and does not reflect unrealized gains or losses, although a Fund may also present a distribution rate excluding the effect of capital gains. The distribution rate differs from the yield, because it includes capital gains which are often non-recurring in nature, whereas yield does not include such items. Distribution rates may also be presented excluding the effect of a sales charge, if any.
Standardized yield and total return quotations will be computed separately for Investor C Shares and the other classes of the Funds. Because of differences in the fees and/or expenses borne by different classes of Shares of the Funds, the net yield and total return on Investor C Shares may be different from that for another class of the same Fund. For example, net yield and total return on Investor C Shares is expected, at any given time, to be lower than the net yield and total return on Institutional Shares for the same period.
Investors may also judge the performance of any class of Shares or Fund by comparing or referencing it to the performance of other mutual funds with comparable investment objectives and policies through various mutual fund or market indices such as those prepared by various services which indices may be published by such services or by other services or publications, including, but published by Morningstar, Inc. In addition to performance information, general information about the Funds that appears in such publications may be included in advertisements, in sales literature and in reports to Shareholders. For further information regarding such services and publications, see "ADDITIONAL INFORMATION--Performance Comparisons" in the Statement of Additional Information.
Total return and yield are functions of the type and quality of instruments held in the portfolio, operating expenses, and market conditions. Consequently, total return and yield will fluctuate and are not necessarily representative of future results. Any fees charged by First of America Bank Corporation or any of its affiliates with respect to customer accounts for investing in shares of the Funds will not be included in performance calculations; such fees, if charged, will reduce the actual performance from that quoted. In addition, if First of America and BISYS voluntarily reduce all or a part of their respective fees, as further discussed below, the total return of such Fund will be higher than it would otherwise be in the absence of such voluntary fee reductions.
Shareholders of the Group may obtain current price, yield and other performance information on any of the Group's funds through FUNDATA(R), an Automated Voice Response System, 24 hours a day by calling (800) 451-8377 from any touch-tone phone. Shareholders may also speak directly with a Group representative, employed by BISYS, during regular business hours.
The Group was organized as a Massachusetts business trust in 1987 and currently offers sixteen Funds. The shares of each of the Funds of the Group, other than its four Money Market Funds, are offered in four separate classes: Investor A Shares, Investor B Shares, Investor C Shares and Institutional Shares. Shares of each of the four Money Market Funds of the Group are offered in two separate classes: Investor A Shares and Institutional Shares. Each Share represents an equal proportionate interest in a fund with other shares of the same fund, and is entitled to such dividends and distributions out of the income earned on the assets belonging to that Fund as are declared at the discretion of the Trustees. Shares are without par value.
Shareholders are entitled to one vote for each dollar of value invested and a proportionate fractional vote for any fraction of a dollar invested. Shareholders will vote in the aggregate and not by fund except as otherwise expressly required by law. For example, Shareholders of the Funds will vote in the aggregate with other shareholders of the Group with respect to the election of trustees and ratification of the selection of independent accountants. However, Shareholders of a Fund will vote as a fund, and not in the aggregate with other shareholders of the Group, for purposes of approval of that Fund's investment advisory agreement. In addition, holders of Investor C Shares of a Fund will vote as a class and not with holders of another class of that Fund with respect to the approval of its Investor C Plan.
An annual or special meeting of shareholders to conduct necessary business is not required by the Declaration of Trust, the 1940 Act or other authority except, under certain circumstances, to elect Trustees, amend the Declaration of Trust, approve an investment and sub-investment advisory agreements and to satisfy certain other requirements. To the extent that such a meeting is not required, the Group may elect not to have an annual or special meeting.
The Group has represented to the Commission that the Trustees will call a special meeting of shareholders for purposes of considering the removal of one or more Trustees upon written request therefor from shareholders holding not less than 10% of the outstanding votes of the Group. At such a meeting, a quorum of shareholders (constituting a majority of votes attributable to all outstanding shares of the Group), by majority vote, has the power to remove one or more Trustees.
As of June 30, 1995, First of America Bank Corporation, through its wholly owned subsidiaries, possessed on behalf of its underlying accounts voting or investment power with respect to more than
25% of the Shares of each of the Funds, and therefore may be presumed to control each Fund within the meaning of the 1940 Act.
In addition to Investor C Shares, the Group also offers Investor A, Investor B and Institutional Shares of the Funds under an exemptive order granted by the Commission. A salesperson or other person entitled to receive compensation for selling or servicing the Shares may receive different compensation with respect to one particular class of Shares over another in the same Fund. The amount of dividends payable with respect to other Classes of Shares will differ from dividends on Investor C Shares as a result of the different Investor C Plan fees applicable to Investor C Shares and because Investor C Shares may bear different retail transfer agency expenses. For further details regarding these other Classes of Shares, call the Group at (800) 451-8377.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
BISYS Fund Services Ohio, Inc., formerly known as The Winsbury Service Corporation, 3435 Stelzer Road, Columbus, Ohio 43219, serves as the Group's Transfer Agent pursuant to a Transfer Agency Agreement with the Group and receives a fee for such services. BISYS Fund Services Ohio, Inc. also provides certain accounting services for each of the Funds and receives a fee for such services. See "MANAGEMENT OF THE GROUP--Custodian, Transfer Agent and Fund Accounting Services" in the Statement of Additional Information for further information.
While BISYS Fund Services Ohio, Inc. is a distinct legal entity from BISYS (the Group's administrator and distributor), BISYS Fund Services Ohio, Inc. is considered to be an affiliated person of BISYS under the 1940 Act due to, among other things, the fact that BISYS Fund Services Ohio, Inc. and BISYS are both owned by The BISYS Group, Inc.
Shareholders will receive unaudited semi-annual reports and annual reports audited by independent public accountants.
Inquiries regarding the Group may be directed in writing to The Parkstone Group of Funds at 3435 Stelzer Road, Columbus, Ohio 43219, or by calling toll free (800) 451-8377.
No person has been authorized to give any information or to 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 Funds or their Distributor. This Prospectus does not constitute an offering by the Funds or by their Distributor in any jurisdiction in which such offering may not lawfully be made.
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THE PARKSTONE GROUP OF FUNDS First of America Investment Corporation SUB-INVESTMENT ADVISER (INTERNATIONAL AND BALANCED FUNDS) Gulfstream Global Investors, Ltd. BISYS Fund Services Ohio, Inc. The Bank of California, N.A. Howard & Howard Attorneys, P.C.
PARKSTONE HIGH INCOME EQUITY FUND
PARKSTONE LIMITED MATURITY BOND FUND PARKSTONE INTERMEDIATE GOVERNMENT OBLIGATIONS FUND PARKSTONE U.S. GOVERNMENT INCOME FUND
PARKSTONE MICHIGAN MUNICIPAL BOND FUND
PARKSTONE U.S. GOVERNMENT OBLIGATIONS FUND
Prospectus dated October 13, 1995
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THE PARKSTONE GROUP OF FUNDS
INSTITUTIONAL SHARES PROSPECTUS DATED OCTOBER 13, 1995
The Funds listed above are each of the fifteen currently-offered series of The Parkstone Group of Funds (the "Group") which offer Institutional Shares. This Prospectus explains concisely what you should know before investing in the Institutional Shares of the Funds listed above. Please read it carefully and keep it for future reference. You can find more detailed information about the Fund in the October 13, 1995 Statement of Additional Information, as amended from time to time. For a free copy of the Statement of Additional Information or other information, contact the Group at the number specified above. The Statement of Additional Information has been filed with the Securities and Exchange Commission and is incorporated into this Prospectus by reference.
THE SHARES OF THE THE PARKSTONE GROUP OF FUNDS ARE NOT OBLIGATIONS OR DEPOSITS OF FIRST OF AMERICA INVESTMENT CORPORATION OR ITS PARENT, AND THE INVESTMENTS DESCRIBED IN THIS PROSPECTUS ARE NOT ENDORSED, INSURED OR GUARANTEED BY FIRST OF AMERICA INVESTMENT CORPORATION, ITS PARENT OR THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY. INVESTMENTS IN THE PARKSTONE GROUP OF FUNDS INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVOLVED.
For information about the following subjects, consult the pages indicated on the table below.
The Parkstone Group of Funds (the "Group") is an open-end management investment company which offers to the public fifteen separate investment portfolios, fourteen of which are diversified portfolios and one of which is a non-diversified portfolio, each with different investment objectives. These funds enable the Group to meet a wide range of investment needs.
This Prospectus relates only to the Institutional Shares of the following Funds:
Parkstone Equity Fund (the "Equity Fund") Parkstone Small Capitalization Fund (the "Small Capitalization Fund") Parkstone International Discovery Fund (the "International Fund") Parkstone Balanced Fund (the "Balanced Fund") Parkstone High Income Equity Fund (the "High Income Equity Fund") Parkstone Bond Fund (the "Bond Fund") Parkstone Limited Maturity Bond Fund (the "Limited Maturity Bond Fund") Parkstone Intermediate Government Obligations Fund (the "Intermediate Parkstone U.S. Government Income Fund (the "Government Income Fund") Parkstone Municipal Bond Fund (the "Municipal Bond Fund") Parkstone Michigan Municipal Bond Fund (the "Michigan Fund") Parkstone Prime Obligations Fund (the "Prime Obligations Fund") Parkstone U.S. Government Obligations Fund (the "U.S. Government
Parkstone Treasury Fund (the "Treasury Fund") Parkstone Tax-Free Fund (the "Tax-Free Fund")
For convenience of reference, the above Funds are sometimes referred to as part of a general grouping. The Equity, Small Capitalization and International Funds are collectively referred to as the "Growth Funds". The Balanced and High Income Equity Funds are collectively referred to as the "Growth and Income Funds". The Bond, Limited Maturity Bond, Intermediate Government Obligations and Government Income Funds are collectively referred to as the Income Funds. The Municipal Bond and Michigan Funds are collectively referred to as "Tax-Free Income Funds". Finally, the Prime Obligations, U.S. Government Obligations, Treasury and Tax-Free Funds are collectively referred to as the "Money Market Funds".
The Trustees of the Group have divided each of the Funds' beneficial ownership into an unlimited number of transferable units called shares (the "Shares"). Each Fund of the Group offers multiple classes of Shares. This Prospectus describes one class of Shares of each Fund-Institutional Shares. Interested persons who wish to obtain a copy of the Prospectus of the other Classes of Shares of the Funds or a copy of the Group's most recent annual report may contact the Group at the telephone number shown above.
The investment objectives of each of the Funds are described in this Prospectus and are summarized in the Prospectus Summary. First of America Investment Corporation, Kalamazoo, Michigan ("First of America"), acts as the investment adviser to each of the Funds of the Group. To provide investment advisory services for the International and Balanced Funds for investments in foreign securities, First of America has entered into a sub-investment advisory agreement with Gulfstream Global Investors, Ltd., Dallas, Texas ("Gulfstream" or "Subadviser").
Institutional Shares of the following Funds of the Group:
These Funds represent fifteen separate investment portfolios of The Parkstone Group of Funds, a Massachusetts business trust (the "Group") which is registered as an open-end, management investment company.
Offering Price and Sales Charges
The public offering price of Institutional Shares of each Fund is equal to the net asset value per share, which, in the case of the Money Market Funds, the Group will seek to maintain at $1.00.
Under normal market conditions, each Fund will invest as described in the following table:
Risk Factors and Special Considerations
An investment in a mutual fund such as any of the Funds involves a certain amount of risk and may not be suitable for all investors. In addition, some investment policies of the Funds may entail certain risks (see "RISK FACTORS AND INVESTMENT TECHNIQUES").
First of America Investment Corporation ("First of America") serves as investment adviser, and, with respect to the International Fund and a portion of the Balanced Fund, Gulfstream Global Investors, Ltd. ("Gulfstream") or "Subadviser" serves as subadviser.
Dividends from net income are declared and paid monthly. Net realized capital gains are distributed at least annually.
BISYS Fund Services, formerly known as The Winsbury Company, ("BISYS") a partnership owned by The BISYS Group, Inc.
BISYS Fund Services Ohio, Inc., formerly known as The Winsbury Service Corporation (the "Transfer Agent"), a subsidiary of The BISYS Group, Inc.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)*
Absent the voluntary reduction of advisory fees, Management Fees and Total Expenses as a percentage of average net assets for the Balanced Fund would have been 1.00% and 1.50%, respectively. Absent the voluntary reduction of administration fees and advisory fees, Management Fees, Other Expenses and Total Expenses as a percentage of average net assets for the Bond Fund would have been .74%, .37% and 1.11%, respectively. For the Limited Maturity Bond Fund they would have been .74%, .34% and 1.08%, respectively. For the Intermediate Government Obligations Fund they would have been .74%, .39% and 1.13%, respectively. For the Government Income Fund they are estimated to be .74%, .43% and 1.17%, respectively. For the Municipal Bond Fund they would have been .74%, .35% and 1.09%, respectively. For the Michigan Fund they would have been .74%, .33% and 1.07%, respectively. Absent the voluntary reduction of administration fees, Other Expenses and Total Fund Operating Expenses as a percentage of average net assets for the Prime Obligations Fund would be .27% and .67%, respectively. For the U.S. Government Obligations Fund, they would be .29% and .69%, respectively. For the Treasury Fund they would be .34% and .74%, respectively. For the Tax-Free Fund, they would be .26% and .66%, respectively. (See "MANAGEMENT OF THE FUNDS--Investment Adviser and Subadviser" and
You would pay the following expenses on a $1,000 investment in Investor A Shares, assuming (1) 5% annual return and (2) redemption at the end of each time period:
The information set forth in the foregoing Fee Tables and examples relates only to Institutional Shares of the Funds. Each of the Funds also may offer other classes of Shares. The other classes of Shares of the Funds are subject to the same expenses except that the sales charges and level of Rule 12b-1 fees paid by holders of the different classes will differ.
The purpose of the above tables is to assist a potential purchaser of Institutional Shares of any Fund in understanding the various costs and expenses that an investor in a Fund will bear directly or indirectly. Such expenses do not include any fees charged by First of America or any of its affiliates to its customer accounts which may have invested in Institutional Shares of the Funds. See "MANAGEMENT OF THE FUNDS" and "GENERAL INFORMATION" for a more complete discussion of the annual operating expenses of each of the Funds. The expense information for Institutional Shares reflects current fees. THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The table below sets forth certain information concerning the investment results of the Institutional Shares of each of the Funds since its inception. Further financial information is included in the Statement of Additional Information and the Group's June 30, 1995 Annual Report to Shareholders.
The Financial Highlights for the periods presented below have been derived from financial statements audited by Coopers & Lybrand L.L.P. (Limited Liability Partnership), independent accountants for the Group, whose report thereon is included in the Annual Report.
On March 31, 1993, the Shareholders of all of the then-outstanding Funds of the Group approved the reclassification of such Fund's outstanding Shares into Investor A Shares and Institutional Shares. The financial information provided below and in the Annual Report include periods prior to such reclassification.
EQUITY FUND - INSTITUTIONAL SHARES
SMALL CAPITALIZATION FUND - INSTITUTIONAL SHARES
INTERNATIONAL DISCOVERY FUND - INSTITUTIONAL SHARES
BALANCED FUND - INSTITUTIONAL SHARES
HIGH INCOME EQUITY FUND - INSTITUTIONAL SHARES
BOND FUND - INSTITUTIONAL SHARES
LIMITED MATURITY BOND FUND - INSTITUTIONAL SHARES
INTERMEDIATE GOVERNMENT OBLIGATIONS FUND - INSTITUTIONAL SHARES
GOVERNMENT INCOME FUND - INSTITUTIONAL SHARES
MUNICIPAL BOND FUND - INSTITUTIONAL SHARES
MICHIGAN FUND - INSTITUTIONAL SHARES
PRIME OBLIGATIONS FUND - INSTITUTIONAL SHARES
U.S. GOVERNMENT OBLIGATIONS FUND - INSTITUTIONAL SHARES
TREASURY FUND - INSTITUTIONAL SHARES
TAX-FREE FUND - INSTITUTIONAL SHARES
* During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios would have been as indicated. (a) Period from commencement of operations. (b) On April 1, 1993 the shareholders of the Group exchanged their shares for either the Group's Investor A Shares or Institutional Shares. For the year ended June 30, 1993 the Financial Highlights ratios of expenses, ratios of net investment income, total return and the per share investment activities and distributions are presented on the basis whereby the Fund's net investment income, expenses, and distributions for the period July 1, 1992 through March 31, 1993 were allocated to each class of shares based upon the relative net assets of each class of shares as of April 1, 1993 and the results combined therewith the results of operations and distributions for each applicable class for the period April 1, 1993 through June 30, 1993. (c) Annualized. (d) Portfolio turnover is calculated on the basis of the Fund as a whole without distinguishing between classes of shares issued. (e) Not annualized.
The investment objectives of each of the Funds is set forth below under the headings describing the Funds. The investment objectives of each Fund are fundamental policies and may not be changed without a vote of the holders of a majority of the outstanding Shares of that Fund (as defined in the Statement of Additional Information). Other policies of a Fund may be changed without a vote of the holders of a majority of outstanding Shares of that Fund unless the policy is expressly deemed to be a fundamental policy or changeable only by such majority vote. There can be no assurance that the investment objectives of any Fund will be achieved. Depending upon the performance of a Fund's investments, the net asset value per share of that Fund may decrease instead of increase.
During temporary defensive periods as determined by First of America or the Subadviser, as the case may be, each of the Funds may hold up to 100% of its total assets in short-term obligations including domestic bank certificates of deposit, bankers' acceptances and repurchase agreements secured by bank instruments. However, to the extent that a Fund is so invested, its investment objective may not be achieved during that time. Uninvested cash reserves will not earn income.
THE EQUITY FUND AND SMALL CAPITALIZATION FUND
The investment objective of the Equity Fund is to seek growth of capital by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks. The investment objective of the Small Capitalization Fund is to seek growth of capital by investing primarily in a diversified portfolio of common stocks and securities convertible into common stocks of small to medium-sized companies.
Under normal market conditions, each of the Equity and Small Capitalization Funds will invest at least 80% of the value of its total assets in common stocks and securities convertible into common stocks of companies believed by First of America to be characterized by sound management and the ability to finance expected long-term growth. In addition, under normal market conditions, the Small Capitalization Fund will invest at least 65% of the value of its total assets in common stocks and securities convertible into common stocks of companies considered by First of America to have a market capitalization of less than $1 billion. Each of the Equity and Small Capitalization Funds may also invest up to 20% of the value of its total assets in preferred stocks, corporate bonds, notes, units of real estate investment trusts, warrants, and short-term obligations (with maturities of 12 months or less) consisting of commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit, repurchase agreements, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and demand and time deposits of domestic and foreign banks and savings and loan associations. Each of the Equity and Small Capitalization Funds may also hold securities of other investment companies and depositary or custodial receipts representing beneficial interests in any of the foregoing securities.
Subject to the foregoing policies, each of the Equity and Small Capitalization Funds may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper. For a discussion of risks associated with foreign securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Foreign Securities" herein.
The Equity Fund anticipates investing in growth-oriented, medium capitalization companies. These companies have typically exhibited consistent, above average growth in revenues and earnings, strong management, and sound and improving financial fundamentals. Often, these companies are market or industry leaders, have excellent products and/or services, and exhibit the potential for growth. Core holdings of the Equity Fund are in companies that participate in long-term growth industries, although these will be supplemented by holdings in non-growth industries that exhibit the desired characteristics.
The Small Capitalization Fund anticipates investing in dynamic small- to medium-sized companies that exhibit outstanding potential for superior growth. For purposes of the foregoing sentence, small-sized companies are considered to be those with capitalization of less than $1 billion and medium-sized companies are considered to be those with capitalization of $1 billion or more but less than $5 billion. The Small Capitalization Fund will limit its investment in securities of medium-sized companies to not more than 35% of the value of its total assets. Companies that participate in sectors that are identified as having long-term growth potential generally make up a substantial portion of such Fund's holdings. These companies often have established a market niche or have developed unique products or technologies that are expected to produce superior growth in revenues and earnings. As smaller capitalization stocks are quite volatile and subject to wide fluctuations in both the short and medium term, the Small Capitalization Fund may be fairly characterized more aggressive than a general equity fund such as the Equity Fund. Consistent with the foregoing, each of the Equity and Small Capitalization Funds will focus its investments in those companies and types of companies that First of America believes will enable such Fund to achieve its investment objective.
The investment objective of the International Fund is the long-term growth of capital.
Under normal market conditions the International Fund will invest at least 65% of its total assets in an internationally diversified portfolio of equity securities which trade on markets in countries other than the United States and which are issued by companies (i) domiciled in countries other than the United States, or (ii) that derive at least 50% of either their revenues or pre-tax income from activities outside of the United States, and (iii) which are small- or medium-sized companies on the basis of their capitalization.
Equity securities include common and preferred stock, securities (bonds and preferred stock) convertible into common stock, warrants and securities representing underlying international securities such as ADRs and EDRs.
Companies are deemed to be small- or medium-sized which at the time of purchase are of a size which would rank them in the lower half of a major market index in each country by weighted market capitalization and all equity securities listed in recognized secondary markets where such markets exist. In addition, in countries with less well-developed stock markets, where the range of investment opportunities is more restrictive, the equity securities of all listed companies will be eligible for investment. In major markets issuers could have capitalizations of up to approximately $10 billion while in smaller markets issuers would be eligible with capitalizations as low as approximately $200 million.
The International Fund may invest in securities of issuers in, but not limited to, Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Korea, Malaysia, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and United Kingdom. Normally the International Fund will invest at least 65% of its total assets in securities traded in at least three foreign countries, including the countries listed above. It is possible, although not currently anticipated, that up to 35% of the International Fund's assets could be invested in U.S. companies. In addition, the International Fund temporarily may invest cash in short-term debt instruments of U.S. and foreign issuers for cash management purposes or pending investment.
The investment objectives of the Balanced Fund are to seek current income, long-term capital growth and conservation of capital.
The Balanced Fund may invest in any type or class of security. Under normal market conditions the Balanced Fund will invest in common stocks, fixed income securities and securities convertible into common stocks (i.e., warrants, convertible preferred stock, fixed rate preferred stock, convertible fixed- income securities, options and rights). At least 25% of the value of the Balanced Fund's total assets will be invested in fixed income senior securities. Up to 15% of the value of the Balanced Fund's total assets may be invested in foreign securities.
The Balanced Fund's common stocks are held for the purpose of providing dividend income and long-term growth of capital. The Balanced Fund will invest in the common and preferred stocks of companies with capitalization of at least $100 million and which are traded either in established over-the-counter markets or on national exchanges. The Balanced Fund intends to invest primarily in those companies which are growth oriented and have exhibited consistent, above average growth in revenues and earnings. When choosing such stocks, the potential for long term capital appreciation will be the primary basis for selection.
The Balanced Fund's fixed income senior securities consist of bonds, debentures, notes, zero-coupon securities, mortgage-related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, certificates of deposit, time deposits, high quality commercial paper, bankers' acceptances and variable amount master demand notes. In addition, a portion of the Balanced Fund may from time to time be invested in first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Some of the securities in which the Balanced Fund invests may have warrants or options attached. The Balanced Fund may also invest in repurchase agreements.
The Balanced Fund expects to invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, as well as "stripped" U.S. Treasury obligations such as Treasury Receipts issued by the U.S. Treasury representing either future interest or principal payments ("Stripped Treasury Obligations"), and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. See "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations" below.
The Balanced Fund also expects to invest in bonds, notes and debentures of a wide range of U.S. corporate issuers. Such obligations, in the case of debentures, will represent unsecured promises to pay, in the case of notes and bonds, may be secured by mortgages on real property or security interests in personal property and will in most cases differ in their interest rates, maturities and times of issuance.
The Balanced Fund will invest only in corporate fixed income securities which are rated at the time of purchase within the four highest rating groups assigned by a nationally-recognized statistical rating organization ("NRSRO") or, if unrated, which First of America deems present attractive opportunities and are of comparable quality. For a description of the rating symbols of the NRSROs, see the Appendix to the Statement of Additional Information. For a discussion of fixed income securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES-- Medium Grade Securities" herein.
The Balanced Fund may hold some short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper, variable amount master demand notes, bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase agreements. The Balanced Fund may also invest in securities of other investment companies.
The Balanced Fund may also invest in obligations of the Export-Import Bank of the United States, in U.S. dollar denominated international bonds for which the primary trading market is in the United States
("Yankee Bonds"), or for which the primary trading market is abroad ("Eurodollar Bonds"), and in Canadian Bonds and bonds issued by institutions, such as the World Bank and the European Economic Community, organized for a specific purpose by two or more sovereign governments ("Supranational Agency Bonds"). The Balanced Fund's investments in foreign securities may be made either directly or through the purchase of American Depositary Receipts ("ADRs") and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in Canadian commercial paper ("CCP"), and in Europaper (U.S. dollar denominated commercial paper of a foreign issuer).
The amount invested in stock, bonds and cash reserves may be varied from time to time, depending upon First of America's assessment of business, economic and market conditions, including any potential advantage of price shifts between the stock market and the bond market. The Balanced Fund reserves the right to hold short-term securities in whatever proportion deemed desirable for temporary defensive periods during adverse market conditions as determined by First of America. However, to the extent that the Balanced Fund is so invested, its investment objectives may not be achieved during that time.
Like any investment program, the Balanced Fund entails certain risks. As a Fund investing primarily in common stocks the Balanced Fund is subject to stock market risk, i.e., the possibility that stock prices in general will decline over short or even extended periods.
Since the Balanced Fund also invests in bonds, investors in the Balanced Fund are also exposed to bond market risk, i.e., fluctuations in the market value of bonds. Bond prices are influenced primarily by changes in the level of interest rates. When interest rates rise, the prices of bonds generally fall; conversely, when interest rates fall, bond prices generally rise. While bonds normally fluctuate less in price than stock, there have been extended periods of cyclical increases in interest rates that have caused significant declines in bond prices.
From time to time, the stock and bond markets may fluctuate independently of one another. In other words, a decline in the stock market may in certain instances be offset by a rise in the bond market, or vice versa. As a result the Balanced Fund, with its balance of common stock and bond investments, is expected to entail less investment risk (and a potentially smaller investment return) than a mutual fund investing exclusively in common stocks.
THE HIGH INCOME EQUITY FUND
The investment objective of the High Income Equity Fund is to seek current income by investing in a diversified portfolio of high quality, dividend-paying common stocks and securities convertible into common stocks. A secondary investment objective of High Income Equity Fund is growth of capital.
The High Income Equity Fund, under normal market conditions, will invest at least 80% of the value of its total assets in common stocks and securities convertible into common stocks of companies believed by First of America to be characterized by sound management, the ability to finance expected growth and the ability to pay above average dividends. The High Income Equity Funds may also invest up to 20% of the value of its total assets in preferred stocks, corporate bonds, notes, units of real estate investment trusts, warrants, and short-term obligations (with maturities of 12 months or less) consisting of commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit, repurchase agreements, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and demand and time deposits of domestic and foreign banks and savings and loan associations. The High Income Equity Funds may also hold securities of other investment companies and depositary or custodial receipts representing beneficial interests in any of the foregoing securities.
Subject to the foregoing policies, the High Income Equity Funds may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper. For a discussion of risks associated with foreign securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Foreign Securities" herein.
The High Income Equity Fund anticipates investing in securities that currently have a high dividend yield, with the anticipation that the dividend will remain constant or be increased in the future. These securities generally represent the core holdings of this Fund. However, these holdings are balanced with lower yielding but higher growth-oriented securities to achieve portfolio balance. All securities must provide current income. Given its bias towards income, the High Income Equity Fund may be considered the more conservative than growth-oriented equity funds such as the Group's Equity and Small Capitalization Funds.
Consistent with the foregoing, the High Income Equity Fund will focus its investments in those companies and types of companies that First of America believes will enable such Fund to achieve its investment objective.
THE BOND FUND AND LIMITED MATURITY BOND FUND
The investment objective of the Bond Fund is to seek current income as well as preservation of capital by investing in a portfolio of high and medium grade fixed-income securities. The investment objective of the Limited Maturity Bond Fund is to seek current income as well as preservation of capital by investing in a portfolio of high and medium grade fixed-income securities with remaining maturities of six years or less.
Under normal market conditions, the Bond Fund will invest at least 80% of the value of its total assets in bonds, debentures, notes with remaining maturities at the time of purchase of one year or more, zero-coupon securities, mortgage-related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, debt securities convertible into, or exchangeable for, common stocks, first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Bond Fund will invest in state and municipal securities when, in the opinion of First of America, their yields are competitive with comparable taxable debt obligations. In addition, up to 20% of the value of the Bond Fund's total assets may be invested in preferred stocks, notes with remaining maturities at the time of purchase of less than one year, short-term debt obligations consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, repurchase agreements, securities of other investment companies, and Guaranteed Investment Contracts ("GICs") issued by insurance companies, as more fully described below. The Bond Fund intends that under normal market conditions its portfolio will maintain an average weighted maturity of eight to twelve years. However, the Bond Fund may extend or shorten the average weighted maturity of its portfolio depending upon anticipated changes in interest rates or other relevant market factors. Some of the securities in which the Bond Fund invests may have warrants or options attached.
Under normal market conditions, the Limited Maturity Bond Fund will invest at least 80% of the value of its total assets in the following securities which have remaining maturities of six years or less: bonds, debentures, notes with remaining maturities at the time of purchase of one year or more, zero-coupon securities, mortgage related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, debt securities convertible into, or exchangeable for, common stocks, first mortgage loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Limited Maturity Bond Fund will invest in state and municipal securities when, in the opinion of First of America, their yields are competitive with comparable taxable debt obligations. In addition, up to 20% of the value of the Limited Maturity Bond Fund's total assets may be invested in the debt securities listed above without regard to maturity, preferred stocks, notes with remaining maturities at the time of purchase of less than one year, short-term debt obligations consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, repurchase agreements, securities of other investment companies and GICs. Under normal market conditions, the Limited Maturity Bond Fund expects to maintain a dollar-weighted average portfolio maturity of its debt securities of three years or less. Some of the securities in which the Limited Maturity Bond Fund invests may have warrants or options attached.
The Bond Fund and Limited Maturity Bond Fund each expects to invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, as well as Stripped Treasury Obligations, and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. See "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations" below.
The Bond Fund and the Limited Maturity Bond Fund each also expects to invest in bonds, notes and debentures of a wide range of U.S. corporate issuers. Such obligations, in the case of debentures, will represent unsecured promises to pay, in the case of notes and bonds, may be secured by mortgages on real property or security interests in personal property and will in most cases differ in their interest rates, maturities and times of issuance.
The Bond Fund and the Limited Maturity Bond Fund each will invest only in corporate debt securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or, if unrated, which First of America deems present attractive opportunities and are of comparable quality. For a discussion of debt securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium-Grade Securities" herein.
The Bond Fund and the Limited Maturity Bond Fund each may hold some short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase agreements. The Bond Fund and the Limited Maturity Bond Fund each may also invest in securities of other investment companies or in GICs.
The Bond Fund and the Limited Maturity Bond Fund each may also invest in obligations of the Export-Import Bank of the United States, in Yankee Bonds, in Eurodollar Bonds, in Canadian Bonds and in Supranational Agency Bonds. Each of the Bond Fund and Limited Maturity Bond Fund may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper.
An increase in interest rates will generally reduce the value of the investments in the Bond Fund and the Limited Maturity Bond Fund and a decline in interest rates will generally increase the value of those investments. Depending upon the prevailing market conditions, First of America may purchase debt securities at a discount from face value, which produces a yield greater than the coupon rate. Conversely, if debt securities are purchased at a premium over face value, the yield will be lower than the coupon rate. In making investment decisions for the Bond Fund, First of America will consider many factors other than current yield, including the preservation of capital, the potential for realizing capital appreciation, maturity, and yield to maturity. In making investment decisions for the Limited Maturity Bond Fund, First of America will consider many factors other than current yield, including the preservation of capital, maturity, and yield to maturity.
By seeking to maintain a dollar-weighted average portfolio maturity of three years or less, the Limited Maturity Bond Fund attempts to minimize the fluctuation in its Shares' net asset value relative to those funds which invest in longer term obligations.
THE INTERMEDIATE GOVERNMENT OBLIGATIONS FUND
The investment objective of the Intermediate Government Obligations Fund is to seek current income with preservation of capital by investing in U.S. Government securities with remaining maturities of twelve years or less.
Under normal market conditions, the Intermediate Government Obligations Fund will invest at least 80% of its total assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and with remaining maturities of twelve years or less, although up to 20% of the value of its total assets may be invested in debt securities, preferred stocks and other investments without regard to maturity, except as set forth below. Under normal market conditions, the Intermediate Government Obligations Fund expects to maintain a dollar-weighted average portfolio maturity of its debt securities of three to ten years.
The types of U.S. Government obligations invested in by the Intermediate Government Obligations Fund will include obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Treasury, such as Treasury bills, notes, bonds and certificates of indebtedness, and Government Securities, as described below in "RISK FACTORS AND INVESTMENT TECHNIQUES-- Government Obligations."
The Intermediate Government Obligations Fund may also invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities, as more fully described below under "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations."
By seeking to maintain a dollar-weighted average portfolio maturity of three to ten years, the Intermediate Government Obligations Fund attempts to minimize the fluctuation in its Shares' net asset value relative to those funds which invest in longer term obligations.
The investment objective of the Government Income Fund is to provide shareholders with a high level of current income consistent with prudent investment risk.
Under normal market conditions, the Government Income Fund will invest at least 65% of its total assets in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, although up to 35% of the value of its total assets may be invested in debt securities and preferred stocks of nongovernmental issuers. Consistent with the foregoing, under current market conditions, the Government Income Fund intends to invest up to 80% of the value of its total assets in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Government Income Fund also may invest up to 35% of its total assets in mortgage-related securities issued by nongovernmental entities and in other securities described below. For more information, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Mortgage-Related Securities," below.
The types of U.S. Government obligations, including mortgage-related securities, invested in by the Government Income Fund will include obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Treasury, such as Treasury bills, notes and bonds, Stripped Treasury Obligations and Government Securities, as described below in "RISK FACTORS AND INVESTMENT TECHNIQUES--Government Obligations".
The Government Income Fund may also hold short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper rated at the time of purchase within the top two categories by an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase and reverse repurchase agreements. The Government Income Fund may also invest in corporate debt securities which are rated at the time of purchase within the top three categories of an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality.
The investment objective of the Municipal Bond Fund is to seek current interest income which is exempt from federal income taxes as well as preservation of capital. The investment objectives of the Michigan Fund are to seek income which is exempt from federal income tax and Michigan state income and intangibles tax, although such income may be subject to the federal alternative minimum tax when received by certain Shareholders, and to seek preservation of capital.
Under normal market conditions and as a fundamental policy, at least 80% of the net assets of the Municipal Bond Fund will be invested in a diversified portfolio of Municipal Securities and at 80% of the net assets of the Michigan Fund will be invested in a portfolio of Michigan Municipal Securities.
"Municipal Securities" include obligations consisting of bonds, notes and commercial paper, issued by or on behalf of states, territories and possessions of the United States, the District of Columbia and other political subdivisions, agencies, instrumentalities and authorities, the interest on which is both exempt from federal income taxes and not treated as a preference item for individuals for purposes of the federal alternative minimum tax. "Michigan Municipal Securities" include debt obligations, consisting of notes, bonds and commercial paper, issued by or on behalf of the State of Michigan, its political subdivisions, municipalities and public authorities, the interest on which is, in the opinion of bond counsel to the issuer, exempt from federal income tax and Michigan state income and intangibles taxes (but may be treated as a preference item for individuals for purposes of the federal alternative minimum tax) and debt obligations issued by the Government of Puerto Rico or the U.S. territories and possessions of Guam and the U.S. Virgin Islands and such other governmental entities whose debt obligations, either by law or treaty, generate interest income which is exempt from federal and Michigan state income and intangibles tax. For more information regarding Municipal Securities and Michigan Municipal Securities, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Municipal Securities," below.
Under normal market conditions, at least 65% of the net assets of each of the Municipal Bond Fund and the Michigan Fund will be invested in Municipal Securities (Michigan Municipal Securities in the case of the Michigan Fund) consisting of bonds and notes with remaining maturities at the time of purchase of one year or more. Quality is the primary consideration in selecting Michigan Municipal Securities for investment by the Michigan Fund.
The Municipal Bond Fund also intends that under normal market conditions its portfolio will maintain an average weighted maturity of approximately eight to ten years and an average weighted rating of AA/Aa. The Michigan Fund, under normal market conditions, will be invested in long-term Michigan Municipal Securities and that the average weighted maturity of such investments will be 5 to 12 years, although the Michigan Fund may invest in Michigan Municipal Securities of any maturity. However, First of America may extend or shorten the average weighted maturity of its portfolio depending upon anticipated changes in interest rates or other relevant market factors. In addition, the average weighted rating of a Tax-Free Income Fund's portfolio may vary depending upon the availability of suitable Municipal Securities or other relevant market factors.
The Michigan Fund invests in Michigan Municipal Securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or rated within the two highest rating groups assigned by an NRSRO in the case of notes, tax-exempt commercial paper or variable rate demand obligations. The Michigan Fund may also purchase Michigan Municipal Securities which are unrated at the time of purchase but are determined to be of comparable quality by First of America pursuant to guidelines approved by the Group's Board of Trustees. The applicable Michigan Municipal Securities ratings are described in the Appendix to the Statement of Additional Information. For a description of debt securities rated within the fourth highest rating group assigned by the NRSROs, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium-Grade Securities" herein.
Interest income from certain types of municipal securities may be subject to federal alternative minimum tax. The Tax-Free Income Funds will not treat these bonds as "Municipal Securities" or "Michigan Municipal Securities" for purposes of measuring compliance with the 80% tests described above. To the extent the Tax-Free Income Funds invests in these bonds, individual shareholders, depending own tax status, may be subject to alternative minimum tax on that part of the Tax-Free Income Fund's distributions derived from these bonds. For further information relating to the types of municipal securities which will be included in income subject to alternative minimum tax, see "ADDITIONAL INFORMATION-- Additional Tax Information Concerning the Tax-Free Fund, the Municipal Bond Fund and the Michigan Fund" in the Statement of Additional Information.
In addition, investments may be made in taxable obligations if, for example, suitable tax-exempt obligations are unavailable or if acquisition of U.S. Government or other taxable securities is deemed appropriate for temporary defensive purposes as determined by First of America to be warranted due to market conditions. Such taxable obligations consist of Government Securities, certificates of deposit, time deposits and bankers' acceptances of selected banks, commercial paper meeting the Tax-Free Income Fund's quality standards (as described above) for tax-exempt commercial paper, and such taxable obligations as may be subject to repurchase agreements. These obligations are described further in the Statement of Additional Information. Under such circumstances and during the period of such investment, the affected Tax-Free Income Fund may not achieve its stated investment objectives.
SPECIAL CONSIDERATIONS RELATING TO THE MICHIGAN FUND
Although the Municipal Bond Fund may invest more than 25% of its net assets in (i) Municipal Securities whose issuers are in the same state, (ii) Municipal Securities the interest on which is paid solely from revenues of similar projects, and (iii) private activity bonds, it does not presently intend to do so on a regular basis. To the extent the Municipal Bond Fund's assets are concentrated in Municipal Securities that are payable from the revenues of similar projects or are issued by issuers located in the same state, or are concentrated in private activity bonds, the Municipal Bond Fund will be subject to the peculiar risks presented by the laws and economic conditions relating to such states, projects and bonds to a greater extent than it would be if its assets were not so concentrated.
Because the Michigan Fund invests primarily in securities issued by the State of Michigan and its political subdivisions, municipalities and public authorities, the Michigan Fund's performance is closely tied to the general economic conditions within the State as a whole and to the economic conditions within particular industries and geographic areas represented or located within the State. However, the Michigan Fund attempts to diversify, to the extent First of America deems appropriate, among issuers and geographic areas in the State of Michigan.
The Michigan Fund's classification as a "non-diversified" investment company means that the proportion of the Michigan Fund's assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. However, the Michigan Fund intends to conduct its operations so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended, which requires the Michigan Fund generally to invest, with respect to 50% of its total assets, not more than 5% of such assets in the obligations of a single issuer; as to the remaining 50% of its total assets, the Michigan Fund is not so restricted. In no event, however, may the Michigan Fund invest more than 25% of its total assets in the obligations of any one issuer. Compliance with this requirement is measured at the close of each quarter of the Michigan Fund's taxable year. Since a relatively high percentage of the Michigan Fund's assets may be invested in the obligations of a limited number of issuers, some of which may be within the same economic sector, the Michigan Fund's portfolio securities may be more susceptible to any single economic, political or regulatory occurrence than the portfolio securities of a diversified investment company.
The investment objective of each of the Prime Obligations Fund, the U.S. Government Obligations Fund and the Treasury Fund is to seek current income with liquidity and stability of principal. The investment objective of the Tax-Free Fund is to seek as high a level of current interest income free from federal income taxes as is consistent with the preservation of capital and relative stability of principal.
The Prime Obligations Fund invests in high-quality money market instruments, including Municipal Securities and other instruments deemed to be of comparable high quality as determined by the Board of Trustees. The U.S. Government Obligations Fund invests at least 65% of the value of its total assets in short-term U.S. Treasury bills, notes, and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Treasury Fund, under normal market conditions invests exclusively in obligations issued or guaranteed by the U.S. Treasury, its agencies or instrumentalities and in repurchase agreements related to such securities. As a matter of fundamental policy, under normal market conditions, at least 80% of the Tax-Free Fund's total assets will be invested in Municipal Securities.
The U.S. Government Obligations Fund may invest up to 35% of the value of its total assets in high-quality money market instruments, including Municipal Securities, and other instruments deemed to be of comparable high quality as determined by the Board of Trustees.
The Tax-Free Fund may invest up to 20% of its total assets in obligations, the interest on which is either subject to federal income taxation or treated as a preference item for purposes of the federal alternative minimum tax ("Taxable Obligations"). If deemed appropriate for temporary defensive purposes, the Tax- Free Fund may increase its holdings in Taxable Obligations to over 20% of its total assets and may also hold uninvested cash reserves pending investment. Taxable Obligations may include obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities (some of which may be subject to repurchase agreements), certificates of deposit and bankers' acceptances of selected banks, and commercial paper meeting the Tax-Free Fund's quality standards (as described below) for tax-exempt commercial paper. These obligations are described further in the Statement of Additional Information.
As a money market fund, each Money Market Fund invests exclusively in United States dollar denominated instruments which the Trustees of the Group and the Money Market Fund's investment adviser determine present minimal credit risks and which at the time of acquisition are rated by one or more appropriate nationally recognized statistical rating organizations ("NRSRO") (e.g., Standard & Poor's Corporation and Moody's Investors Service, Inc.) in one of the two highest rating categories for short-term debt obligations or, if unrated, are of comparable quality. In addition, the U.S. Government Obligations Fund, the Prime Obligations Fund and the Treasury Fund each diversify its investments so that, with minor exceptions and except for United States Government securities, not more than five percent of its total assets is invested in the securities of any one issuer, not more than five percent of its total assets is invested in securities of all issuers rated by the NRSRO at the time of investment in the second highest rating category for short-term debt obligations or deemed to be of comparable quality to securities rated in the second highest rating categories for short-term debt obligations ("Second Tier
Securities") and not more than the greater of one percent of total assets or one million dollars is invested in the securities of one issuer that are Second Tier Securities. All securities or instruments in which a Money Market Fund invests have remaining maturities of 397 calendar days (thirteen months) or less. The dollar-weighted average maturity of the obligations in a Money Market Fund will not exceed 90 days.
The Prime Obligations Fund and, within the limitations described above, the U.S. Government Obligations Fund may invest in short-term promissory notes issued by corporations (including variable amount master demand notes) rated at the time of purchase within the two highest categories assigned by an NRSRO or, if not rated, found by the Group's Board of Trustees to be of comparable quality to instruments that are so rated. Instruments may be purchased in reliance upon a rating only when the rating organization is not affiliated with the issuer or guarantor of the instrument. For a description of the rating symbols of the NRSROs as used in this paragraph, see the Appendix to the Statement of Additional Information. The Prime Obligations Fund may also invest in CCP and in Europaper.
The Tax-Free Fund may acquire zero coupon obligations, which have greater price volatility than coupon obligations and which will not result in the payment of interest until maturity.
Although the Tax-Free Fund presently does not intend to do so on a regular basis, it may invest more than 25% of its assets in Municipal Securities which are related in such a way that an economic, business, or political development or change affecting one such security would likewise affect the other Municipal Securities. Examples of such securities are obligations the repayment of which is dependent upon similar types of projects or projects located in the same state. Such investments would be made only if deemed necessary or appropriate by the Tax-Free Fund's investment adviser. To the extent that the Tax-Free Fund's assets are concentrated in Municipal Securities that are so related, the Tax-Free Fund will be subject to the peculiar risks presented by such Municipal Securities, such as negative developments in a particular industry or state, to a greater extent than it would be if the Tax-Free Fund's assets were not so concentrated.
Variable amount master demand notes in which the Prime Obligations Fund and the U.S. Government Obligations Fund may invest are unsecured demand notes that permit the indebtedness thereunder to vary, and that provide for periodic adjustments in the interest rate according to the terms of the instrument. Because master demand notes are direct lending arrangements between the Fund and the issuer, they are not normally traded. Although there is no secondary market in the notes, the Fund may demand payment of principal and accrued interest at any time. While the notes are not typically rated by credit rating agencies, issuers of variable amount master demand notes (which are normally manufacturing, retail, financial, and other business concerns) must satisfy the same criteria as set forth above for commercial paper. First of America will consider the earning power, cash flow, and other liquidity ratios of the issuers of such notes and will continuously monitor their financial status and ability to meet payment on demand. In determining average weighted portfolio maturity, a variable amount master demand note will be deemed to have a maturity equal to the period of time remaining until the principal amount can be recovered from the issuer through demand. The period of time remaining until the principal amount can be recovered under a variable master demand note shall not exceed seven days.
Similarly, the Tax-Free Fund, within the limitations described above and subject to the quality standards for tax-exempt commercial paper described below, may invest in commercial paper.
RISK FACTORS AND INVESTMENT TECHNIQUES
Like any investment program, an investment in a Fund entails certain risks. The Funds will not acquire portfolio securities issued by, make savings deposits in, or enter into repurchase, reverse repurchase or dollar roll agreements with First of America Bank-Michigan, N.A. (the parent corporation of First of America), BISYS, or their affiliates, and will not give preference to First of America Bank-Michigan, N.A.'s correspondents with respect to such transactions, securities, savings deposits, repurchase agreements, reverse repurchase agreements and dollar roll agreements.
Some of the investment techniques utilized by First of America and, in the case of the International and Balanced Funds, the Subadviser in the management of each of the Funds (with the exception of the Treasury Fund) involve complex securities sometimes referred to as "derivatives." Among such securities are put and call options, foreign currency transactions and futures contracts, all of which are described below. The Adviser and Subadviser believe that such complex securities may, in some circumstances, play a valuable role in successfully implementing each Fund's investment strategy and achieving its goals. However, because complex securities and the strategies for which they are used, are by their nature complicated, they present substantial opportunities for misunderstanding and misuse. To guard against these risks, the Adviser and Subadviser will utilize complex securities primarily for hedging, not speculative, purposes and only after careful review of the unique risk factors associated with each such security.
The International Fund invests primarily in the securities of foreign issuers. The Balanced Fund may invest up to 15% of its total assets in foreign securities. The Equity, Small Capitalization and High Income Equity Funds may also invest in foreign securities as permitted by their respective investment policies. Each of the Bond Fund and Limited Maturity Bond Fund may also invest up to 25% of its net assets in foreign securities either directly or through the purchase of ADRs and may also invest in securities issued by foreign branches of U.S. banks and foreign banks, in CCP, and in Europaper. The U.S. Government Obligations Fund, the Prime Obligations Fund and the Tax-Free Fund may invest in foreign securities by purchasing ECDs, ETDs, CTDs, Yankee CDs, CCP, and Europaper.
Investment in foreign securities is subject to special investment risks that differ in some respects from those related to investments in securities of U.S. domestic issuers. Such risks include political, social or economic instability in the country of the issuer, the difficulty of predicting international trade patterns, the possibility of the imposition of exchange controls, expropriation, limits on removal of currency or other assets, nationalization of assets, foreign withholding and income taxation, and foreign trading practices (including higher trading commissions, custodial charges and delayed settlements). Such securities may be subject to greater fluctuations in price than securities issued by U.S. corporations or issued or guaranteed by the U.S. government, its agencies or instrumentalities. The markets on which such securities trade may have less volume and liquidity, and may be more volatile than securities markets in the U.S. In addition, there may be less publicly available information about a foreign company than about a U.S. domiciled company. Foreign companies generally are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to U.S. domestic companies. There is generally less government regulation of securities exchanges, brokers and listed companies abroad than in the U.S. Confiscatory taxation or diplomatic developments could also affect investment in those countries. In addition, foreign branches of U.S. banks, foreign banks and foreign issuers may be subject to less stringent reserve requirements and to different accounting, auditing, reporting, and recordkeeping standards than those applicable to domestic branches of U.S. banks and U.S. domestic issuers.
In many instances, foreign debt securities may provide higher yields than securities of domestic issuers which have similar maturities and quality. Under certain market conditions these investments may be less liquid than the securities of U.S. corporations and are certainly less liquid than securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. Finally, in the event of a default of any such foreign debt obligations, it may be more difficult for a Fund to obtain or to enforce a judgment against the issuers of such securities. If a security is denominated in foreign currency, the value of the security to the Fund will be affected by changes in currency exchange rates and in exchange control regulations, and costs will be incurred in connection with conversions between currencies. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of a Fund's securities denominated in that currency. Such changes will also affect a Fund's income and distributions to shareholders. In addition, although a Fund will receive income on foreign securities in such currencies, such Fund will be required to compute and distribute its income in U.S. dollars. Therefore, if the exchange rate for any such currency declines materially after such Fund's income has been accrued and translated into U.S. dollars, the Fund could be required to liquidate portfolio securities to make required distributions. Similarly, if an exchange rate declines between the time a Fund incurs expenses in U.S. dollars and the time such expenses are paid, the amount of such currency required to be converted into U.S. dollars in order to pay such expenses in U.S. dollars will be greater.
For many foreign securities, U.S. dollar-denominated American Depositary Receipts, or ADR's, which are traded in the United States on exchanges or over-the-counter, are issued by domestic banks. ADR's represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADR's do not eliminate all the risk inherent in investing in the securities of foreign issuers. However, by investing in ADR's rather than directly in foreign issuers' stock, a Fund can avoid currency risks during the settlement period for either purchases or sales. In general, there is a large, liquid market in the United States for many ADR's. The information available for ADR's is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject. The International and Balanced Funds may also invest in European Depository Receipts, or EDR's, which are receipts evidencing an arrangement with a European bank similar to that for ADR's and are designed for use in the European securities markets. EDR's are not necessarily denominated in the currency of the underlying security.
Certain of the ADR's and EDR's, typically those denominated as unsponsored, require the holders thereof to bear most of the costs of such facilities while issuers of sponsored facilities normally pay more of the costs thereof. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through the voting rights to facility holders in respect to the deposited securities, whereas the depository of a sponsored facility typically distributes shareholder communications and passes through the voting rights.
Subject to its applicable investment policies, each of the Growth Funds and Growth and Income Funds may invest in debt securities denominated in the ECU, which is a "basket" consisting of specified amounts of the currencies of certain of the twelve member states of the European Community. The specific amounts of currencies comprising the ECU may be adjusted by the Council of Ministers of the European Community to reflect changes in relative values of the underlying currencies. Such adjustments may adversely affect holders of ECU-denominated obligations or the marketability of such securities. European governments and supranationals, in particular, issue ECU-denominated obligations.
Each of the Funds, with the exception of the Money Market Funds and the Michigan Fund, may utilize foreign currency transactions in its portfolio. The value of the assets of a Fund as measured in United States dollars may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and a Fund may incur costs in connection with conversions between various currencies. A Fund will conduct its 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. A forward foreign currency exchange contract ("forward currency contracts") involves 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. These forward currency contracts are traded directly
(usually large commercial banks) and their customers. The Funds may enter into forward currency contracts in order to hedge against adverse movements in exchange rates between currencies.
For example, when a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, it may want to establish the United States dollar cost or proceeds, as the case may be. By entering into a forward currency contract in United States dollars for the purchase or sale of the amount of foreign currency involved in an underlying security transaction, such Fund is able to protect itself against a possible loss between trade and settlement dates resulting from an adverse change in the relationship between the United States dollar and such foreign currency. Additionally, for example, when a Fund believes that a foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a forward currency sale contract to sell an amount of that foreign currency approximating the value of some or all of that Fund's portfolio securities or other assets denominated in such foreign currency, or when a Fund believes that the U.S. dollar may suffer a substantial decline against a foreign currency, it may enter into a forward currency purchase contract to buy that foreign currency for a fixed U.S. dollar amount. However, this tends to limit potential gains which might result from a positive change in such currency relationships. A Fund may also hedge its foreign currency exchange rate risk by engaging in currency financial futures and options transactions. The forecasting of short-term currency market movement is extremely difficult and whether such a short-term hedging strategy will be successful is highly uncertain.
It is impossible to forecast with precision the market value of portfolio securities at the expiration of a forward currency contract. Accordingly, it may be necessary for a Fund to purchase additional currency on the spot market (and bear the expense of such purchase) if the market value of the security is less than the amount of foreign currency such Fund is obligated to deliver when a decision is made to sell the security and make delivery of the foreign currency in settlement of a forward contract. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency such Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting transaction, such Fund will incur a gain or a loss (as described below) to the extent that there has been movement in forward currency contract prices. If the Fund engages in an offsetting transaction, it may subsequently enter into a new forward currency contract to sell the foreign currency. Should forward prices decline during the period between a Fund's entering into a forward currency contract for the sale of foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, such Fund would realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, such Fund would suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell. Although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which might result should the value of such currency increase. The Funds will have to convert their holdings of foreign currencies into United States dollars from time to time. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the difference (the "spread") between the prices at which they are buying and selling various currencies.
The International Fund does not intend to enter into forward currency contracts if the International Fund would have more than 15% of the value of its total assets committed to such contracts on a regular or continuous basis. The International Fund does not intend to enter into forward currency contracts or maintain a net exposure in such contracts where the International Fund would be obligated to deliver an amount of foreign currency in excess of the value of the Fund's portfolio securities or other assets denominated in that currency.
For further information about the characteristics, risks and possible benefits of options, futures and foreign currency transactions, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments" in the Statement of Additional Information.
The Growth Funds, the Growth and Income Funds, the Bond Fund, the Limited Maturity Bond Fund, the Intermediate Government Obligations Fund, the Municipal Bond Fund and the Parkstone Government Income Fund may also enter into contracts for the future delivery of securities or foreign currencies and futures contracts based on a specific security, class of securities, foreign currency or an index, purchase or sell options on any such futures contracts and engage in related closing transactions. A futures contract on a securities index is an agreement obligating either party to pay, and entitling the other party to receive, while the contract is outstanding, cash payments based on the level of a specified securities index.
A Fund may engage in such futures contracts in an effort to hedge against market risks. For example, when interest rates are expected to rise or market values of portfolio securities are expected to fall, a Fund can seek through the sale of futures contracts to offset a decline in the value of its portfolio securities. When interest rates are expected to fall or market values are expected to rise, a Fund, through the purchase of such contracts, can attempt to secure better rates or prices for the Fund than might later be available in the market when it effects anticipated purchases.
The acquisition of put and call options on futures contracts will, respectively, give a Fund the right (but not the obligation), for a specified price, to sell or to purchase the underlying futures contract, upon exercise of the option, at any time during the option period.
Aggregate initial margin deposits for futures contracts, and premiums paid for related options, may not exceed five percent of a Fund's total assets, and the value of securities that are the subject of such futures and options (both for receipt and delivery) may not exceed one-third of the market value of a Fund's total assets. Futures transactions will be limited to the extent necessary to maintain each Fund's qualification as a regulated investment company.
Futures transactions involve brokerage costs and require a Fund to segregate assets to cover contracts that would require it to purchase securities or currencies. A Fund may lose the expected benefit of futures transactions if interest rates, exchange rates or securities prices move in an unanticipated manner. Such unanticipated changes may also result in poorer overall performance than if the Fund had not entered into any futures transactions. In addition, the value of a Fund's futures positions may not prove to be perfectly or even highly correlated with the value of its portfolio securities or foreign currencies, limiting the Fund's ability to hedge effectively against interest rate, exchange rate and/or market risk and giving rise to additional risks. There is no assurance of liquidity in the secondary market for purposes of closing out futures positions.
The U.S. Government Obligations Fund will invest primarily in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Subject to the investment parameters described above, each of the remaining Funds may also invest in such obligations. The Treasury Fund, however, will invest exclusively in obligations issued or guaranteed by the U.S. Treasury and in repurchase agreements backed by such securities. The remaining Funds may invest in government obligations as permitted by the investment parameters described above.
The types of U.S. Government obligations in which each these Funds may invest include U.S. Treasury notes, bills, bonds, and any other securities directly issued by the U.S. Government that are available for public investment, which differ only in their interest rates, maturities, and times of issuance, as well as "stripped" U.S. Treasury obligations, such as Treasury Receipts issued by the U.S. Treasury and representing either future interest or principal payments, and, except for the Treasury Fund, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Stripped securities are issued at a discount to their "face value" and may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors. The stripped Treasury obligations in which the Money Market Funds may invest do not include certificates of accrual on treasury securities (CATS) or treasury income growth receipts (TIGRs).
Obligations of certain agencies and instrumentalities of the U.S. Government, such as the Government National Mortgage Association, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Student Loan Marketing Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law. The Funds which may invest in these government obligations will invest in the obligations of such agencies or instrumentalities only when First of America believes that the credit risk with respect thereto is minimal.
The Bond Fund and the Limited Maturity Bond Fund may invest in guaranteed investment contracts (GICs). When investing in GICs, the Bond Fund and the Limited Maturity Bond Fund make cash contributions to a deposit fund of an insurance company's general account. The insurance company then credits to the deposit fund on a monthly basis guaranteed interest. The GICs provide that this guaranteed interest will not be less than a certain minimum rate. The insurance company may assess periodic charges against a GIC for expense and service costs allocable to it, and the charges will be deducted from the value of the deposit fund. The Bond Fund and the Limited Maturity Bond Fund may invest in GICs of insurance companies without regard to the ratings, if any, assigned to such insurance companies' outstanding debt securities. Because a Fund may not receive the principal amount of a GIC from the insurance company on seven days notice or less, the GIC is considered an illiquid investment, and, together with other instruments in that Income Fund which are deemed to be illiquid, will not exceed 15% of its total assets. In determining average portfolio maturity, GICs will be deemed to have a maturity equal to the period of time remaining until the next readjustment of the guaranteed interest rate.
In order to generate additional income, each Fund may, from time to time, lend its portfolio securities to broker-dealers, banks, or institutional borrowers of securities. A Fund must receive 100% collateral in the form of cash or U.S. Government securities. This collateral will be valued daily by First of America or by the Subadvisers, as the case may be. Should the market value of the loaned securities increase, the borrower must furnish additional collateral to that Fund. During the time portfolio securities are on loan, the borrower pays that Fund any dividends or interest received on such securities. Loans are subject to termination by the Fund or the borrower at any time. While a Fund does not have the right to vote securities on loan, each Fund intends to terminate the loan and regain the right to vote if that is considered important with respect to the investment. In the event the borrower defaults in its obligation to a Fund, such Fund bears the risk of delay in the recovery of its portfolio securities and the risk of loss of rights in the collateral. The Funds will enter into loan agreements only with broker-dealers, banks, or other institutions that the Adviser or the Subadvisers, as the case may be, have determined are creditworthy under guidelines established by the Group's Board of Trustees.
As described above, the Balanced, Bond, Limited Maturity Bond, Municipal Bond and the Michigan Funds may invest in fixed income securities within the fourth highest rating group assigned by an NRSRO (i.e., BBB or Baa by S&P and Moody's, respectively) and comparable unrated securities. These types of fixed income securities are considered by the NRSROs to have some speculative characteristics, and are more vulnerable to changes in economic conditions, higher interest rates or adverse issuer-specific developments which are more likely to lead to a weaker capacity to make principal and interest payments than comparable higher rated debt securities.
Should subsequent events cause the rating of a fixed income security purchased by any of the Funds listed above to fall below the fourth highest rating, First of America will consider such an event in determining whether the Fund should continue to hold that security. In no event, however, would the Fund be required to liquidate any such portfolio security where the Fund would suffer a loss on the sale of such security.
As indicated above, the Government Income Fund intends to invest up to 80% of the value of its total assets and the Balanced Fund, Bond Fund, Limited Maturity Bond Fund, Intermediate Government Obligations Fund, Prime Obligations Fund and U.S. Government Obligations Fund may invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Such agencies or instrumentalities include the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), and in mortgage-related securities issued by nongovernmental entities which are rated, at the time of purchase, within the three highest bond rating categories assigned by an NRSRO or, if unrated, which First of America deems to present attractive opportunities and are of comparable quality. However, the Government Income Fund may invest greater amounts as conditions warrant.
The mortgage-related securities in which the these Funds may invest have mortgage obligations backing such securities, consisting of conventional thirty year fixed rate mortgage obligations, graduated payment mortgage obligations, fifteen year mortgage obligations and adjustable rate mortgage obligations. All of these mortgage obligations can be used to create pass-through securities. A pass-through security is created when mortgage obligations are pooled together and undivided interests in the pool or pools are sold. The cash flow from the mortgage obligations is passed through to the holders of the securities in the form of periodic payments of interest, principal and prepayments (net of a service fee). Prepayments occur when the holder of an individual mortgage obligation prepays the remaining principal before the mortgage obligation's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, mortgage-backed securities are often subject to more rapid prepayment of principal than their stated maturity would indicate. Because the prepayment characteristics of the underlying mortgage obligations vary, it is not possible to predict accurately the realized yield or average life of a particular issue of pass-through certificates. Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments have an adverse impact on yields for pass-throughs purchased at a premium (i.e., a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may not have been fully amortized at the time the obligation is repaid. The opposite is true for pass-throughs purchased at a discount. The Fund may purchase mortgage-related securities at a premium or at a discount.
If a Fund purchases a mortgage-related 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-related 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, thereby shortening the average life of the security and shortening the period of time over which income at the higher rate is received. When interest rates are rising, though, the rate of prepayment tends to decrease, thereby lengthening the period of time over which income at the lower rate is received. For these and other reasons, a mortgage-related security's average maturity may be shortened or lengthened as a result of interest rate fluctuations and, therefore, it is not possible to predict accurately the security's return to the Fund. In addition, regular payments received with respect to mortgage-related securities include both interest and principal. No assurance can be given as to the return a Fund will receive when these amounts are reinvested.
The principal governmental (i.e., backed by the full faith and credit of the United States Government) guarantor of mortgage-related securities is GNMA. GNMA is a wholly-owned United States Government corporation within the Department of Housing and Urban Development. GNMA is authorized to guarantee, with the full faith and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the United States Government) guarantors include FNMA and FHLMC. FNMA is a government-sponsored corporation owned entirely by private stockholders. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA but are not backed by the full faith and credit of the United States Government. FHLMC is a corporate instrumentality of the United States Government whose stock is owned by the twelve Federal Home Loan Banks. Participation certificates issued by FHLMC are guaranteed as to the timely payment of interest and ultimate collection of principal but are not backed by the full faith and credit of the United States Government.
The Government Income Fund also may invest up to 35% of its total assets in mortgage-related securities issued by nongovernmental entities and in other securities described below. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issues also create pass-through pools of conventional residential mortgage loans. Such issuers may also be the originators of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such nongovernmental issuers generally offer a higher rate of interest than government and government-related pools because there are not direct or indirect government guarantees of payments in the former pools. However, timely payment of interest and principal of these pools is supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers and the mortgage poolers. Such insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets a Fund's investment quality standards. There can be no assurance that the private insurers can meet their obligations under the policies. The Government Income Fund may buy mortgage-related securities without insurance or guarantees if through an examination of the loan experience and practices of the poolers First of America determines that the securities meet the Government Income Fund's quality standards. Although the market for such securities is becoming increasingly liquid, securities issued by certain private organizations may not be readily marketable. The Government Income Fund will not purchase mortgage-related securities or any other assets which in First of America's opinion are illiquid, if as a result, more than 15% of the value of the Government Income Fund's total assets will be illiquid.
Mortgage-related securities in which the above-named Funds may invest may also include collateralized mortgage obligations ("CMOs"). CMOs are debt obligations issued generally by finance subsidiaries or trusts that are secured by mortgage-backed certificates, including, in many cases, certificates issued by government-related guarantors, including GNMA, FNMA and FHLMC, together with certain funds and other collateral. Although payment of the principal of and interest on the mortgage-backed certificates pledged to secure the CMOs may be guaranteed by GNMA, FNMA or FHLMC, the CMOs represent obligations solely of the issuer and are not insured or guaranteed by GNMA, FHLMC, FNMA or any other governmental agency, or by any other person or entity. The issuers of the CMOs typically have no significant assets other than those pledged as collateral for the obligations.
The Government Income Fund expects that governmental, government-related or private entities may create mortgage loan pools offering pass-through investments in addition to those described above. The mortgages underlying these securities may be alternative mortgage instruments, that is, mortgage instruments whose principal or interest payments may vary or whose terms to maturity may differ from customary long-term fixed rate mortgages. As new types of mortgage-related securities are developed and offered to investors, First of America will, consistent with the Government Income Fund's investment objective, policies and quality standards, consider making investments in such new types of securities.
The two principal classifications of Municipal Securities (Michigan Municipal Securities, in the case of the Michigan Fund) which may be held by the Bond, Limited Maturity Bond, Municipal Bond Fund, Michigan Fund, Prime Obligations, U.S. Government Obligations and Tax-Free Funds are "general obligation" securities and "revenue" securities. General obligation securities are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue securities are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from proceeds of a special excise tax or other specific revenue source such as the user of the facility being financed. Private activity bonds held by the Municipal Bond and Michigan Fund are in most cases revenue securities and are not payable from the unrestricted revenues of the issuer. Consequently, the credit quality of private activity bonds is usually directly related to the credit standing of the corporate user of the facility involved.
The above-named Funds may also invest in "moral obligation" securities, which are normally issued by special purpose public authorities. If the issuer of moral obligation securities is unable to meet its debt service obligations from current revenues, it may draw on a reserve fund, the restoration of which is a moral commitment but not a legal obligation of the state or municipality which created the issuer.
Each of the above-named Funds invests primarily in Municipal Securities which are rated at the time of purchase within the four highest rating groups assigned by an NRSRO or in the highest rating group assigned by an NRSRO in the case of notes, tax-exempt commercial paper or variable rate demand obligations. The Funds may also purchase Municipal Securities which are unrated at the time of purchase but are determined to be of comparable quality by First of America pursuant to guidelines approved by the Group's Board of Trustees. The applicable Municipal Securities ratings are described in the Appendix to the Statement of Additional Information. For a discussion of debt securities rated within the fourth highest rating group assigned by an NRSRO, see "RISK FACTORS AND INVESTMENT TECHNIQUES--Medium Grade Securities" herein.
Opinions relating to the validity of Municipal Securities and to the exemption of interest thereon from federal income tax are rendered by bond counsel to the respective issuers at the time of issuance. No Fund nor First of America will review the proceedings relating to the issuance of Municipal Securities or the basis for such opinions.
Municipal Securities and Michigan Municipal Securities purchased by the Tax-Free Income Funds may include rated and unrated variable and floating rate tax-exempt notes. A variable rate note is one whose terms provide for the adjustment of its interest rate on set dates and which, upon such adjustment, can reasonably be expected to have a market value that approximates its par value. A floating rate note is one whose terms provide for the adjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value. Such notes are frequently not rated by credit rating agencies; however, unrated variable and floating rate notes purchased by the Tax-Free Income Funds will be determined by First of America, under guidelines established by the Group's Board of Trustees, to be of comparable quality at the time of purchase to rated instruments eligible for purchase under the Fund's investment policies. In making such determinations, First of America will consider the earning power, cash flow and other liquidity ratios of the issuers of such notes (such issuers include financial, merchandising, bank holding and other companies) and will continuously monitor their financial condition. There may be no active secondary market with respect to a particular variable or floating rate note. Nevertheless, the periodic readjustments of their interest rates tend to assure that their value to the Tax-Free Income Fund will approximate their par value. The Tax-Free Income Funds will not purchase variable and floating rate notes or any other securities which in First of America's opinion are illiquid, if as a result, more than 15% of the Tax-Free Income Fund's total assets will be illiquid.
Each of the Funds may invest up to 5% of the value of its total assets in the securities of any one money market mutual fund (including shares of the Parkstone Prime Obligations Fund, the Parkstone U.S. Government Obligations Fund, the Parkstone Tax-Free Fund, the Parkstone Municipal Investor Fund, and the Parkstone Treasury Fund), provided that no more than 10% of the Fund's total assets may be invested in the securities of mutual funds in the aggregate. In order to avoid the imposition of additional fees as a result of investments by a Fund in Shares of the money market funds of the Group, the Investment Adviser, Administrator and their affiliates (See "MANAGEMENT OF THE FUNDS--Investment Adviser and Subadvisers" and "Administrator, Sub-Administrator and Distributor" and "GENERAL INFORMATION--Transfer Agency and Fund Accounting Services") will not retain any portion of their usual asset-based service fees from a Fund that are attributable to investments by the Fund in Shares of those money market mutual funds if the fee is being taken in the Fund. The Investment Adviser and the Administrator will promptly forward such fees to the appropriate Fund. Each Fund will incur additional expenses due to the duplication of expenses as a result of any investment in securities of unaffiliated mutual funds. Additional restrictions regarding the Funds' investments in securities of unaffiliated mutual funds and/or money market funds of the Group are contained in the Statement of Additional Information.
The Tax-Free Fund may also invest in private activity bonds. It should be noted that the Tax Reform Act of 1986 substantially revised provisions of prior federal law affecting the issuance and use of proceeds of certain tax-exempt obligations. A new definition of private activity bonds applies to many types of bonds, including those which were industrial development bonds under prior law. Any reference herein to private activity bonds includes industrial development bonds. Interest on private activity bonds is tax-exempt (and such bonds will be considered Municipal Securities for purposes of this Prospectus) only if the bonds fall within certain defined categories of qualified private activity bonds and meet the requirements specified in those respective categories. If the Tax-Free Fund invests in private activity bonds which fall outside these categories, Shareholders may become subject to the alternative minimum tax on that part of the Tax-Free Fund's distributions derived from interest on such bonds. The Tax Reform Act generally does not change the federal tax treatment of bonds issued to finance government operations. For further information relating to the types of private activity bonds which will be included in income subject to the alternative minimum tax, see "ADDITIONAL INFORMATION--Additional Tax Information Concerning the Tax-Free Fund and the Municipal Bond Fund" in the Statement of Additional Information.
Each of the Growth Funds, the Growth and Income Funds, the Income Funds and the Tax-Free Income Funds may purchase put and call options on securities and on foreign currencies, subject to its applicable investment policies, for the purposes of hedging against market risks related to its portfolio securities and adverse movements in exchange rates between currencies, respectively. Purchasing options is a specialized investment technique that entails a substantial risk of a complete loss of the amounts paid as premiums to writers of options. Each Fund may also engage in writing call options from time to time as First of America or the Subadvisers, as the case may be with respect to the International Fund, deem appropriate. The Funds will write only covered call options (options on securities or currencies owned by the particular Fund). In order to close out a call option it has written, the Fund will enter into a "closing purchase transaction"--the purchase of a call option on the same security or currency with the same exercise price and expiration date as the call option which such Fund previously has written. When a portfolio security or currency subject to a call option is sold, the Fund will effect a closing purchase transaction to close out any existing call option on that security or currency. If such Fund is unable to effect a closing purchase transaction, it will not be able to sell the underlying security or currency until the option expires or that Fund delivers the underlying security or currency upon exercise. In addition, upon the exercise of a call option by the holder thereof, the Fund will forego the potential benefit represented by market appreciation over the exercise price. Under normal conditions, it is not expected that the Funds will cause the underlying value of portfolio securities and currencies subject to such options to exceed 50% of its net assets, and with respect to each of the Balanced and International Funds, 20% of its net assets.
Each of the Growth Funds, the Growth and Income Funds and the Government Income Fund, as part of its option transactions, also may purchase index put and call options and write index options. As with options on individual securities, a Fund will write only covered index call options. Through the writing or purchase of index options a Fund can achieve many of the same objectives as through the use of options on individual securities. Options on securities indices are similar to options on a security except that, rather than the right to take or make delivery of a security at a specified price, an option on a securities index gives the holder the right to receive, upon exercise of the option, an amount of cash if the closing level of the securities index upon which the option is based is greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option.
Price movements in securities which a Fund owns or intends to purchase probably will not correlate perfectly with movements in the level of an index and, therefore, a Fund bears the risk of a loss on an index option that is not completely offset by movements in the price of such securities. Because index options are settled in cash, a call writer cannot determine the amount of its settlement obligations in advance and, unlike call writing on specific securities, cannot provide in advance for, or cover, its potential settlement obligations by acquiring and holding the underlying securities. A Fund may be required to segregate assets or provide an initial margin to cover index options that would require it to pay cash upon exercise.
In addition, the Tax-Free Fund, the Municipal Bond Fund and the Michigan Fund may each acquire "puts" with respect to Municipal Securities or Michigan Municipal Securities, as the case may be, held in its portfolio. Under a put, such a Fund would have the right to sell a specified Municipal Security (or Michigan Municipal Security, as the case may be) within a specified period of time at a specified price. A put would be sold, transferred, or assigned only with the underlying security. The Municipal Bond, the Michigan and the Tax-Free Funds will acquire puts solely to either facilitate portfolio liquidity, shorten the maturity of the underlying securities, or permit the investment of its funds at a more favorable rate of return. Each of the Municipal Bond Fund, the Michigan Fund and the Tax-Free Fund expects that it will generally acquire puts only where the puts are available without the payment of any direct or indirect consideration. However, if necessary or advisable, such Fund may pay for a put either separately in cash or by paying a higher price for portfolio securities which are acquired subject to the puts (thus reducing the yield to maturity otherwise available for the same securities).
Securities held by a Fund may be subject to repurchase agreements. Under the terms of a repurchase agreement, a Fund would acquire securities from financial institutions such as member banks of the Federal Deposit Insurance Corporation or registered broker-dealers which First of America or the Subadvisers, as the case may be, deem creditworthy under guidelines approved by the Group's Board of Trustees, subject to the seller's agreement to repurchase such securities at a mutually agreed upon date and price. The repurchase price would generally equal the price paid by the Fund plus interest negotiated on the basis of current short-term rates, which may be more or less than the rate on the underlying portfolio securities. Securities subject to repurchase agreements will be held in a segregated account. If the seller were to default on its repurchase obligation or become insolvent, the Fund would suffer a loss to the extent that the proceeds from a sale of the underlying portfolio securities were less than the repurchase price under the agreement, or to the extent that the disposition of such securities by that Fund were delayed pending court action. Repurchase agreements are considered to be loans by an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). For further information about repurchase agreements, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments--Repurchase Agreements" in the Statement of Additional Information.
Securities in which each of the Funds, with the exception of the Treasury Fund, may invest include securities issued by corporations without registration under the Securities Act of 1933, as amended (the "1933 Act"), in reliance on the exemption from such registration afforded by Section 3(a)(3) thereof, and securities issued in reliance on the so-called "private placement" exemption from registration which is afforded by Section 4(2) of the 1933 Act ("Section 4(2) securities"). Section 4(2) securities are restricted as to disposition under the Federal securities laws, and generally are sold to institutional investors such as the Funds who agree that they are purchasing the securities for investment and not with a view to public distribution. Any resale must also generally be made in an exempt transaction. Section 4(2) securities are normally resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in such Section 4(2) securities, thus providing liquidity. Pursuant to procedures adopted by the Board of Trustees of the Group, First of America may determine Section 4(2) securities to be liquid if such securities are eligible for resale under Rule 144A under the 1933 Act and are readily saleable.
Thus, subject to the limitations described above, the Funds may acquire investments that are illiquid or of limited liquidity, such as private placements or investments that are not registered under the 1993 Act. An illiquid investment is any investment that cannot be disposed of within seven (7) days in the normal course of business at approximately the amount at which it is valued by a Fund. The price a Fund pays for illiquid securities or receives upon resale may be lower than the price paid or received for similar securities with a more liquid market. Accordingly, the valuation of these securities will reflect any limitations on their liquidity. A Fund may not invest in additional illiquid securities if, as a result, more than 15% (10% in the case of the Money Market Funds) of the market value of its net assets would be invested in illiquid securities.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
Each of the Funds may borrow funds by entering into reverse repurchase agreements and, in the case of the Income and the Tax-Free Income Funds, dollar roll agreements in accordance with the investment restrictions described below. Pursuant to such agreements, a Fund would sell certain of its securities to financial institutions such as banks and broker-dealers, and agree to repurchase the securities, or substantially similar securities in the case of a dollar roll agreement, at a mutually agreed upon date and price. Dollar roll agreements utilized by the Income and Tax-Free Income Funds are identical to reverse repurchase agreements except for the fact that substantially similar securities may be repurchased. At the time a Fund enters into a reverse repurchase agreement or a dollar roll agreement, it will place in a segregated custodial account assets such as U.S. Government securities or other liquid high grade debt securities consistent with its investment restrictions having a value equal to the repurchase price (including accrued interest), and will subsequently continually monitor the account to ensure that such equivalent value is maintained at all times. Reverse repurchase agreements and dollar roll agreements involve the risk that the market value of securities sold by a Fund may decline below the price at which it is obligated to repurchase the securities. Reverse repurchase agreements and dollar roll agreements are considered to be borrowings by an investment company under the 1940 Act and therefore a form of leverage. A Fund may experience a negative impact on its net asset value if interest rates rise during the term of a reverse repurchase agreement or dollar roll agreement. A Fund generally will invest the proceeds of such borrowings only when such borrowings will enhance a Funds's liquidity or when the Fund reasonably expects that the interest income to be earned from the investment of the proceeds is greater than the interest expense of the transaction. For further information about reverse repurchase agreements and dollar roll agreements, see "INVESTMENT OBJECTIVES AND POLICIES--Additional Information on Portfolio Instruments--Reverse Repurchase Agreements and Dollar Roll Agreements" in the Statement of Additional Information.
Each of the Funds, with the exception of the Treasury Fund, may each purchase securities on a when-issued or delayed-delivery basis. Such Funds will engage in when-issued and delayed-delivery transactions only for the purpose of acquiring portfolio securities consistent with its investment objectives and policies, not for investment leverage although such transactions represent a form of leveraging. When-issued securities are securities purchased for delivery beyond the normal settlement date at a stated price and yield and thereby involve a risk that the yield obtained in the transaction will be less than those available in the market when delivery takes place. A Fund will not pay for such securities or start earning interest on them until they are received. When a Fund agrees to purchase such securities, its custodian will set aside cash or liquid securities equal to the amount of the commitment in a separate account. Securities purchased on a when-issued basis are recorded as an asset and are subject to changes in the value based upon changes in the general level of interest rates. In when-issued and delayed-delivery transactions, a Fund relies on the seller to complete the transaction; the seller's failure to do so may cause such Fund to miss a price or yield considered to be advantageous. The Prime Obligations, U.S. Government Obligations and Tax-Free Funds will purchase only Municipal Securities on a when-issued or delayed delivery basis. No Fund's commitments to purchase "when-issued" securities will exceed 25% of the value of its total assets under normal market conditions, and a commitment by a Fund to purchase "when-issued" securities will not exceed 60 days. In the event its commitments to purchase "when-issued" securities ever exceeded 25% of the value of its assets, a Fund's liquidity and the investment adviser's ability to manage it might be adversely affected. The Funds intend only to purchase "when-issued" securities for the purpose of acquiring portfolio securities, not for investment leverage although such transactions represent a form of leveraging.
The portfolio turnover rate for each Fund is calculated by dividing the lesser of a Fund's purchases or sales of portfolio securities for the year by the monthly average value of the portfolio securities. The Securities and Exchange Commission requires that the calculation exclude all securities whose remaining maturities at the time of acquisition are one year or less. The portfolio turnover rate for a Fund may vary greatly from year to year, as well as within a particular year, and may also be affected by cash requirements for redemptions of Shares. High portfolio turnover rates will generally result in higher transaction costs, including brokerage commissions, to a Fund and may result in additional tax consequences to a Fund's shareholders. Portfolio turnover will not be a limiting factor in making investment decisions.
Each Fund is subject to a number of investment restrictions that may be changed only by a vote of a majority of the outstanding Shares of that Fund (as defined in the Statement of Additional Information).
None of the Funds, with the exception of the Michigan Fund, may:
Purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if, immediately after such purchase, more than 5% of the value of the Fund's total assets would be invested in such issuer, or the Fund would hold more than 10% of the outstanding voting securities of the issuer, except that 25% or less of the value of such Fund's total assets may be invested without regard to such limitations. There is no limit to the percentage of assets that may be invested in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities.
Irrespective of the investment restriction above, and pursuant to Rule 2a-7 under the 1940 Act, the U.S. Government Obligations Fund, the Prime Obligations Fund and the Treasury Fund each will, with respect to 100% of its total assets, limit its investment in the securities of any one issuer in the manner provided by such Rule, which limitations are referred to above under the caption "INVESTMENT OBJECTIVES AND POLICIES--The Money Market Funds."
The Michigan Fund may not:
Purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if, immediately after such purchase, (a) more than 5% of the value of the Fund's total assets (taken at current value) would be invested in such issuer (except that up to 50% of the value of the Fund's total assets may be invested without regard to such 5% limitation), and (b) more than 25% of its total assets (taken at current value) would be invested in the securities of a single issuer.
For purposes of the investment limitations above, a security is considered to be issued by the governmental entity (or entities) whose assets and revenues back the security and, with respect to a private activity bond that is backed only by the assets and revenues of a non-governmental user, a security is considered to be issued by such non-governmental user.
None of the Funds will:
1. Purchase any securities which would cause more than 25% of the value of the Fund's total assets at the time of purchase to be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and repurchase agreements secured by obligations of the U.S. Government or its agencies or instrumentalities; (b) wholly owned finance companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of their parents; and (c) utilities will be divided according to their services. For example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry.
2. (a) Borrow money (not including reverse repurchase agreements or dollar roll agreements), except that the Funds may borrow from banks for temporary or emergency purposes and then only in amounts up to 30% (10% in the case of the Money Market Funds) of its total assets at the time of borrowing (and provided that such bank borrowings and reverse repurchase agreements and dollar roll agreements do not exceed in the aggregate one-third of the Fund's total assets less liabilities other than the obligations represented by the bank borrowings, reverse repurchase agreements and dollar roll agreements), or mortgage, pledge or hypothecate any assets except in connection with a bank borrowing in amounts not to exceed 30% of the Fund's net assets at the time of borrowing; (b) enter into reverse repurchase agreements, dollar roll agreements and other permitted borrowings in amounts exceeding in the aggregate one-third of the Fund's total assets less liabilities other than the obligations represented by such reverse repurchase and dollar roll agreements; and (c) issue senior securities except as permitted by the 1940 Act rule, order or interpretation thereunder.
3. Make loans, except that the Fund may purchase or hold debt instruments and lend portfolio securities in accordance with its investment objective and policies, make time deposits with financial institutions and enter into repurchase agreements.
For purposes only of investment limitation number 1 above, such limitation shall not apply to Municipal Securities or governmental guarantees of Municipal Securities, and industrial development bonds or private activity bonds that are backed only by the assets and revenues of a non-governmental user shall not be deemed to be Municipal Securities.
The following additional investment restriction may be changed without the vote of a majority of the outstanding Shares of a Fund.
1. Purchase or otherwise acquire any securities, if as a result, more than 15% (10% in the case of the Money Market Funds) of the Fund's net assets would be invested in securities that are illiquid.
In addition to the above investment restrictions, the Funds are subject to certain other investment restrictions set forth under "INVESTMENT OBJECTIVES AND POLICIES--Investment Restrictions" in the Statement of Additional Information.
Overall responsibility for management of the Group rests with its Board of Trustees, who are elected by the shareholders of all of the Group's Funds. The Group will be managed by the Trustees in accordance with the laws of the Commonwealth of Massachusetts governing business trusts. There are currently five Trustees, three of whom are not "interested persons" of the Group within the meaning of that term under the 1940 Act. The Trustees, in turn, elect the officers of the Group to supervise actively its day-to-day operations.
The Trustees of the Group are Stephen G. Mintos* (Chairman), George R. Landreth*, Robert M. Beam, Lawrence D. Bryan and Adrian Charles Edwards. The addresses, and principal occupations during the past five years of the Trustees are set forth in the Statement of Additional Information. Those Trustees designated with an asterisk (*) are considered to be "interested persons" of the Group as defined in the 1940 Act.
The Trustees of the Group receive quarterly fees and fees and expenses for each meeting of the Board of Trustees attended. However, no officer or employee of BISYS, The BISYS Group, Inc. or BISYS Fund Services Ohio, Inc. receives any compensation from the Group for acting as a Trustee of the Group. The officers of the Group receive no compensation directly from the Group for performing the duties of their offices. BISYS receives fees from the Group for acting as Administrator. BISYS Fund Services Ohio, Inc., an affiliate of BISYS, receives fees from the Group for acting as Transfer Agent and for providing certain fund accounting services. Mr. Mintos and Mr. Landreth are employees of BISYS.
First of America was established in 1932 and is the investment adviser of the Group. First of America, a registered investment adviser, is a wholly owned subsidiary of First of America Bank-Michigan, N.A., which is a wholly owned subsidiary of First of America Bank Corporation. First of America Bank Corporation currently has over $25 billion in assets and provides financial services to over 300 communities in Michigan, Indiana, Illinois and Florida. As of June 30, 1995, First of America managed over $10 billion on behalf of both taxable and tax-exempt clients, including pensions, endowments, corporations and individual portfolios. First of America also acts as investment adviser to the Trust Division of First of America Bank Corporation with respect to an additional $2.3 billion in discretionary assets, providing equity, fixed income, balanced and money management services.
Subject to such policies as the Group's Board of Trustees may determine, First of America, either directly or, with respect to the International Fund and the Balanced Fund, through one or more subadvisers, furnishes a continuous investment program for each Fund and makes investment decisions on behalf of each Fund.
First of America utilizes a team approach to the investment management of the Funds, with up to three professionals working as a team to ensure a disciplined investment process designed to result in long-term performance consistent with each Fund's investment objectives. Roger H. Stamper, Managing Director of First of America, is primarily responsible for the day-to-day management of each of the Growth Funds (except the International Fund) and the Growth and Income Funds. Mark R. Kummerer, Managing Director--Fixed Income of First of America, is primarily responsible for the day-to-day management of the Income Funds. Christian S. Swantek, Vice President of First of America, is primarily responsible for the day-to-day management of the Tax-Free Income Funds. Messrs. Stamper and Kummerer have held their respective positions with First of America since 1988 and 1986, respectively. Prior to June 1993, Mr. Swantek was a portfolio manager at PNC Investment Management & Research and its various investment management affiliates.
For the services provided and expenses assumed pursuant to its Investment Advisory Agreement with the Group, First of America receives a fee from each of the Equity, Small Capitalization, High Income Equity and Balanced Funds, computed daily and paid monthly, at the annual rate of one percent (1%) of that Fund's average daily net assets. For its services in connection with the
America's fee is computed daily and paid monthly at the annual rate of one and twenty-five hundredths percent (1.25%) of the first $50 Million of the International Fund's average daily net assets, one and twenty hundredths percent (1.20%) of average daily net assets between $50 Million and $100 Million, one and fifteen hundredths percent (1.15%) of average daily net assets between $100 Million and $400 Million and one and five hundredths percent (1.05%) of average daily net assets above $400 Million. For its services in connection with each Income Fund and Tax-Free Income Fund, First of America's fee is computed daily and paid monthly at the annual rate of seventy-four one-hundredths of one percent (.74%) of each Income Fund's and Tax-Free Income Fund's average daily net assets. For its services in connection with the Money Market Funds, First of America's fee is computed daily and paid monthly, at the annual rate of forty one-hundredths of one percent (.40%) of each Money Market Fund's average daily net assets. First of America may periodically voluntarily reduce all or a portion of its advisory fee with respect to a Fund to increase the net income of that Fund available for distribution as dividends. The voluntary fee reduction will cause the yield of that Fund to be higher than it would otherwise be in the absence of such a reduction.
Pursuant to the terms of its Investment Advisory Agreement with the Group, First of America has entered into a Sub-Investment Advisory Agreement with Gulfstream Global Investors, Ltd., 300 Crescent Court, Suite 1605, Dallas, Texas 75201 ("Gulfstream"). Pursuant to the terms of such Sub-Investment Advisory Agreement Gulfstream has been retained by First of America to manage the investment and reinvestment of the assets of the International Fund and to manage the investment and reinvestment of those assets of the Balanced Fund which are invested in foreign securities, subject to the direction and control of the Group's Board of Trustees.
Under this arrangement, Gulfstream is responsible for the day-to-day management of the International Fund's assets, reviews investment performance policies and guidelines and maintains certain books and records, and First of America is responsible for selecting and monitoring the performance of Gulfstream and for reporting the activities of Gulfstream in managing the International Fund to the Group's Board of Trustees. Gulfstream utilizes a team approach to the investment management of the International Fund to ensure a disciplined investment process designed to result in long-term performance consistent with its investment objective. No one person is responsible for the Fund's management. First of America may also render advice with respect to the International Fund's investments in the U.S.
For its services provided and expenses assumed pursuant to its Sub-Investment Advisory Agreement with First of America, Gulfstream receives from First of America a fee, computed daily and paid monthly, at the annual rate of one-half percent (.50%) of the first $50 million of the International Fund's average daily net assets and the average daily net assets of the Balanced Fund which are invested in foreign securities, forty-five one hundredths percent (.45%) of such average daily net assets between $50 million and $100 million, forty one hundredths percent (.40%) of such average daily net assets between $100 million and $400 million and thirty one hundredths percent (.30%) of such average daily net assets above $400 million, provided the minimum annual fee shall be $75,000.
Gulfstream, 300 Crescent Court, Suite 1605, Dallas, Texas 75201, was organized in 1991 as a Texas limited partnership by Tull, Doud, Marsh & Triltsch, Inc., a Texas corporation ("TDMT"). TDMT is the sole general partner of Gulfstream. TDMT is owned by C. Thomas Tull, Stephen C. Doud, James P. Marsh and Reiner M. Triltsch. Messrs. Tull, Doud and Triltsch are the portfolio managers and Mr. Marsh is responsible for client services with Gulfstream. First of America is the sole limited partner, holding a forty nine (49) percent interest in Gulfstream with options which would under certain circumstances permit it to acquire up to a seventy two (72) percent interest. Gulfstream has over $360 million in assets of institutional, investment company, governmental, pension fund and high net worth individual clients under its investment management. Gulfstream's portfolio management personnel average twenty (20) years of investment experience and nine (9) years of international investment experience. As of January 3, 1994, Gulfstream managed over $300 million in international investment portfolios.
Prior to January 1, 1995, Ivory & Sime International, Inc. ("ISI" and Ivory & Sime plc ("ISplc" together with ISI, "Ivory & Sime") served as subadvisers to the International Fund. The Trustees voted unanimously to terminate this arrangement and replace it with the current subadvisory arrangement with
Gulfstream. As required by the 1940 Act, the Shareholders of the International Discovery Fund and the Balanced Fund each approved the appointment of Gulfstream as subadviser, as well as the related Sub-Investment Advisory Agreements, at a meeting held on February 28, 1995.
Under Gulfstream's partnership agreement, First of America possesses veto authority over the general budgetary affairs of Gulfstream. Because of its current 49 percent ownership interest and its possession of options enabling it to acquire up to a 72 percent ownership interest, First of America may be deemed to control Gulfstream for purposes of the 1940 Act.
For further information regarding the relationship between Gulfstream and First of America, see "MANAGEMENT OF THE GROUP--INVESTMENT ADVISER" in the Statement of Additional Information.
BISYS, 3435 Stelzer Road, Columbus, Ohio 43219, is the administrator for each fund of the Group, and also acts as the Group's principal underwriter and distributor (the "Administrator" or the "Distributor," as the context indicates). First of America serves as Sub-Administrator for each Fund of the Group and provides certain services as may be requested by BISYS from time to time. BISYS and its affiliated companies, including BISYS Fund Services Ohio, Inc. are wholly-owned by The BISYS Group, Inc., a publicly-held company which is a provider of information processing, loan servicing and 401(k) administration and recordkeeping services to and through banking and other financial organizations.
The Administrator generally assists in all aspects of the Funds' administration and operation. For expenses assumed and services provided as administrator pursuant to its Administration Agreement with the Group, the Administrator receives a fee from each Fund equal to the lesser of a fee, computed daily and paid periodically, at an annual rate of twenty one-hundredths of one percent (.20%) of the Fund's average daily net assets, or such other fee as may be agreed upon from time to time in writing by the Group and the Administrator. For its services as Subadministrator First of America receives, from the Administrator, pursuant to its Sub-Administration Agreement with BISYS, a fee not to exceed five one hundredths of one percent (.05%) of each Fund's average daily net assets. The Administrator may periodically voluntarily reduce all or a portion of its administrative fee with respect to a Fund to increase the net income of that Fund available for distribution as dividends. The voluntary fee reduction will cause the return of that Fund to be higher than it would otherwise be in the absence of such reduction.
The Distributor acts as agent for the Funds in the distribution of each of their Shares and, in such capacity, solicits orders for the sale of Shares, advertises, and pays the cost of advertising, office space and its personnel involved in such activities. The Distributor receives no compensation under its Distribution Agreement with the Group, but may retain some or all of any sales charge imposed upon the Investor Shares and may receive compensation under the Distribution and Shareholder Service Plans described below.
First of America, the Subadvisers and the Administrator each bear all expenses in connection with the performance of its services as investment adviser, subadviser and administrator, respectively, other than the cost of securities (including brokerage commissions) purchased for the Group. Each Fund will bear the following expenses relating to its operation: organizational expenses, taxes, interest, brokerage fees and commissions, fees of the Trustees of the Group, Securities and Exchange Commission fees, state securities qualification fees, costs of preparing and printing prospectuses for regulatory purposes and for distribution to current Shareholders, outside auditing and legal expenses, advisory and administration fees, fees and out-of-pocket expenses of the custodian, Transfer Agent and fund accountant, certain insurance premiums, costs of maintenance of the Group's existence, costs of Shareholders' reports and meetings, and any extraordinary expenses incurred in each Fund's operation. As a general matter, expenses are allocated to the Institutional Shares and the other Classes of Shares of the Funds on the basis of the relative net asset value of each class. The various Classes may bear certain additional retail transfer agency expenses and may also bear certain additional shareholder service and incurred pursuant to a Distribution and Shareholder Service Plans. The Trustees reserve the right, subject to the receipt of relevant regulatory approvals or rulings, if needed, to allocate certain other expenses to the Shareholders of a particular class, including Investor Shares, on a basis other than relative net asset value, as they deem appropriate ("Class Expenses"). In such event, Class Expenses would be limited to: transfer agency fees identified by the Transfer Agent as attributable to a specific class; printing and postage expenses related to preparing and distributing materials such as Shareholder reports, prospectuses and proxies to current Shareholders; Blue Sky registration fees incurred by a class of Shares; Securities and Exchange Commission registration fees incurred by a class of Shares; expenses related to administrative personnel and services as required to support the Shareholders of a specific class; litigation or other legal expenses relating solely to one class of Shares; and Trustees' fees incurred as a result of issues relating solely to one class of Shares.
First of America believes that it may perform the investment advisory services for the Group's Funds contemplated by the Investment Advisory Agreement and by this Prospectus without violating applicable banking laws or regulations. Future changes in federal or state statutes and regulations relating to permissible activities of banks or bank holding companies and their subsidiaries and affiliates as well as further judicial or administrative decisions or interpretations of present and future statutes and regulations could change the manner in which First of America could continue to perform such services for the Group. See the Statement of Additional Information ("MANAGEMENT OF THE GROUP--Glass-Steagall Act") for further discussion.
HOW TO BUY INSTITUTIONAL SHARES
Institutional Shares may be purchased through procedures established by the Distributor in connection with the requirements of Customer Accounts maintained by or on behalf of certain persons ("Customers") by Banks. These procedures may include instructions under which a Customer Account is "swept" automatically no less frequently than weekly and amounts in excess of a minimum amount agreed upon by the Bank and the Customer are invested by the Distributor in Institutional Shares of the Money Market Funds, depending upon the type of Customer Account and/or the instructions of the Customer.
Institutional Shares of the Group sold to the Banks acting in a fiduciary, advisory, custodial, or other similar capacity on behalf of Customers will normally be held of record by the Banks. With respect to Institutional Shares of the Group so sold, it is the responsibility of the particular Bank to transmit purchase or redemption orders to the Distributor and to deliver federal funds for purchase on a timely basis. Beneficial ownership of Institutional Shares of the Group will be recorded by the Banks and reflected in the account statements provided by the Banks to Customers. A Bank may exercise voting authority for those Institutional Shares for which it is granted authority by the Customer.
Institutional Shares of each Fund are purchased at the net asset value per share (see "VALUATION OF SHARES") next determined after receipt by the Distributor of an order to purchase Institutional Shares. An order to purchase Institutional Shares will be deemed to have been received by the Distributor only when federal funds with respect thereto are available to the Group's custodian for investment. Federal funds are monies credited to a bank's account within a Federal Reserve Bank. Payment for an order to purchase Institutional Shares which is transmitted by federal funds wire will be available the same day for investment by the Group's custodian, if received prior to the last Valuation Time (see "VALUATION OF SHARES"). Payments transmitted by other means (such as by check drawn on a member of the Federal Reserve System) will normally be converted into federal funds within two banking days after receipt. The Group strongly recommends that investors of substantial amounts use federal funds to purchase Institutional Shares.
Purchases of Institutional Shares of a Fund will be effected only on a Business Day (as defined in "VALUATION OF SHARES") of the respective Fund. An order received prior to a Valuation Time on any Business Day will be executed at the net asset value determined as of the next Valuation Time on the date of receipt. An order received after the last Valuation Time on any Business Day will be executed at the net asset value determined as of the next Valuation Time on the next Business Day of the Group. Trust Shares purchased before 12:00 noon, Eastern Time, begin earning dividends on the same Business Day. All Institutional Shares continue to earn dividends through the day before their redemption.
There is no sales charge imposed by the Group in connection with the purchase of Institutional Shares in the Funds. Depending upon the terms of a particular Customer Account, the Banks may charge a Customer account fees for automatic investment and other cash management services provided in connection with investment in the Group. Information concerning these services and any charges may be obtained from the Banks. This Prospectus should be read in conjunction with any such information received from the Banks.
The Group reserves the right to reject any order for the purchase of Institutional Shares in whole or in part.
Confirmations of purchases and redemption of Institutional Shares of the Group by Banks on behalf of their Customers may be obtained from the Entities. Shareholders may rely on these statements in lieu of certificates. Certificates representing Institutional Shares of the Funds will not be issued.
Shareholders may exchange Institutional Shares of various Funds of the Group without payment of a sales charge so long as that the Shareholder making the exchange is eligible on the date of the exchange to purchase Institutional Shares and the exchange is made in states where it is legally authorized. The exchange will be made on the basis of the relative net asset values of the Institutional Shares exchanged.
A Bank should notify the Group of its desire to make an exchange on behalf of its Customers, and the Distributor will furnish the Shareholder with a prospectus of the appropriate class of Shares of the Fund and the appropriate authorization form. An exchange is considered to be a sale of Institutional Shares for federal income tax purposes on which a Shareholder may realize a capital gain or loss.
HOW TO REDEEM YOUR INSTITUTIONAL SHARES
Institutional Shares may ordinarily be redeemed by mail or by telephone. However, all or part of a Customer's Institutional Shares may be redeemed in accordance with instructions and limitations pertaining to his or her account at a Bank. For example, if a Customer has agreed with a Bank to maintain a minimum balance in his or her account with the Bank, and the balance in that account falls below that minimum, the Customer may be obliged to redeem, or the Bank may redeem for and on behalf of the Customer, all or part of the Customer's Institutional Shares of a Fund of the Group to the extent necessary to maintain the required minimum balance.
A written request for redemption must be received by the Transfer Agent in order to honor the request. Such a request must be sent to:
The Parkstone Group of Funds
Redemption orders are effected at the net asset value per share next determined after the Institutional Shares are properly tendered for redemption, as described above. Payment to Shareholders for Institutional Shares redeemed will be made within seven days after receipt by the Transfer Agent of the request for redemption. However, to the greatest extent possible, the Group will attempt to honor requests from Banks for the same day payments upon redemption of Institutional Shares if the request for redemption is received by the Transfer Agent before the last Valuation Time, on a Business Day or, if the request for redemption is received after the last Valuation Time, to honor requests for payment on the next Business Day, unless it would be disadvantageous to the Group or the Shareholders of a Fund to sell or liquidate portfolio securities in an amount sufficient to satisfy requests for payments in that manner.
See "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION--Matters Affecting Redemption" and "NET ASSET VALUE" in the Statement of Additional Information for examples of when the Group may suspend the right of redemption or redeem Institutional Shares involuntarily if it appears appropriate to do so in light of the Group's responsibilities under the 1940 Act.
The net asset value of each class of Shares of the Funds, with the exception of the Money Market Funds, is determined and their Shares are priced as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern Time) on each Business Day (the "Valuation Time"). The net asset value of each class of Shares of Money Market Funds is determined and their Shares are priced as of noon and as of the close of trading on the New York Stock Exchange on each Business Day the ("Valuation Time"). A "Business Day" is a day on which the New York Stock Exchange is open for trading and the Federal Reserve Bank of Chicago is open and any other day (other than a day on which no Shares are tendered for redemption and no order to purchase any Shares is received) during which there is sufficient trading in its portfolio instruments that its net asset value per share might be materially affected. Currently, the New York Stock Exchange or the Federal Reserve Bank of Chicago will not open in observance of the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran's Day, Thanksgiving and Christmas.
Net asset value per share for a particular class for purposes of pricing sales and redemptions is calculated by dividing the value of all securities and other assets belonging to a Fund allocable to such class, less the liabilities charged to that Fund allocable to such class and any liabilities charged directly to that class, by the number of outstanding Shares of such class.
The net asset value per share will fluctuate as the value of the investment portfolio of a Fund changes. However, the assets in each Money Market Fund are valued based upon the amortized cost method. Pursuant to the rules and regulations of the Securities and Exchange Commission regarding the use of the amortized cost method, each Money Market Fund will maintain a dollar-weighted average portfolio maturity of 90 days or less. Although the Group seeks to maintain each Money Market Fund's net asset value per share at $1.00, there can be no assurance that net asset value will not vary.
The securities in each Fund will be valued at market value. If market quotations are not available, the securities will be valued by a method which the Board of Trustees believes accurately reflects fair value. Foreign securities are valued based on quotations from the primary market in which they are traded and are translated from the local currency into U.S. dollars using current exchange rates. For further information about valuation of investments, see "NET ASSET VALUE" in the Statement of Additional Information.
Net income is declared monthly as a dividend to Shareholders at the close of business on the day of declaration and is generally paid monthly. Distributable net realized capital gains are distributed at least annually. A Shareholder will automatically receive all income dividends and capital gains distributions in additional full and fractional Shares at net asset value as of the date of declaration, unless the Shareholder elects to receive dividends or distributions in cash or elects to participate in the Parkstone Directed Dividend Option. Such election, or any revocation thereof, must be made in writing to the Transfer Agent at 3435 Stelzer Road, Columbus, Ohio 43219, and will become effective with respect to dividends and distributions having record dates after its receipt by the Transfer Agent.
Each of the Funds of the Group is treated as a separate entity for Federal income tax purposes, intends to qualify as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"), for so long as such qualification is in the best interest of its shareholders and intends to distribute all of its net income and capital gains so that it is not required to pay Federal income taxes on amounts so distributed to shareholders.
To avoid Federal income tax, the Code requires each Fund to distribute each taxable year at least 90% of its investment company taxable income and at least 90% of its exempt-interest income. In addition, to avoid imposition of a nondeductible 4% excise tax, each Fund is required annually to distribute, prior to calendar year end, 98% of taxable ordinary income on a calendar year basis, 98% of capital gain net income realized in the twelve months preceding October 31, and the balance of undistributed taxable ordinary income and capital gain net income from the prior calendar year. Finally, in order to permit the Municipal Bond Fund and the Michigan Fund each to distribute exempt-interest dividends which Shareholders may exclude from their gross taxable income for federal income tax purposes, at least 50% of such Fund's total assets must consist of obligations the interest on which is exempt from federal income tax as of the close of each fiscal quarter of such Fund.
A Shareholder receiving a distribution of ordinary income and/or an excess of short-term capital gain over net long-term loss would treat it as a receipt of ordinary income. The dividends-received deduction for corporations will apply to the aggregate of such ordinary income distributions in the same proportion as the aggregate dividends from domestic corporations, if any, received by that Fund bear to its gross income. A Shareholder will not be able to take the dividends-received deduction unless that Shareholder holds the Shares for at least 46 days.
Distribution by a Fund of the excess of net long-term capital gain over net short-term capital loss is taxable to its Shareholders as long-term capital gain in the year in which it is received, regardless of how long the Shareholder has held Shares. Such distributions are not eligible for the dividends-received deduction.
Prior to purchasing Shares, the impact of dividends or capital gains distributions which are expected to be declared or have been declared, but have not been paid, should be carefully considered. Any such dividends or capital gains distributions paid shortly after a purchase of Shares prior to the record date will have the effect of reducing the per share net asset value of the Shares by the amount of the dividends or distributions. All or a portion of such dividends or distributions, although in effect a return of capital, is subject to tax.
Taxes may be imposed on the Funds, particularly the Balanced and International Funds, by foreign countries with respect to income received on foreign securities. If more than 50% of the value of a Fund's assets at the close of its taxable year consists of stocks or securities of foreign corporations, the Fund may elect to treat any foreign income taxes it paid as paid by its Shareholders. In this case, Shareholders generally will be required to include in income their pro rata share of such taxes, but will then be entitled to claim a credit or deduction for their share of such taxes. However, a particular Shareholder's ability to utilize such a credit will be subject to certain limitations imposed by the Code. The Funds will report to its Shareholders each year the amount, if any, of foreign taxes per share that it has elected to have treated as paid by its Shareholders.
Shareholders will be advised at least annually as to the Federal income tax consequences of distributions made during the year.
THE MUNICIPAL BOND FUND, THE MICHIGAN FUND AND THE TAX-FREE FUND (THE "EXEMPT
Dividends derived from exempt-interest income may be treated by an Exempt Fund's Shareholders as items of interest excludable from their gross income. However, such dividends may be taxable to Shareholders of the Municipal Bond Fund and the Tax-Free Fund under state or local law as ordinary income even though all or a portion of the amounts may be derived from interest on tax-exempt obligations which, if realized directly, would be exempt from such taxes. In determining net exempt-interest income, expenses of the Exempt Fund are allocated to gross tax-exempt interest income in the proportion that the gross amount of such interest income bears to the Exempt Fund's total gross income, excluding net capital gains. (Shareholders are advised to consult a tax adviser with respect to whether exempt-interest dividends retain the exclusion if such Shareholder would be treated as a "substantial user" or a "related person" to such user under the Code.) Interest on indebtedness incurred or continued by a Shareholder to purchase or carry Shares is not deductible for federal income tax purposes if an Exempt Fund distributes exempt-interest dividends during the Shareholder's taxable year. It is anticipated that distributions from the Exempt Funds will not be eligible for the dividends received deduction for corporations.
Under the Code, if a Shareholder receives an exempt-interest dividend with respect to any Share and such Share is held for six months or less, any loss on the sale or exchange of such Share will be disallowed to the extent of the amount of such exempt-interest dividend, although the Treasury Department is authorized to issue regulations reducing the period to not less than 31 days for regulated investment companies that regularly distribute at least 90% of their net tax-exempt interest. No such regulations have been issued as of the date of this Prospectus. In addition, dividends attributable to interest on certain private activity bonds may have to be included in Shareholders' income for purposes of calculating alternative minimum tax. See "ADDITIONAL INFORMATION--Additional Tax Information Concerning the Tax-Free Fund, the Municipal Bond Fund and the Michigan Fund" in the Statement of Additional Information for more information regarding the federal alternative minimum tax.
To the extent dividends paid to Shareholders are derived from taxable income (for example, from interest on certificates of deposit or repurchase agreements) or from long-term or short-term capital gains, such dividends will be subject to federal income tax. A Shareholder should consult his or her own tax adviser for any special advice.
Distributions by the Michigan Fund to holders of Shares who are subject to the Michigan personal income tax and/or single business tax will not be subject to the Michigan personal income tax, single business tax or any Michigan city income tax to the extent that the distributions are attributable to income received by the Michigan Fund as interest from Michigan Municipal Securities or to the extent that the distributions are attributable to interest income and gains from the sale or disposal of United States obligations exempted from state taxation by the United States Constitution, treaties, and statutes. However, some or all of the other distributions by the Michigan Fund may be taxable by the State of Michigan or subject to applicable city income taxes, even if the distributions are attributable to income of the Michigan Fund derived from obligations of the United States or its agencies and instrumentalities. In addition, to the extent that a Shareholder of the Michigan Fund is obligated to pay state or local taxes outside of Michigan, dividends earned by an investment in the Michigan Fund may represent taxable income. Investments held in the Michigan Fund by a Michigan resident are not subject to the Michigan intangible personal property tax to the extent that the investments are attributable to bonds or other similar obligations of the State of Michigan or a political subdivision thereof, or obligations of the United States.
The Michigan Department of Treasury in a 1986 Revenue Administrative Bulletin has taken the position that the tax attributes of the securities held by a mutual fund flow through to the investors. Based on this position, the Michigan Department of Treasury has stated that mutual fund distributions attributable to interest from the fund's investment in direct U.S. government securities, as well as Municipal Securities, will not be subject to the Michigan personal income tax. The Michigan Department of Treasury also has stated that an owner of a share of a mutual fund will not be subject to intangible personal property tax to the extent that the pro rata share of the securities underlying the mutual fund would be exempt.
For Michigan personal income tax and intangible personal property tax purposes, taxable distributions from investment income and short term capital gains, if any, are taxable as ordinary income, whether received in cash or additional Shares, and are subject to the Michigan intangible personal property tax and to applicable Michigan city income taxes. The Michigan single business tax, a modified value added tax, is computed by applying the tax rate to a tax base determined by making certain adjustments to federal taxable income. Taxable distributions from investment income and gains, if any, may be included in federal taxable income or may comprise one of the adjustments made to the tax base. Distributions of cash, other property or additional Shares by the Michigan Fund to a Michigan single business taxpayer attributable to any gain realized from the sale, exchange or other disposition of Michigan Municipal Securities are includable in the Michigan single business taxpayer's adjusted tax base for purposes of the Michigan single business tax to the extent included in federal taxable income. Distributions of cash, other property or additional Shares by the Michigan Fund to a Michigan single business taxpayer are not subject to the Michigan single business tax to the extent that the distributions are attributable to interest income from and any gain realized from the sale, exchange or other disposition of U.S. Securities. Taxable long- term capital gains distributions are taxable as long-term capital gains for Michigan purposes irrespective of how long a Shareholder has held the Shares, except that such distributions reinvested in Shares of the Michigan Fund are exempt from the Michigan intangible personal property tax.
U.S. GOVERNMENT OBLIGATIONS FUND, PRIME OBLIGATIONS FUND AND TREASURY FUND
Since all of the net investment income of the U.S. Government Obligations Fund, the Prime Obligations Fund and the Treasury Fund is expected to be derived from earned interest, it is anticipated that no part of any distribution will be eligible for the dividends received deduction for corporations. The U.S. Government Obligations Fund, the Prime Obligations Fund and the Treasury Fund do not expect to realize any long-term capital gains and, therefore, do not foresee paying any "capital gains dividends" as described in the Code.
The foregoing is intended only as a brief summary of some of the important tax considerations generally affecting the Funds and their Shareholders. Potential investors are advised to consult their tax advisers concerning state and local taxes, which may differ from the Federal income taxes described above.
From time to time performance information for the Funds showing their average annual total return, aggregate total return and/or yield may be presented in advertisements, sales literature and shareholder reports. Such performance figures are based on historical earnings and are not intended to indicate future performance. Average annual total return of a class of Shares in a Fund will be calculated for the period since the establishment of the Funds and will reflect the imposition of the maximum sales charge, if any. Average annual total return is measured by comparing the value of an investment in a class of Shares in a Fund at the beginning of the relevant period to the redemption value of the investment at the end of the period (assuming immediate reinvestment of any dividends or capital gains distributions) and annualizing the result. Aggregate total return is calculated similarly to average annual total return except that the return figure is aggregated over the relevant period instead of annualized. Yield of a class of Shares will be computed by dividing a class of Shares' net investment income per share earned during a recent one-month period by that class of Shares' per share maximum offering price (reduced by any undeclared earned income expected to be paid shortly as a dividend) on the last day of the period and annualizing the result. Each Fund may also present its average annual total return, aggregate total return and yield, as the case may be, excluding the effect of a sales charge, if any.
In addition, from time to time the Funds may present their respective distribution rates for a class of Shares in supplemental sales literature which is accompanied or preceded by a prospectus and in Shareholder reports. Distribution rates will be computed by dividing the distribution per share of a class made by a Fund over a twelve-month period by the maximum offering price per share. The calculation of income in the distribution rate includes both income and capital gain dividends and does not reflect unrealized gains or losses, although a Fund may also present a distribution rate excluding the effect of capital gains. The distribution rate differs from the yield, because it includes capital gains which are often non-recurring in nature, whereas yield does not include such items. Distribution rates may also be presented excluding the effect of a sales charge, if any.
Standardized yield and total return quotations will be computed separately for Institutional Shares and the other classes of the Funds. Because of differences in the fees and/or expenses borne by different classes of Shares of the Funds, the net yield and total return on Institutional Shares may be different from that for another class of the same Fund. For example, net yield and total return on Investor A Shares is expected, at any given time, to be lower than the net yield and total return on Institutional Shares for the same period.
Investors may also judge the performance of any class of Shares or Fund by comparing or referencing it to the performance of other mutual funds with comparable investment objectives and policies through various mutual fund or market indices such as those prepared by various services which indices may be published by such services or by other services or publications, including, but not limited to, ratings published by Morningstar, Inc. In addition to performance information, general information about the Funds that appears in such publications may be included in advertisements, in sales literature and in reports to Shareholders. For further information regarding such services and publications, see "ADDITIONAL INFORMATION--Performance Comparisons" in the Statement of Additional Information.
Total return and yield are functions of the type and quality of instruments held in the portfolio, operating expenses, and market conditions. Consequently, total return and yield will fluctuate and are not necessarily representative of future results. Any fees charged by First of America Bank Corporation or any of its affiliates with respect to customer accounts for investing in shares of the Funds will not be included in performance calculations; such fees, if charged, will reduce the actual performance from that quoted. In addition, if First of America and BISYS voluntarily reduce all or a part of their respective fees, as further discussed below, the total return of such Fund will be higher than it would otherwise be in the absence of such voluntary fee reductions.
Shareholders of the Group may obtain current price, yield and other performance information on any of the Group's funds through FUNDATA(R), an Automated Voice Response System, 24 hours a day by calling (800) 451-8377 from any touch-tone phone. Shareholders may also speak directly with a Group representative, employed by BISYS, during regular business hours.
The Group was organized as a Massachusetts business trust in 1987 and currently offers fifteen Funds. The shares of each of the Funds of the Group, other than its four Money Market Funds, are offered in four separate classes: Investor A Shares, Investor B Shares, Investor C Shares and Institutional Shares. Shares of each of the four Money Market Funds of the Group are offered in two separate classes: Investor A Shares and Institutional Shares. Each Share represents an equal proportionate interest in a fund with other shares of the same fund, and is entitled to such dividends and distributions out of the income earned on the assets belonging to that Fund as are declared at the discretion of the Trustees. Shares are without par value.
Shareholders are entitled to one vote for each dollar of value invested and a proportionate fractional vote for any fraction of a dollar invested. Shareholders will vote in the aggregate and not by fund except as otherwise expressly required by law. For example, Shareholders of the Funds will vote in the aggregate with other shareholders of the Group with respect to the election of trustees and ratification of the selection of independent accountants. However, Shareholders of a Fund will vote as a fund, and not in the aggregate with other shareholders of the Group, for purposes of approval of that Fund's investment advisory agreement.
An annual or special meeting of shareholders to conduct necessary business is not required by the Declaration of Trust, the 1940 Act or other authority except, under certain circumstances, to elect Trustees, amend the Declaration of Trust, approve an investment and sub-investment advisory agreements and to satisfy certain other requirements. To the extent that such a meeting is not required, the Group may elect not to have an annual or special meeting.
The Group has represented to the Commission that the Trustees will call a special meeting of shareholders for purposes of considering the removal of one or more Trustees upon written request therefor from shareholders holding not less than 10% of the outstanding votes of the Group. At such a meeting, a quorum of shareholders (constituting a majority of votes attributable to all outstanding shares of the Group), by majority vote, has the power to remove one or more Trustees.
As of June 30, 1995, First of America Bank Corporation, through its wholly owned subsidiaries, possessed on behalf of its underlying accounts voting or investment power with respect to more than 25% of the Shares of each of the Funds, and therefore may be presumed to control each Fund within the meaning of the 1940 Act.
In addition to Institutional Shares, the Group also offers Investor A, Investor B and Investor C Shares of the Funds under an exemptive order granted by the Commission. A salesperson or other person entitled to receive compensation for selling or servicing the Shares may receive different compensation with respect to one particular class of Shares over another in the same Fund. The amount of dividends payable with respect to other classes of Shares will differ from dividends on Institutional Shares as a result of the Distribution and Shareholder Service Plan fees applicable to such other classes of Shares and because the different classes of Shares may bear different retail transfer agency expenses. For further details regarding these other classes of Shares, call the Group at (800) 451-8377.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
BISYS Fund Services Ohio, Inc., formerly known as The Winsbury Service Corporation, 3435 Stelzer Road, Columbus, Ohio 43219, serves as the Group's Transfer Agent pursuant to a Transfer Agency Agreement with the Group and receives a fee for such services. BISYS Fund Services Ohio, Inc. also provides certain accounting services for each of the Funds and receives a fee for such services. See "MANAGEMENT OF THE GROUP--Custodian, Transfer Agent and Fund Accounting Services" in the Statement of Additional Information for further information.
While BISYS Fund Services Ohio, Inc. is a distinct legal entity from BISYS (the Group's administrator and distributor), BISYS Fund Services Ohio, Inc. is considered to be an affiliated person of BISYS under the 1940 Act due to, among other things, the fact that BISYS Fund Services Ohio, Inc. and BISYS are both owned by The BISYS Group, Inc.
Shareholders will receive unaudited semi-annual reports and annual reports audited by independent public accountants.
Inquiries regarding the Group may be directed in writing to The Parkstone Group of Funds at 3435 Stelzer Road, Columbus, Ohio 43219, or by calling toll free (800) 451-8377.
No person has been authorized to give any information or to 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 Funds or their Distributor. This Prospectus does not constitute an offering by the Funds or by their Distributor in any jurisdiction in which such offering may not lawfully be made.
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THE PARKSTONE GROUP OF FUNDS
First of America Investment Corporation
SUB-INVESTMENT ADVISER (INTERNATIONAL AND BALANCED FUNDS) Gulfstream Global Investors, Ltd.
BISYS Fund Services Ohio, Inc.
The Bank of California, N.A.
Howard & Howard Attorneys, P.C. | 497 | 497 | 1996-01-12T00:00:00 | 1996-01-12T17:28:03 |
0000950147-96-000014 | 0000950147-96-000014_0004.txt | SIXTH MODIFICATION AGREEMENT EXHIBIT 10.3
PARTIES: Borrower: MILBURN INVESTMENTS, INC., a Texas corporation.
Bank: BANK ONE, ARIZONA, NA, a national banking association.
A. Bank has extended to Borrower credit ("Loan") in the principal amount of $25,000,000.00 pursuant to the Amended and Restated Loan Agreement, dated October 28, 1994 ("Loan Agreement"), and evidenced by the Replacement Promissory Note, dated October 28, 1994 ("Note"). The unpaid principal of the Loan as of the date hereof is $0.
B. The Loan is secured by, among other things, various Deeds of Trust, Assignment of Leases and Rents, Security Agreement and Financing Statements ("Deeds of Trust"), by Borrower, as trustor, for the benefit of Bank, as beneficiary, recorded in records of Bell, Travis, and Williamson Counties, Texas (the agreements, documents, and instruments securing the Loan and the Note are referred to individually and collectively as the "Security Documents").
C. Bank and Borrower have executed and delivered previously the following agreements ("Modifications") modifying the terms of the Loan, the Note, the Loan Agreement, and/or the Security Documents: First Modification Agreement, dated December 8, 1994, Second Modification Agreement, dated March 15, 1995, Third Modification Agreement, dated May 19, 1995, Fourth Modification Agreement, dated July 28, 1995, and Fifth Modification Agreement, dated September 26, 1995. (The Note, the Loan Agreement, the Security Documents, any arbitration resolution, any environmental certification and indemnity agreement, and all other agreements, documents, and instruments evidencing, securing, or otherwise relating to the Loan, as modified in the Modifications, are sometimes referred to individually and collectively as the "Loan Documents". Hereinafter, "Note", "Loan Agreement", "Deed of Trusts" and "Security Documents" shall mean such documents as modified in the Modifications.)
D. Borrower has requested that Bank modify the Loan and the Loan Documents as provided herein. Bank is willing to so modify the Loan and the Loan Documents, subject to the terms and conditions herein.
For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Bank agree as follows:
Borrower acknowledges the accuracy of the Recitals.
2. MODIFICATION OF LOAN DOCUMENTS.
2.1 The Loan Documents are modified as follows:
2.1.1 The Conversion Date of the Loan and the Note is changed from November 26, 1995 to November 15, 1997.
2.1.2 Section 6.22.1 of the Loan Agreement is hereby modified in its entirety to read as follows:
Tangible Net Worth in an amount not less than $23,000,000.00 as of May 31, 1995, and increasing thereafter during each fiscal quarter (with the first such fiscal quarter commencing June 1, 1995) by an amount equal to twenty-five percent (25%) of Borrower's net profit after tax, as shown on Borrower's quarterly financial statements delivered to Bank pursuant to Section 6.3.1.2 for the immediately preceding fiscal quarter.
2.1.3 Section 6.22.2 of the Loan Agreement is hereby modified in its entirety to read as follows:
A Debt to Tangible Net Worth Ratio of not more than 1.70 to 1.
2.1.4 Section 6.22.3 of the Loan Agreement is hereby modified in its entirety to read as follows:
A Debt to Net Worth Ratio of not more than 1.25 to 1.
2.2 Each of the Loan Documents is modified to provide that it shall be a default or an event of default thereunder if Borrower shall fail to comply with any of the covenants of Borrower herein or if any representation or warranty by Borrower herein or by any guarantor in any related Consent and Agreement of Guarantor(s) is materially incomplete, incorrect, or misleading as of the date hereof.
2.3 Each reference in the Loan Documents to any of the Loan Documents shall be a reference to such document as modified herein.
3. RATIFICATION OF LOAN DOCUMENTS AND COLLATERAL.
The Loan Documents are ratified and affirmed by Borrower and shall remain in full force and effect as modified herein. Any property or rights to or interests in property granted as security in the Loan Documents shall remain as security for the Loan and the obligations of Borrower in the Loan Documents.
4. BORROWER REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Bank:
4.1 No default or event of default under any of the Loan Documents as modified herein, nor any event, that, with the giving of notice or the passage of time or both, would be a default or an event of default under the Loan Documents as modified herein has occurred and is continuing.
4.2 There has been no material adverse change in the financial condition of Borrower or any other person whose financial statement has been delivered to Bank in connection with the Loan from the most recent financial statement received by Bank.
4.3 Each and all representations and warranties of Borrower in the Loan Documents are accurate on the date hereof.
4.4 Borrower has no claims, counterclaims, defenses, or set-offs with respect to the Loan or the Loan Documents as modified herein.
4.5 The Loan Documents as modified herein are the legal, valid, and binding obligation of Borrower, enforceable against Borrower in accordance with their terms.
4.6 Borrower is validly existing under the laws of the State of its formation or organization and has the requisite power and authority to execute and deliver this Agreement and to perform the Loan Documents as modified herein. The execution and delivery of this Agreement and the performance of the Loan Documents as modified herein have been duly authorized by all requisite action by or on behalf of Borrower. This Agreement has been duly executed and delivered on behalf of Borrower.
5.1 Borrower shall execute, deliver, and provide to Bank such additional agreements, documents, and instruments as reasonably required by Bank to effectuate the intent of this Agreement. 5.2 Borrower fully, finally, and forever releases and discharges Bank and its successors, assigns, directors, officers, employees, agents, and representatives from any and all actions, causes of action, claims, debts, demands, liabilities, obligations, and suits, of whatever kind or nature, in law or equity of Borrower, whether now known or unknown to Borrower, (i) in respect of the Loan, the Loan Documents, or the actions or omissions of Bank in respect of the Loan or the Loan Documents and (ii) arising from events occurring prior to the date of this Agreement. 5.3 Contemporaneously with the execution and delivery of this Agreement, Borrower has paid to Bank:
5.3.1 All accrued and unpaid interest under the Note and all amounts, other than interest and principal, due and payable by Borrower under the Loan Documents as of the date hereof.
5.3.2 All the internal and external costs and expenses incurred by Bank in connection with this Agreement (including, without limitation, inside and outside attorneys, appraisal, appraisal review, processing, title, filing, and recording costs, expenses, and fees).
5.3.3 Loan commitment fees as follows:
(a) A commitment fee of one-half of one percent (.5%) per annum of $15,000,000.00 of the Commitment Amount (i.e., $25,000.00), for the time period from July 28, 1995 until November 26, 1995.
(b) A commitment fee of one-half of one percent (.50%) per annum of the remaining $10,000,000.00 of the Commitment Amount (i.e., $16,666.00), for the time period from July 28, 1995 until November 26, 1995.
(c) A commitment fee of one-half of one percent (.5%) per annum of $15,000,000.00 of the Commitment Amount (i.e., $71,875.00), for the time period from November 26, 1995 until November 15, 1996. Borrower shall pay a commitment fee in the amount of $75,000.00 on or before November 15, 1996.
(d) A commitment fee of one-quarter of one percent (.25%) per annum of the remaining $10,000,000.00 of the Commitment Amount (i.e., $23,959.00), for the time period from November 26, 1995 until November 15, 1996. Borrower shall pay a commitment fee in the amount of $25,000.00 on or before November 15, 1996.
6. EXECUTION AND DELIVERY OF AGREEMENT BY BANK.
Bank shall not be bound by this Agreement until (i) Bank has executed and delivered this Agreement, (ii) Borrower has performed all of the obligations of Borrower under this Agreement to be performed contemporaneously with the execution and delivery of this Agreement, (iii) each guarantor(s) of the Loan, if any, has executed and delivered to Bank a Consent and Agreement of Guarantor(s), and (iv) if required by Bank, Borrower and any guarantor(s) have executed and delivered to Bank an arbitration resolution, an environmental questionnaire, and an environmental certification and indemnity agreement.
7. INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, OR WAIVER.
The Loan Documents as modified herein contain the complete understanding and agreement of Borrower and Bank in respect of the Loan and supersede all prior representations, warranties, agreements, arrangements, understandings, and negotiations. No provision of the Loan Documents as modified herein may be changed, discharged, supplemented, terminated, or waived except in a writing signed by the parties thereto.
The Loan Documents as modified herein shall be binding upon and shall inure to the benefit of Borrower and Bank and their successors and assigns and the executors, legal administrators, personal representatives, heirs, devisees, and beneficiaries of Borrower, provided, however, Borrower may not assign any of its right or delegate any of its obligation under the Loan Documents and any purported assignment or delegation shall be void.
This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona, without giving effect to conflicts of law principles.
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.
DATED as of the date first above stated.
By: /s/ Kenda B. Gonzales
By: /s/ Rhonda R. Williams | 10-Q | EX-10.3 | 1996-01-12T00:00:00 | 1996-01-12T16:40:21 |
0000845613-96-000003 | 0000845613-96-000003_0000.txt | (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
For the quarterly period ended SEPTEMBER 30, 1995
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE CHANGE ACT OF 1934
For the transition period from to
FRANKLIN SELECT REAL ESTATE INCOME FUND (Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)(I.R.S.Employer
P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (415) 312-2000
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 Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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
Common Stock Shares Outstanding as of September 30, 1995, Series A 5,383,439 Common Stock Shares Outstanding as of September 30, 1995, Series B 185,866
PART I - FINANCIAL INFORMATION
and Analysis of Financial Condition
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 THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1994
Net income for the nine month period ended September 30, 1995 increased $89,000, or 9%, compared to 1994 due to the following factors: an increase in rental revenue of $53,000; an increase in interest and dividends of $86,000; an increase in depreciation and amortization of $25,000; a decrease in operating expenses of $32,000; an increase in related party expenses of $68,000; an increase in consolidation expense of $66,000; a decrease in general and administrative expense of $64,000 and a decrease in loss on sale of mortgage-backed securities of $13,000. Explanations of the material changes are as follows:
Rental revenue for the nine month period ended September 30, 1995 increased $53,000, or 2%, primarily due to increased rental revenue at the Shores Office Complex, as a result of an increase in average occupancy and rental rates. The average occupancy rate at the Shores Office Complex during the nine month periods ended September 30, 1995 and 1994 was 98% and 91%, respectively. The occupancy rate at the Data General Building was 100% for both periods.
Interest and dividend income for the nine month period ended September 30, 1995 increased $86,000, or 31%, due to higher yields realized on investments in mortgage-backed securities.
Total expenses for the nine month period ended September 30, 1995, increased by $50,000, or 2%, from $2,665,000 in 1994 to $2,715,000. The increase in total expenses is attributable to the following factors: an increase in depreciation and amortization of $25,000, or 2%; a decrease in operating expenses of $32,000, or 3%; an increase in related party expenses of $68,000, or 25%; an increase in consolidation expense of $66,000, or 100%; a decrease in general and administrative expense of $64,000, or 31%; and a decrease in loss on sale of mortgage-backed securities of $13,000.
Depreciation and amortization increased $25,000 for the nine month period ended September 30, 1995, reflecting tenant improvement costs at the Shores Office Complex related to new leases commencing in late 1994.
Operating expenses for the nine month period ended September 30, 1995 decreased $32,000, primarily due to a decrease in property tax expense at the Data General Building.
Related party expense for the nine month period ended September 30, 1995 increased $68,000, primarily due to an increase in advisory fees related to the conversion of the Company to an infinite life REIT on October 1, 1994.
PART I - FINANCIAL INFORMATION
and Analysis of Financial Condition
Consolidation expense for the nine month period ended September 30, 1995 of $66,000 relates to the proposed consolidation.
General and administrative expense for the nine month period ended September 30, 1995 decreased $64,000 primarily due to a decrease in nonrecurring costs associated with listing the Company's stock on the American Stock Exchange in January, 1994 of $68,000.
The Company's principal source of capital for the acquisition and major renovation of properties has been the proceeds from the initial public offering of its stock. The Company's funds from operations have been its principal source of capital for minor property improvements, leasing costs and the payment of quarterly dividends. At September 30, 1995, the Company's cash reserves, including mortgage-backed securities, aggregated $8,554,000.
The Company is currently examining the possibility of raising additional capital through arranging debt financing on its existing portfolio. Any capital raised in this manner would be used to acquire additional properties and for other corporate purposes.
As of September 30, 1995, the Company had no formal borrowing arrangements with a bank and has no long-term debt. Each of the Company's properties is owned free and clear of mortgage indebtedness.
Management continues to evaluate other properties for acquisition by the Company. In the short-term and in the long term, 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 nine month period ended September 30, 1995 was $2,211,000 which was substantially unchanged from the same period in 1994.
Funds from Operations for the nine month period ended September 30, 1995 increased $101,000, or 5%, to $2,163,000 compared to the same period in 1994. The increase is primarily due to the improvement in net income as described under "Results of Operations" above. 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 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.
PART I - FINANCIAL INFORMATION
and Analysis of Financial Condition
LIQUIDITY AND CAPITAL RESOURCES (Continued)
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. 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 nine-month period ended September 30, 1995, the Company declared dividends totaling $1,776,000.
On November 2, 1995 the Board of Directors of the Company and of two other real estate investment trusts that Franklin Properties, Inc. advises, Franklin Real Estate Income Fund ("FREIF") and Franklin Advantage Real Estate Income Fund ("Advantage"), authorized the execution of a Merger Agreement and the filing of a Joint Proxy Statement/Registration Statement with the Securities and Exchange Commission. The Registration Statement was filed on November 13, 1995.
In the proposed merger, the FREIF and/or Advantage would be merged into the Company, which would be renamed Franklin Select Realty Trust. The shares of the Company will be offered to shareholders of the FREIF and Advantage in exchange for their shares on the basis described in the Joint Proxy Statement/Registration Statement. The merger is subject to certain conditions including approval by a majority of the shareholders of the Company, FREIF, and/or Advantage. A special meeting of the shareholders of each REIT will be held to vote on the proposed merger upon the effectiveness of the Registration Statement and the close of the solicitation period.
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.
FRANKLIN SELECT REAL ESTATE INCOME FUND
By: /S/ DAVID P. GOSS | 10-Q/A | 10-Q | 1996-01-12T00:00:00 | 1996-01-11T21:17:22 |
0000916480-96-000001 | 0000916480-96-000001_0000.txt | <DESCRIPTION>10-Q FOR 11/30/95 FOR WPM
[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 charter)
(State of incorporation) (I.R.S. Employer Identification
(Address of principal executive office)
Registrant's telephone number, including area code: 715-845-5266
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 report), and (2) has been subject to such filing requirements for the past 90 days.
The number of common shares outstanding at December 31, 1995 was 29,465,842.
Note: The number of shares outstanding at December 31, 1995 are before the effect of the 5-for-4 stock split payable January 17, 1996 to shareholders of record as of January 2, 1996.
November 30, 1995 (unaudited) and
Sheets November 30, 1995 (unaudited) and August 31, 1995 (derived from audited
of Cash Flows Three Months Ended November 30, 1995 (unaudited) and
Notes to Condensed Consolidated 4 - 5
Item 2. Management's Discussion and 6 - 8
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The accompanying unaudited financial statements include all adjustments, which are all normal and recurring in nature and, in the opinion of management, present fairly the condensed results for the interim periods presented. Refer to the Notes to Financial Statements which appear in the 1995 Annual Report for the company's accounting policies which are pertinent to these statements.
Note 2: Selling, administrative and research expenses include stock appreciation rights and stock option expense of $653,000 or $.01 per share for the quarter ended November 30, 1995 and income of $101,000 or less than $.01 per share for the quarter ended November 30, 1994.
Note 3: All shares and per share data have been restated to reflect the 10% stock dividend which occurred in January 1995.
Note 6: The accumulated depreciation on fixed assets was $155,875,000 as of November 30, 1995 and $150,736,000 as of August 31, 1995.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
For the three months ended November 30, 1995, net sales were a record $141,904,000, up 12.4% from the prior year's first quarter net sales of $126,267,000. Shipments of 103,900 tons matched last year's record first quarter shipments. The increase in sales over the prior year is due primarily to higher selling prices for both printing and writing and technical specialty grades.
Despite a worldwide slowing in demand for paper products, shipments of the company's printing and writing grades were strong for the quarter and exceeded last year's first quarter by 1.9%. Order backlogs at quarter-end at the Printing and Writing Division were down slightly from a year ago as a result of weaker demand for certain grades of paper. These grades, such as commodity cut-size and offset papers, are at the low end of the division's mix and represent a small portion of its volume. These papers have been produced since early fiscal 1995 to fill out production at the Groveton mill. Pricing has become increasingly competitive on these grades due to weakening demand, making it more difficult for the company to participate in this market segment.
Shipments of Rhinelander's technical specialty grades were down 3.6% compared to the prior year. Although demand for pressure sensitive products improved in the first quarter of fiscal 1996 from the previous quarter, order backlogs were below last year's first quarter levels when demand for Rhinelander's products was extremely strong.
Fiscal 1996 first quarter gross profit was $19,628,000 or 13.8% of net sales.
Gross profit in the first quarter of fiscal 1995 was $21,098,000 or 16.7% of net sales.
Gross profit in the first quarter of fiscal 1996 was negatively impacted primarily by higher pulp prices compared to the previous year. The average list price for northern bleached softwood kraft in the first quarter of fiscal 1996 was approximately 40% higher than a year ago. Although market pulp prices for some grades of pulp increased in the first quarter, pulp prices appear to have peaked and are beginning to decline as weakening global demand for paper is effecting worldwide demand for pulp. The company did not increase paper prices in the first quarter in response to the pulp price increases. Management expects that with continued strong sales and reduced pulp costs the company will return, in the longer term, to historical per ton margins and renewed profit growth momentum.
Production in the first quarter of fiscal 1996 at the company's Printing and Writing Division was up 11.5% over the prior year. The higher production level was primarily the result of having full operations at the Groveton mill compared to last year's first quarter when Groveton's second paper machine operated for only two months. Inventory levels dropped slightly during the quarter as a result of strong shipments. The inventory decline was less than experienced in the first quarter of fiscal 1995 which was impacted by strong shipments, below capacity operations at Groveton, and capital improvement related downtime at the Brokaw mill.
The Rhinelander mill operated at 97% of capacity in the first quarter of fiscal 1996. As a result, production was 2.3% below last year's first quarter. Demand for its products improved during the quarter, but was not as strong as a year ago. Inventory levels remained essentially unchanged in the quarter as was the case during the first quarter of fiscal 1995.
Selling, Administrative and Research Expenses
In the first quarter of fiscal 1996, selling, administrative and research expenses were $7,416,000 compared to $6,727,000 for the same period a year ago. The increase over the prior year is due to stock appreciation rights and stock option expense of $653,000 in the first quarter of fiscal 1996 compared to income of $101,000 recorded in last year's first quarter.
Interest income was $210,000 and $60,000 in the three months ended November 30, 1995 and 1994, respectively. The increase in the first quarter of fiscal 1996 over the prior year is due to interest income from undistributed proceeds from the $19 million industrial development bond issuance in August 1995. Interest expense totalled $570,000 in the first quarter of fiscal 1996, compared to $436,000 a year ago. Higher interest expense is the result of higher debt levels compared with last year's first quarter.
The income tax provision in the first quarter of fiscal 1996 was $4,500,000 for an effective tax rate of 38.1%. The effective tax rate in the first quarter of fiscal 1995 was 38.4%.
Net earnings for the three months ended November 30, 1995 were $7,305,000 or $.25 per share. Net earnings were $8,597,000 or $.29 per share in last year's first quarter.
For the three months ended November 30, 1995, cash provided by operations was $18,470,000 compared to $20,155,000 for the same period in fiscal 1995. Cash provided by operations was lower in the first quarter of fiscal 1996 compared to a year ago due primarily to higher unit productions costs.
For the three months ended November 30, capital expenditures were $17,316,000 and $8,626,000 in 1995 and 1994, respectively.
The $46 million expansion project at Rhinelander is proceeding on schedule. The Rhinelander mill successfully started up the new supercalender in November which will allow for increased production of pressure sensitive products. The expansion project also includes a rebuild of No. 7 paper machine which is scheduled for March 1996. No. 7 paper machine will be down approximately two weeks to complete the capital improvements. Work continues on several other major projects throughout the company including the $16.4 million fiber handling and processing project at the Brokaw mill.
On December 18, 1995, the Board of Directors approved $8 million in capital improvements including nearly $6 million to modernize the wood processing facility at the Brokaw mill. The wood room project will increase process efficiencies and wood yield, reduce operating costs and improve working conditions.
Total capital expenditures are projected to be approximately $70 million in fiscal 1996.
Long-term debt decreased $6.1 million in the first quarter of fiscal 1996 to $62,568,000. Long-term debt consisted primarily of $30.0 million in notes to Prudential Insurance Company of America and its subsidiaries, less the current portion, with a fixed rate of 6.03%. In addition, the company had $19.0 million in variable rate industrial development bonds with an interest rate of 3.95% at November 30, 1995. Undistributed proceeds from the August 1995 industrial development bond issuance totalled $11,797,000 at the end of the quarter. At November 30, 1995, the company also had $11.5 million in revolving credit agreement borrowings at effective interest rates ranging from 5.95% to 6.06% and $6.8 million in commercial paper with effective interest rates of 6.20% to 6.31%.
Cash provided by operations, industrial development bond proceeds and the revolving credit facility are expected to meet working capital needs and dividend requirements, as well as fund the company's stock repurchase program and planned capital expenditure requirements. The company believes additional financing is readily available, should it be needed, to fund a major expansion or acquisition.
On June 30, 1994, the Board of Directors authorized the repurchase of up to 1,485,000 shares (after the effect of the January 1995 stock dividend) of the company's common stock from time to time in the open market or through privately negotiated transactions at prevailing market prices. There were no repurchases of company stock during the first quarter of fiscal 1996.
On December 18, 1995, the Board of Directors declared a 5-for-4 stock split and approved a 10% increase in the cash dividend, from $.050 to $.055 per share on a new share basis. Both the cash dividend and the additional shares from the stock split are payable January 17, 1996 to shareholders of record as of January 2, 1996. Any fractional shares resulting from the stock split will be paid in cash, based on the closing price of the stock on the record date.
PART II - OTHER INFORMATION
On December 18, 1995 shareholders approved an increase in authorized shares of the company's common stock from 36,000,000 to 100,000,000.
The company negotiated a five year labor agreement, effective January 1, 1996 with the United Paperworkers International Union at the Rhinelander Division. The agreement, which expires in December 2000, includes a general wage increase of 3.0% in 1996, 3.5% in 1997, 3.5% in 1998, 3.0% in 1999 and 3.0% in 2000. The contract includes changes in work rules to provide greater operating efficiencies and increases in employee benefits. The company is of the opinion that this labor agreement will provide competitive labor costs over the contract period.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
(10) Supplemental Retirement Benefit Plan dated 1/16/92, as amended 11/13/95.
(b) Reports on form 8-K: None
S I G N A T U R E
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.
Vice President Finance, Secretary and Treasurer | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-12T14:58:18 |
0000950130-96-000107 | 0000950130-96-000107_0004.txt | NEW YORK, NEW YORK 10017
We have acted as special counsel for you, as sponsor (the "Sponsor") of the California Trust 147, the Florida Trust 73 and the New York Trust 151, of Tax Exempt Securities Trust (the "Trusts"), in connection with the issuance of units of fractional undivided interest in the Trusts (the "Units") in accordance with the Trust Indenture and Agreement and related Reference Trust Agreement relating to the Trusts (the "Indenture").
We have examined and are familiar with originals or copies, certified or otherwise identified to our satisfaction, of such documents and instruments as we have deemed necessary or advisable for the purpose of this opinion.
Based upon the foregoing, we are of the opinion that (i) the execution and delivery of the Indenture and the issuance of the Units have been duly authorized by the Sponsor and (ii) the Units, when duly issued and delivered by the Sponsor and the Trustee in accordance with the Indenture, will be legally issued, fully paid and non-assessable.
We hereby consent to the use of this opinion as Exhibit 3.1 to the Registration Statement relating to the Units filed under the Securities Act of 1933 and to the use of our name in such Registration Statement and in the related prospectus under the headings "Taxes", "New York Taxes" and "Legal Opinion". | 487 | EX-99.3.1 | 1996-01-12T00:00:00 | 1996-01-12T16:52:44 |
0000912057-96-000430 | 0000912057-96-000430_0000.txt | 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 Issuer as specified in its charter)
(State or other (Commission (IRS Employer File Number)
6890 SOUTH TUCSON WAY, SUITE 202 (Address of principal executive offices zip code)
(Registrant's telephone number, including area code)
Pursuant to Section 13 or 15(d) of the Securities Act of 1934
Item 1. CHANGES IN CONTROL OF REGISTRANT.
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
Item 3. BANKRUPTCY OR RECEIVERSHIP.
Item 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
AGTsports, Inc. of Englewood, Colorado has been notified by Unisys Australia Limited that the Board of Directors of the Australian Golf Union (AGU) has endorsed the Ferrier Hodgson Corporate Advisory (FHCA) recommendation that Unisys Australia Limited (Unisys) be selected as the preferred provider of the AGU's National Handicapping System and Database. The Board's selection of Unisys as the preferred provider is subject to the signing of a Heads of Agreement which will document the arrangements as proposed by Unisys. This Agreement will be drafted with a view to executing it by the middle of January.
Unisys communicated to AGTsports, Inc. that the plan is first for Unisys to complete the Heads of Agreement with the AGU, next to finalize details of Unisys' arrangement with AGTsports, Inc. and other providers under the Agreement, and finally, to have Unisys sign a contract with the AGU.
Unisys will liaison with the Managing Director of AGTsports Australia, a subsidiary of the Registrant, and meet with a representative of AGTsports, Inc. in early February regarding these agreements currently under development.
Item 6. RESIGNATION OF REGISTRANT'S DIRECTORS. Not Applicable.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
Item 8. CHANGE IN FISCAL YEAR.
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/ T. Alan Walls | 8-K | 8-K | 1996-01-12T00:00:00 | 1996-01-12T11:42:38 |
0000950130-96-000108 | 0000950130-96-000108_0013.txt | This agreement will confirm our possible interest in preliminary discussions ("DISCUSSIONS") which might lead to some form of negotiated transaction between the parties (the "TRANSACTION"). During such Discussions, we, which term (as well as the terms "us" and "party" when referring to Lockheed Martin Corporation shall include Lockheed Martin Corporation and its affiliates and their directors, officers, employees and Representatives (as hereinafter defined) and you, which term (as well as the term "party" when referring to Loral Corporation shall include Loral Corporation and its affiliates and their directors, officers, employees and Representatives, may determine that it is necessary and appropriate to exchange certain information relating to us or you respectively. Any such information (whether written or oral) furnished (whether before or after the date hereof) by you to us or by us to you, including your or our respective financial advisors, attorneys, accountants or agents (collectively, "REPRESENTATIVES") and all analyses, compilations, forecasts, studies or other documents prepared by you or by us in connection with your or our review of, or interest in, the Discussions or the Transactions which contain or reflect any such information is hereinafter referred to as the "INFORMATION." The term Information will not include information which (i) is or becomes publicly available other than as a result of a disclosure by the receiving party or (ii) is or becomes available to the receiving party on a nonconfidential basis from a source (other than that party) which, to the best of the receiving party's knowledge, is not prohibited from disclosing such information to it by a legal, contractual or fiduciary obligation, or (iii) is independently developed by the receiving party without reference to the Information.
Accordingly, it is hereby agreed that:
1. Each of the parties (i) will keep the Information confidential and will not (except as required by applicable law, regulation or legal process, and only after compliance with paragraph 3 below), without the prior written consent to the party which furnished the Information, disclose the Information in any manner whatsoever, and (ii) will not use the Information other than in connection with the Transaction. Information may be revealed to a receiving party's Representatives only if such Representatives (a) need to know the Information for the purpose of evaluating, or advising the receiving party with respect to the Transaction, (b) are informed of the confidential nature of the Information and (c) agree to act in accordance with the terms of this agreement.
2. Each of the parties will not (except as required by applicable law, regulation or legal process, and only after compliance with paragraph 3 below), without the other party's prior written consent, disclose to any person the fact that the Information exists or has been made available, that either party is considering the Transaction, or that discussions or negotiations are taking or have taken place concerning the Transactions or any term, condition or other fact relating to any such Transaction or such discussions or negotiations, including, without limitation, the status thereof.
3. In the event that we are requested pursuant to, or required by, applicable law, regulation or legal process to disclose any of the Information, we will notify you promptly so that you may seek a protective order or other appropriate remedy or, in your sole discretion, waive compliance with the terms of this agreement. Similarly, in the event that you are requested pursuant to, or required by, applicable law, regulation or legal process to disclose any of the Information provided by us, you will notify us promptly so that we may seek a protective order or other appropriate remedy or in our sole discretion, waive compliance with the terms of this agreement. In the event that no such protective order or other remedy is obtained, that we or you waive compliance with the terms of this agreement, or that disclosure is legally required, the disclosing party will furnish only that portion of the information which it is advised by counsel is legally required and will exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded the Information.
4. If either party determines to cease discussions and/or not to proceed with a Transaction, it will promptly inform the other party of that decision. In that case, each party at its sole election will either (i) promptly destroy all copies of the written Information in its possession and confirm such destruction to the other party in writing, or (ii) promptly deliver to the other party at the returning party's expense all copies of the written Information in its possession.
5. The parties acknowledge that neither party or any of its controlling persons within the meaning of Section 20 of the Securities Exchange Act of 1934, as amended, makes any express or implied representation or warranty as to the accuracy or completeness of the Information furnished to the other party, and the parties agree that no such person will have any liability relating to the Information or for any errors therein or omissions therefrom. The parties further agree that they are not entitled to rely on the accuracy or completeness of the Information and that they will be entitled to rely solely on such representations and warranties as may be included in any definitive agreement with respect to a Transaction, subject to such limitation and restrictions as may be contained therein.
6. The parties acknowledge that they are aware of the restrictions imposed by the United States securities laws on the purchase or sale of securities by any person who has received material, non-public information from the issuer of such securities and on the communication of such information to any other person when it is reasonably foreseeable that such other person is likely to purchase or sell such securities in reliance upon such information.
7. For a period of three years from the date of this agreement, neither you nor we nor any of either of our controlled subsidiaries, will, unless specifically invited by the other party ("party" in this paragraph 7 and in paragraph 8 meaning either (i) Lockheed Martin Corporation or (ii) Loral Corporation and any existing or newly organized subsidiary of Loral Corporation the stock of which is distributed to the shareholders of Loral Corporation, as the case may be) or its Board of Directors: (i) acquire,
acquire, or agree to acquire, directly or indirectly, by purchase or otherwise, any voting securities, or direct or indirect rights to acquire any voting securities of the other party, or any assets of the other party or any subsidiary or division thereof or of any such successor or controlling person; (ii) make, or in any way participate in, directly or indirectly, any "solicitation" of "proxies" (as such terms are used in the rules of the Securities Exchange Commission) to vote, or seek to advise or influence any person or entity with respect to the voting of, any voting securities of the other party; (iii) make any public announcement with respect to, or submit a proposal for, or offer of (with or without conditions) any extraordinary transactions involving the other party or its securities or assets; (iv) form, join or in any way participate in a "group" (as defined in Section 13 (d) (3) of the Securities Exchange Act of 1934, as amended) in connection with any of the foregoing. The parties agree that for the period specified above, neither will publicly request the other (its officers, directors, employees and agents) or publicly disclose any request, directly or indirectly, to waive any provisions of this paragraph.
8. Each of the parties hereto agrees that, for a period of two years from the date of this agreement, it and its controlled subsidiaries will not, directly or indirectly, solicit for employment any employee of the other party or any of its subsidiaries who became known to it as a result of the Discussions or its consideration of a Transaction or any other person with whom a party has direct contact in the course of negotiating any Transaction, provided, however, that any such solicitation shall not be deemed a breach of this agreement if (i) the personnel who perform such solicitation have no access to or knowledge of any Information or this agreement and (ii) none of the soliciting party's personnel who have access to the Information have actual advance knowledge of such solicitation; provided, further that nothing contained in this paragraph 8 shall be deemed to limit in any manner our ability to offer employment to your employees in the event of the consummation of a Transaction between us. The term "solicit for employment" shall not be deemed to include general solicitations of employment not specifically directed towards employees of a party or any of its subsidiaries.
9. Each of the signatories acknowledge that remedies at law may be inadequate to protect it against any actual or threatened breach of this agreement and, without prejudice to any other rights and remedies otherwise available to them, the signatories agree that each of them shall be entitled to equitable relief, including injunction. In the event of litigation relating to this agreement, if a court of competent jurisdiction determines in a final, nonappealable order that this agreement has been breached then the breaching signatory shall reimburse the nonbreaching signatory for costs and expenses (including, without limitation, legal fees and expenses) incurred in connection with all such litigation.
10. No failure or delay by either signatory in exercising any right, power or privilege hereunder will operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder.
11. This agreement will be governed by and construed in accordance with the laws of the State of New York.
12. Any notice or communication hereunder shall be in writing and shall be delivered personally, telegraphed, telexed or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmissions or, if mailed, three (3) business days after the date of deposit in the United States mail, by certified mail return receipt requested as follows:
(i) If to us, to:
New York, New York 10022
Skadden, Arps, Slate, Meagher & Flom New York, New York 10022
(ii) If to you, to:
New York, New York 10016
New York, New York 10022 Attention: Bruce R. Kraus, Esq.
13. This agreement contains the entire agreement between the signatories concerning the confidentiality of the Information and other matters covered hereby, and no modifications of this agreement or waiver of the terms and conditions hereof will be binding, unless approved in writing by each of the signatories.
Executed this 4th day of December, 1995.
LOCKHEED MARTIN CORPORATION LORAL CORPORATION
By: /s/ Frank H. Menaker, Jr. By: /s/ Michael B. Targoff
Its: Vice President and Its: Senior Vice President | SC 14D1 | EX-99.(C)(1) | 1996-01-12T00:00:00 | 1996-01-12T17:26:30 |
0000950112-96-000053 | 0000950112-96-000053_0000.txt | AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 12, 1996
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2
A. EXACT NAME OF TRUST:
MERRILL LYNCH, PIERCE, FENNER & SMITH INC. SMITH BARNEY INC. DEAN WITTER REYNOLDS INC.
C. COMPLETE ADDRESSES OF DEPOSITORS' PRINCIPAL EXECUTIVE OFFICES:
MERRILL LYNCH, PIERCE, SMITH BARNEY INC. PAINEWEBBER INCORPORATED FENNER & 388 GREENWICH 1285 AVENUE OF THE SMITH INCORPORATED STREET--23RD FLOOR AMERICAS UNIT INVESTMENT TRUST NEW YORK, NY 10013 NEW YORK, N.Y. 10019 DEAN WITTER REYNOLDS INC.
D. NAMES AND COMPLETE ADDRESSES OF AGENTS FOR SERVICE:
TERESA KONCICK, ESQ. LAURIE A. HESSLEIN ROBERT E. HOLLEY P.O. BOX 9051 388 GREENWICH STREET 1200 HARBOR BLVD. PRINCETON, NJ 08543-9051 NEW YORK, N. Y. 10013 WEEHAWKEN, N.J. 07087 COPIES TO: LEE B. SPENCER, JR. DOUGLAS LOWE, ESQ. PIERRE DE SAINT PHALLE, ONE SEAPORT PLAZA 130 LIBERTY STREET--29TH ESQ. 199 WATER STREET FLOOR 450 LEXINGTON AVENUE NEW YORK, N. Y. 10292 NEW YORK, N.Y. 10006 NEW YORK, N. Y. 10017
E. TITLE AND AMOUNT OF SECURITIES BEING REGISTERED:
An indefinite number of Units of Beneficial Interest pursuant to Rule 24f-2 promulgated under the Investment Company Act of 1940, as amended.
F. PROPOSED MAXIMUM OFFERING PRICE TO THE PUBLIC OF THE SECURITIES BEING
G. AMOUNT OF FILING FEE: $500 (as required by Rule 24f-2)
H. APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of the Registration Statement.
/ x / Check box if it is proposed that this filing will become effective at 9:30 a.m. on January 12, 1996 pursuant to Rule 487.
MUNICIPAL INVESTMENT 5.35% ESTIMATED CURRENT RETURN shows the estimated TRUST FUND annual cash to be received from interest-bearing MONTHLY PAYMENT SERIES 564 bonds in the Portfolio (net of estimated annual (A UNIT INVESTMENT expenses) divided by the Public Offering Price TRUST) (including the maximum sales charge). ------------------------------5.38% ESTIMATED LONG TERM RETURN is a measure of / / DESIGNED FOR FEDERALLY the estimated return over the estimated life of TAX-FREE INCOME the Fund. This represents an average of the yields / / DEFINED PORTFOLIO OF to maturity (or in certain cases, to an earlier MUNICIPAL BONDS call date) of the individual bonds in the / / MONTHLY INCOME Portfolio, adjusted to reflect the maximum sales / / INVESTMENT GRADE charge and estimated expenses. The average yield 5.35% for the Portfolio is derived by weighting each ESTIMATED CURRENT RETURN bond's yield by its market value and the time 5.38% remaining to the call or maturity date, depending ESTIMATED LONG TERM RETURN on how the bond is priced. Unlike Estimated AS OF JANUARY 11, 1996 Current Return, Estimated Long Term Return takes into account maturities, discounts and premiums of the underlying bonds. No return estimate can be predictive of your actual return because returns will vary with purchase price (including sales charges), how long units are held, changes in Portfolio composition, changes in interest income and changes in fees and expenses. Therefore, Estimated Current Return and Estimated Long Term Return are designed to be comparative rather than predictive. A yield calculation which is more comparable to an individual bond may be higher or lower than Estimated Current Return or Estimated Long Term Return which are more comparable to return calculations used by other investment products.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR SPONSORS: HAS THE COMMISSION OR ANY STATE SECURITIES Merrill Lynch, COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY Pierce, Fenner & Smith OF THIS DOCUMENT. ANY REPRESENTATION TO THE Incorporated CONTRARY IS A CRIMINAL OFFENSE. Smith Barney Inc. Inquiries should be directed to the Trustee at Prudential Securities 1-800-221-7771. Incorporated Prospectus dated January 12, 1996. Dean Witter Reynolds Inc. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY PaineWebber Incorporated AND RETAIN IT FOR FUTURE REFERENCE.
Defined Asset Funds is America's oldest and largest family of unit investment trusts, with over $100 billion sponsored in the last 25 years. Each Defined Asset Fund is a portfolio of preselected securities. The portfolio is divided into 'units' representing equal shares of the underlying assets. Each unit receives an equal share of income and principal distributions.
Defined Asset Funds offer several defined 'distinctives'. You know in advance what you are investing in and that changes in the portfolio are limited - a defined portfolio. Most defined bond funds pay interest monthly - defined income. The portfolio offers a convenient and simple way to invest - simplicity defined.
Your financial professional can help you select a Defined Asset Fund to meet your personal investment objectives. Our size and market presence enable us to offer a wide variety of investments. The Defined Asset Funds family offers:
The terms of Defined Funds are as short as one year or as long as 30 years. Special defined bond funds are available including: insured funds, double and triple tax-free funds and funds with 'laddered maturities' to help protect against changing interest rates. Defined Asset Funds are offered by prospectus only.
Our defined portfolio of municipal bonds offers you a simple and convenient way to earn tax-free monthly income. And by purchasing Defined Asset Funds, you not only receive professional selection but also gain the advantage of reduced risk by investing in bonds of several different issuers.
To provide interest income exempt from regular federal income taxes through investment in a fixed portfolio consisting primarily of long-term municipal bonds issued by or on behalf of states and their local governments and authorities.
The Portfolio is diversified among 14 bond issues. Spreading your investment among different issuers reduces your risk, but does not eliminate it. Because of maturities, sales or other dispositions of bonds, the size, composition and return of the Portfolio will change over time.
The Portfolio contains a variety of bonds selected by experienced buyers and research analysts. The Fund is not actively managed; however, it is regularly reviewed and a bond can be sold if retaining it is considered detrimental to investors' interests.
The Portfolio consists of $10,000,000 face amount of municipal revenue bonds which are payable from the income generated by a specific project or authority:
/ / State/Local Municipal Electric / / Industrial Development Revenue 15% / / Hospitals/Health Care Facilities 35% / / Lease Rental Appropriation 23%
Each bond included in the Portfolio is rated investment grade. Each bond has been selected by investment professionals from among available bonds rated A or better by a nationally recognized rating organization. In addition, 8% of the bonds included in the Portfolio are backed by bank letters of credit, which are irrevocable obligations of the issuing banks. Letters of credit guarantee the timely payment of principal and interest on the bonds but do not guarantee the value of the bonds or the Fund Units. (See Bonds Backed by Letters of Credit or
It is possible that during periods of falling interest rates, a bond with a coupon higher than current market rates will be prepaid or 'called', at the option of the bond issuer, before its expected maturity. When bonds are initially callable, the price is usually at a premium to par which then declines to par over time. Bonds may also be subject to a mandatory sinking fund or have extraordinary redemption provisions. For example, if the bond's proceeds are not able to be used as intended the bond may be redeemed. This redemption and the sinking fund are often at par.
Although each of the bonds is subject to optional refunding or call provisions, we have selected bonds with call protection. This call protection means that any bond in the Portfolio generally cannot be called for a number of years and thereafter at a declining premium over par.
Based on the opinion of bond counsel, income from the bonds held by this Fund is generally 100% exempt under existing laws from regular federal income tax. Any gain on a disposition of the underlying bonds or units will be subject to tax.
PUBLIC OFFERING PRICE PER UNIT $1,031.25
The Public Offering Price as of January 11, 1996, the business day prior to the Initial Date of Deposit, is based on the aggregate offer side value of the underlying bonds in the Fund ($9,851,376.95), plus cash ($99,000.00), divided by the number of units outstanding (10,099) plus a maximum sales charge of 4.5% on the value of the underlying bonds. The Public Offering Price on any subsequent date will vary. An amount equal to principal cash, if any, as well as net accrued but undistributed interest on the unit is added to the Public Offering Price. The underlying bonds are evaluated by an independent evaluator at 3:30 p.m. Eastern time on every business day thereafter.
The par value of your unit--the amount of money you will receive by termination of the Fund, assuming all the bonds are paid at maturity or are redeemed by the issuer at par or sold by the Fund at par to meet redemptions--is $1,000.
You can get started with a minimum purchase of about $1,000.
You can elect to automatically reinvest your distributions into a separate portfolio of federally tax-exempt bonds. Reinvesting helps to compound your income tax-free. Principal from sales, redemptions and maturities of bonds in the Fund will be distributed to investors periodically when the amount to be distributed is more than $5.00 per unit.
The Fund will generally terminate following the maturity date of the last maturing bond listed in the Portfolio. The Fund may be terminated earlier if the value is less than 40% of the face amount of bonds deposited.
The Sponsors' profit or loss associated with the Fund will include the receipt of applicable sales charges, any fees for underwriting or placing bonds, fluctuations in the Public Offering Price or secondary market price of units and a gain of $57,235.50 on the deposit of the bonds (see Underwriters' and Sponsors' Profits in Part B).
None of the Sponsors has participated as sole underwriter, managing underwriter or member of an underwriting syndicate from which any of the bonds in the Portfolio was acquired.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
New York, NY 10013 9.90%
One Seaport Plaza--199 Water Street, New York, NY 10292 2.48%
Two World Trade Center--59th Floor, New York, NY 10048 5.94%
1285 Avenue of the Americas, New York, NY 10019 14.85%
To compare the yield of a taxable security with the yield of a tax-free security, find your taxable income and read across. The table incorporates 1996 federal income tax rates and assumes that all income would otherwise be taxed at the investor's highest tax rate. Yield figures are for example only.
*Based upon net amount subject to federal income tax after deductions and exemptions. This table does not reflect the possible effect of other tax factors, such as alternative minimum tax, personal exemptions, the phase out of exemptions, itemized deductions or the possible partial disallowance of deductions. Consequently, holders are urged to consult their own tax advisers in this regard.
Although the Fund is a unit investment trust rather than a mutual fund, the following information is presented to permit a comparison of fees and an understanding of the direct or indirect costs and expenses that you pay.
As a % As a % of Initial Offer- of Secondary Maximum Sales Charges 4.5% 5.5%
The Fund (and therefore the investors) will bear all or a portion of its organizational costs--including costs of preparing the registration statement, the trust indenture and other closing documents, registering units with the SEC and the states and the initial audit of the Portfolio--as is common for mutual funds. Historically, the Sponsors of unit investment trusts have paid all the costs of establishing those trusts.
ESTIMATED ANNUAL FUND OPERATING EXPENSES
Trustee's Fee .070% $ 0.69 Administrative Fees .041% $ 0.40 Evaluator's Fee .013% $ 0.13 Organizational Costs .020% $ 0.20 Other Operating Expenses .034% $ 0.33
* Based on the mean of the bid and offer side evaluations.
You would pay the following cumulative expenses on a $1,000 investment, assuming a 5% annual return on the investment throughout the indicated periods:
1 Year 3 Years 5 Years 10 Years
The example assumes reinvestment of all distributions into additional units of the Fund (a reinvestment option different from that offered by this Fund) and uses a 5% annual rate of return as mandated by Securities and Exchange Commission regulations applicable to mutual funds. The Costs Over Time above reflect both sales charges and operating expenses on an increasing investment (because the net annual return is reinvested). The example should not be considered a representation of past or future expenses or annual rate of return; the actual expenses and annual rate of return may be more or less than the example.
You may sell your units at any time. Your price is based on the Fund's then current net asset value (generally based on the lower, bid side evaluation of the bonds, as determined by an independent evaluator) plus principal cash, if any, as well as accrued interest. The bid side redemption and secondary market repurchase price as of January 11, 1996 was $981.32 ($49.93 less than the Public Offering Price). There is no fee for selling your units.
MONTHLY FEDERALLY TAX-FREE INTEREST INCOME
The Fund pays monthly income, even though the bonds generally pay interest semi-annually.
(PAYABLE ON THE 25TH DAY OF THE MONTH TO HOLDERS OF RECORD ON THE 10TH DAY OF THE MONTH):
(February 25, 1996): $ 4.28 Regular Monthly Income per unit (Beginning on March 25, 1996): $ 4.59 Annual Income per unit: $ 55.14
These figures are estimates determined as of the business day prior to the Initial Date of Deposit and actual payments may vary.
Estimated cash flows are available upon request from the Sponsors.
Unit price fluctuates and could be adversely affected by increasing interest rates as well as the financial condition of the issuers of the bonds. Because of the possible maturity, sale or other disposition of securities, the size, composition and return of the portfolio may change at any time. Because of the sales charges, returns of principal and fluctuations in unit price, among other reasons, the sale price will generally be less than the cost of your units. Unit prices could also be adversely affected if a limited trading market exists in any security to be sold. There is no guarantee that the Fund will achieve its investment objective.
The Fund is concentrated in Hospital/Health Care Facility bonds and is therefore dependent to a significant degree on revenues generated from those particular activities (see Risk Factors in Part B).
(1) All ratings are by Standard & Poor's Ratings Group unless followed by '(m)', which indicates a Moody's Investors Service rating or by '(f)', which indicates a Fitch Investors Service rating. Moody's and Fitch ratings have been furnished by the Evaluator but not confirmed with Moody's or Fitch. (See Appendix A to Part B.) (2) Bonds are first subject to optional redemptions (which may be exercised in whole or in part) on the dates and at the prices indicated under the Optional Refunding Redemptions column. In subsequent years, bonds are redeemable at declining prices, but typically not below par value. Some issues may be subject to sinking fund redemption or extraordinary redemption without premium prior to the dates shown. (3) Evaluation of the bonds by the Evaluator is made on the basis of current offer side evaluation. On this basis, 35% of the bonds were deposited at a premium, 15% at par, and 50% at a discount from par. (4) These bonds are when-issued bonds that are expected to settle 7 days after the settlement date for Units. The Trustee's fees and expenses will be reduced by $0.17 per Unit to compensate for interest that would have accrued on the bonds between the settlement date for Units and the actual date of delivery of the bonds. (See Income, Distributions and Reinvestment--Income in Part B.)
The Sponsors, Trustee and Holders of Municipal Investment Trust Fund, Monthly Payment Series--564, Defined Asset Funds (the 'Fund'):
We have audited the accompanying statement of condition and the related defined portfolio included in the prospectus of the Fund as of January 12, 1996. This financial statement is the responsibility of the Trustee. 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. Our procedures included confirmation of cash, securities and an irrevocable letter of credit deposited for the purchase of securities, as described in the statement of condition, with the Trustee. An audit also includes assessing the accounting principles used and significant estimates made by the Trustee, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of the Fund as of January 12, 1996 in conformity with generally accepted accounting principles.
STATEMENT OF CONDITION AS OF JANUARY 12, 1996
Investments--Bonds and Contracts to purchase Bonds(1) $ 9,851,376.95 Accrued interest to Initial Date of Deposit on underlying LIABILITIES AND INTEREST OF HOLDERS Liabilities: Advance by the Trustee for accrued Interest of Holders of 10,099 Units of fractional undivided interest outstanding:
(1) Aggregate cost to the Fund of the bonds listed under Defined Portfolio is based upon the offer side evaluation determined by the Evaluator at the evaluation time on the business day prior to the Initial Date of Deposit. The contracts to purchase the bonds are collateralized by an irrevocable letter of credit which has been issued by Banca Popolare Di Milano, New York Branch, in the amount of $7,167,971.32 and deposited with the Trustee. The amount of the letter of credit includes $7,092,056.45 for the purchase of $7,250,000 face amount of the bonds, plus $75,914.87 for accrued interest. (2) This represents a portion of the Fund's organizational costs which will be deferred and amortized over five years. (3) Representing a special distribution by the Trustee to the Sponsors, of an amount equal to the accrued interest on the bonds as of the Initial Date of Deposit. (4) Aggregate public offering price (exclusive of interest) computed on the basis of the offer side evaluation of the underlying bonds as of the evaluation time on the business day prior to the Initial Date of Deposit. (5) Assumes the maximum sales charge of 4.5%.
I want to learn more about automatic reinvestment in the Investment Accumulation Program. Please send me information about participation in the Municipal Fund Accumulation Program, Inc. and a current Prospectus. My address (please print): Street and Apt. This page is a self-mailer. Please complete the information above, cut along the dotted line, fold along the lines on the reverse side, tape, and mail with the Trustee's address displayed on the outside.
BUSINESS REPLY MAIL NO POSTAGE FIRST CLASS PERMIT NO. 1313 NEW YORK, NY NECESSARY POSTAGE WILL BE PAID BY ADDRESSEE IN THE THE BANK OF NEW YORK UNITED STATES (A NEW YORK BANKING CORPORATION)
DEFINED ASSET FUNDS MUNICIPAL SERIES FURTHER DETAIL REGARDING ANY OF THE INFORMATION PROVIDED IN THE PROSPECTUS MAY WITHIN FIVE DAYS BY WRITING OR CALLING THE TRUSTEE, THE ADDRESS AND TELEPHONE NUMBER OF WHICH ARE SET FORTH ON THE BACK COVER OF PART A OF THIS PROSPECTUS.
How to Buy Units...................................... 8 How to Sell Units..................................... 10 Income, Distributions and Reinvestment................ 10
Appendix A--Description of Ratings.................... a-1 Appendix B--Sales Charge Schedules for Defined Asset Appendix C--Sales Charge Schedules for Municipal
Professional buyers and research analysts for Defined Asset Funds, with access to extensive research, selected the Bonds for the Portfolio after considering the Fund's investment objective as well as the quality of the Bonds (all Bonds in the Portfolio are initially rated in the category A or better by at least one nationally recognized rating organization or have comparable credit characteristics), the yield and price of the Bonds compared to similar securities, the maturities of the Bonds and the diversification of the Portfolio. Only issues meeting these stringent criteria of the Defined Asset Funds team of dedicated research analysts are included in the Portfolio. No leverage or borrowing is used nor does the Portfolio contain other kinds of securities to enhance yield. A summary of the Bonds in the Portfolio appears in Part A of the Prospectus. In a Fund that includes multiple Trusts or Portfolios, the word Fund should be understood to mean each individual Trust or Portfolio.
The deposit of the Bonds in the Fund on the initial date of deposit established a proportionate relationship among the face amounts of the Bonds. During the 90-day period following the initial date of deposit the Sponsors may deposit additional Bonds in order to create new Units, maintaining to the extent possible that original proportionate relationship. Deposits of additional Bonds subsequent to the 90-day period must generally replicate exactly the proportionate relationship among the face amounts of the Bonds at the end of the initial 90-day period.
Yields on bonds depend on many factors including general conditions of the bond markets, the size of a particular offering and the maturity and quality rating of the particular issues. Yields can vary among bonds with similar maturities, coupons and ratings. Ratings represent opinions of the rating organizations as to the quality of the bonds rated, based on the credit of the issuer or any guarantor, insurer or other credit provider, but these ratings are only general standards of quality (see Appendix A).
After the initial date of deposit, the ratings of some Bonds may be reduced or withdrawn, or the credit characteristics of the Bonds may no longer be comparable to bonds rated A or better. Bonds rated BBB or Baa (the lowest investment grade rating) or lower may have speculative characteristics, and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case with higher grade bonds. Bonds rated below investment grade or unrated bonds with similar credit characteristics are often subject to greater market fluctuations and risk of loss of principal and income than higher grade bonds and their value may decline precipitously in response to rising interest rates.
Because each Defined Asset Fund is a preselected portfolio of bonds, you know the securities, maturities, call dates and ratings before you invest. Of course, the Portfolio will change somewhat over time, as Bonds mature, are redeemed or are sold to meet Unit redemptions or in other limited circumstances. Because the Portfolio is not actively managed and principal is returned as the Bonds are disposed of, this principal should be relatively unaffected by changes in interest rates.
The Fund follows a buy and hold investment strategy in contrast to the frequent portfolio changes of a managed fund based on economic, financial and market analyses. The Fund may retain an issuer's bonds despite adverse financial developments. Experienced financial analysts regularly review the Portfolio and a Bond may be sold in certain circumstances including the occurrence of a default in payment or other default on the Bond, a decline in the projected income pledged for debt service on a revenue bond, institution of certain legal proceedings, if the Bond becomes taxable or is otherwise inconsistent with the Fund's investment objectives, a decline in the price of the Bond or the occurrence of other market or credit factors (including advance refunding) that, in the opinion of Defined Asset Funds research analysts, makes retention of the Bond detrimental to the interests of investors. The Trustee must generally reject any offer by an issuer of a Bond to exchange another security pursuant to a refunding or refinancing plan.
The Sponsors and the Trustee are not liable for any default or defect in a Bond. If a contract to purchase any Bond fails, the Sponsors may generally deposit a replacement bond so long as it is a tax-exempt bond, has a fixed maturity or disposition date substantially similar to the failed Bond and is rated A or better by at least one nationally recognized rating organization or has comparable credit characteristics. A replacement bond must be deposited within 110 days after deposit of the failed contract, at a cost that does not exceed the funds reserved for purchasing the failed Bond and at a yield to maturity and current return substantially equivalent (considering then current market conditions and relative creditworthiness) to those of the failed Bond, as of the date the failed contract was deposited.
An investment in the Fund entails certain risks, including the risk that the value of your investment will decline with increases in interest rates. Generally speaking, bonds with longer maturities will fluctuate in value more than bonds with shorter maturities. In recent years there have been wide fluctuations in interest rates and in the value of fixed-rate bonds generally. The Sponsors cannot predict the direction or scope of any future fluctuations.
Certain of the Bonds may have been deposited at a market discount or premium principally because their interest rates are lower or higher than prevailing rates on comparable debt securities. The current returns of market discount bonds are lower than comparably rated bonds selling at par because discount bonds tend to increase in market value as they approach maturity. The current returns of market premium bonds are higher than comparably rated bonds selling at par because premium bonds tend to decrease in market value as they approach maturity. Because part of the purchase price is returned through current income payments and not at maturity, an early redemption at par of a premium bond will result in a reduction in yield to the Fund. Market premium or discount attributable to interest rate changes does not indicate market confidence or lack of confidence in the issue.
Certain Bonds deposited into the Fund may have been acquired on a when-issued or delayed delivery basis. The purchase price for these Bonds is determined prior to their delivery to the Fund and a gain or loss may result from fluctuations in the value of the Bonds. Additionally, in any Defined Asset Funds Municipal Series, if the value of the Bonds reserved for payment of the periodic deferred sales charge, together with the interest thereon, were to become insufficient to pay these charges, additional bonds would be required to be sold.
The Fund may be concentrated in one or more of types of bonds. Concentration in a State may involve additional risk because of the decreased diversification of economic, political, financial and market risks. Set forth below is a brief description of certain risks associated with bonds which may be held by the Fund. Additional
information is contained in the Information Supplement which is available from the Trustee at no charge to the investor.
Certain of the Bonds may be general obligations of a governmental entity. General obligation bonds are backed by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. However, the taxing power of any governmental entity may be limited by provisions of state constitutions or laws and its credit will depend on many factors, including an erosion of the tax base resulting from population declines, natural disasters, declines in the state's industrial base or an inability to attract new industries, economic limits on the ability to tax without eroding the tax base and the extent to which the entity relies on federal or state aid, access to capital markets or other factors beyond the entity's control. In addition, political restrictions on the ability to tax and budgetary constraints affecting state governmental aid may have an adverse impact on the creditworthiness of cities, counties, school districts and other local governmental units.
As a result of the recent recession's adverse impact upon both revenues and expenditures, as well as other factors, many state and local governments have confronted deficits which were the most severe in recent years. Many issuers are facing highly difficult choices about significant tax increases and spending reductions in order to restore budgetary balance. The failure to implement these actions on a timely basis could force these issuers to issue additional debt to finance deficits or cash flow needs and could lead to a reduction of their bond ratings and the value of their outstanding bonds.
The Portfolio may include 'moral obligation' bonds. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of the bonds becomes a moral commitment but not a legal obligation of the state or local government in question. Even though the state or local government may be called on to restore any deficits in capital reserve funds of the agencies or authorities which issued the bonds, any restoration generally requires appropriation by the state or local legislature and does not constitute a legally enforceable obligation or debt of the state or local government. The agencies or authorities generally have no taxing power.
Refunded bonds are typically secured by direct obligations of the U.S. Government or in some cases obligations guaranteed by the U.S. Government placed in an escrow account maintained by an independent trustee until maturity or a predetermined redemption date. These obligations are generally noncallable prior to maturity or the predetermined redemption date. In a few isolated instances, however, bonds which were thought to be escrowed to maturity have been called for redemption prior to maturity.
Municipal revenue bonds are tax-exempt securities issued by states, municipalities, public authorities or similar entities to finance the cost of acquiring, constructing or improving various projects. Municipal revenue bonds are not general obligations of governmental entities backed by their taxing power and payment is generally solely dependent upon the creditworthiness of the public issuer or the financed project or state appropriations. Examples of municipal revenue bonds are:
Municipal utility bonds, including electrical, water and sewer revenue bonds, whose payments are dependent on various factors, including the rates the utilities may charge, the demand for their services and their operating costs, including expenses to comply with environmental legislation and other energy and licensing laws and regulations. Utilities are particularly sensitive to, among other things, the effects of inflation on operating and construction costs, the unpredictability of future usage requirements, the costs and availability of fuel and, with certain electric utilities, the risks associated with the nuclear industry;
Lease rental bonds which are generally issued by governmental financing authorities with no direct taxing power for the purchase of equipment or construction of buildings that will be used by a state or local government. Lease rental bonds are generally subject to an annual risk that the lessee government might not appropriate funds for the leasing rental payments to service the bonds and may also be subject to the risk that rental obligations may terminate in the event of damage to or destruction or condemnation of the equipment or building;
Multi-family housing revenue bonds and single family mortgage revenue bonds which are issued to provide financing for various housing projects and which are payable primarily from the revenues derived from mortgage loans to housing projects for low to moderate income families or notes secured by mortgages on residences; repayment of this type of bond is therefore dependent upon, among other things, occupancy levels, rental income, the rate of default on underlying mortgage loans, the ability of mortgage insurers to pay claims, the continued availability of federal, state or local housing subsidy programs, economic conditions in local markets, construction costs, taxes, utility costs and other operating expenses and the managerial ability of project managers. Housing bonds are generally prepayable at any time and therefore their average life will ordinarily be less than their stated maturities;
Hospital and health care facility bonds whose payments are dependent upon revenues of hospitals and other health care facilities. These revenues come from private third-party payors and government programs, including the Medicare and Medicaid programs, which have generally undertaken cost containment measures to limit payments to health care facilities. Hospitals and health care facilities are subject to various legal claims by patients and others and are adversely affected by increasing costs of insurance. The Internal Revenue Service has been engaged in a program of intensive audits of certain large tax-exempt hospital and health care facility organizations. Although these audits have not yet been completed, it has been reported that the tax-exempt status of some of these organizations may
Airport, port, highway and transit authority revenue bonds which are dependent for payment on revenues from the financed projects, including user fees from ports and airports, tolls on turnpikes and bridges, rents from buildings, transit fare revenues and additional financial resources including federal and state subsidies, lease rentals paid by state or local governments or a pledge of a special tax such as a sales tax or a property tax. In the case of the air travel industry, airport income is largely affected by the airlines' ability to meet their obligations under use agreements which in turn is affected by increased competition among airlines, excess capacity and increased fuel costs, among other factors;
Solid waste disposal bonds which are generally payable from dumping and user fees and from revenues that may be earned by the facility on the sale of electrical energy generated in the combustion of waste products and which are therefore dependent upon the ability of municipalities to fully utilize the facilities, sufficient supply of waste for disposal, economic or population growth, the level of construction and maintenance costs, the existence of lower-cost alternative modes of waste processing and increasing environmental regulation. A recent decision of the U.S. Supreme Court limiting a municipality's ability to require use of its facilities may have an adverse affect on the credit quality of various issues of these
Special tax bonds which are not secured by general tax revenues but are only payable from and secured by the revenues derived by a municipality from a particular tax--for example, a tax on the rental of a hotel room, on the purchase of food and beverages, on the rental of automobiles or on the consumption of liquor and may therefore be adversely affected by a reduction in revenues resulting from a decline in the local economy or population or a decline in the consumption, use or cost of the goods and services that are subject to taxation;
Student loan revenue bonds which are typically secured by pledges of new or existing student loans. The loans, in turn, are generally either guaranteed by eligible guarantors and reinsured by the Secretary of the U.S. Department of Education, directly insured by the federal government, or financed as part of supplemental or alternative loan programs within a state (e.g., loan repayments are not guaranteed). These bonds often permit the issuer to enter into interest rate swap agreements with eligible counterparties in which event the bonds are subject to the additional risk of the counterparty's ability to fulfill its swap obligation;
University and college bonds, the payments on which are dependent upon various factors, including the size and diversity of their sources of revenues, enrollment, reputation, the availability of endowments and other funds and, in the case of public institutions, the financial condition of the relevant state or other governmental entity and its policies with
Tax increment and tax allocation bonds, which are secured by ad valorem taxes imposed on the incremental increase of taxable assessed valuation of property within a jurisdiction above an established base of assessed value. The issuers of these bonds do not have general taxing authority and the tax
which the taxes used to service the bonds are based may be subject to devaluation due to market price declines or governmental action.
Puerto Rico. Certain Bonds may be affected by general economic conditions in the Commonwealth of Puerto Rico. Puerto Rico's economy is largely dependent for its development on federal programs, and current federal budgetary policies suggest that an expansion of its programs is unlikely. Reductions in federal tax benefits or incentives or curtailment of spending programs could adversely affect the Puerto Rican economy.
Industrial Development Revenue Bonds. Industrial development revenue bonds are municipal obligations issued to finance various privately operated projects including pollution control and manufacturing facilities. Payment is generally solely dependent upon the creditworthiness of the corporate operator of the project and, in certain cases, an affiliated or third party guarantor and may be affected by economic factors relating to the particular industry as well as varying degrees of governmental regulation. In many cases industrial revenue bonds do not have the benefit of covenants which would prevent the corporations from engaging in capital restructurings or borrowing transactions which could reduce their ability to meet their obligations and result in a reduction in the value of the Portfolio.
BONDS BACKED BY REPURCHASE COMMITMENTS
Certain Funds contain Bonds that were purchased from commercial banks, savings banks, savings and loan associations or other institutions (thrifts) that had held the Bonds in their investment portfolios prior to selling the Bonds to the Fund. These banks or thrifts (the Sellers) have committed to repurchase the Bonds from the Fund in certain circumstances. In some cases a Seller's Repurchase Commitments may be backed by a security interest in collateral or by a letter of credit (see Bonds Backed by Letters of Credit or Insurance below).
A Seller may have committed to repurchase any Bond sold by it if necessary to satisfy investors' unit redemption requests (a Liquidity Repurchase). A Seller may also have committed to repurchase any Bond sold by it if the issuer of the Bond fails to make payments of interest or principal on the Bond (a Default Repurchase) or if the issuer becomes or is deemed to be bankrupt or insolvent (an Insolvency Repurchase). A Seller may have committed to repurchase any Bond if the interest on that Bond becomes taxable (a Tax Repurchase). Investors should realize that they are subject to having all or a portion of the principal amount of their investment returned prior to termination of the Fund if any of these situations occurs. A Seller may also have committed to repurchase the Bonds sold by it on their scheduled disposition dates (as shown under Portfolio in Part A) (a Disposition Repurchase). The price at which any of these repurchases will occur (the Put Price) is shown in Part A of the Prospectus. Any collateral securing any of the Repurchase Commitments may consist of mortgage-backed securities issued by GNMA (Ginnie Maes), FNMA (Fannie Maes) or FHLMC (Freddie Macs); mortgages; municipal obligations; corporate obligations; U.S. government securities; and cash.
Investors in a Fund containing any of these credit-supported Bonds should be aware that many thrifts have failed in recent years and that the thrift industry generally has experienced severe strains. New federal legislation has resulted that imposes many new limitations on the ways banks and thrifts may do business and mandates aggressive, early intervention into unhealthy institutions. One result of this legislation is an increased possibility of early payment of the principal amount of an investment in Bonds backed by collateralized letters of credit or repurchase commitments if a Seller becomes or is deemed to be insolvent.
BONDS BACKED BY LETTERS OF CREDIT OR INSURANCE
Certain Bonds may be secured by letters of credit issued by commercial banks or savings banks, savings and loan associations and similar thrift institutions or are direct obligations of banks or thrifts. The letter of credit may be drawn upon, and the Bonds redeemed, if an issuer fails to pay amounts due on the Bonds or, in certain cases, if the interest on the Bond becomes taxable. Letters of credit are irrevocable obligations of the issuing institutions. The profitability of a financial institution is largely dependent upon the credit quality of its loan portfolio which, in turn, is affected by the institution's underwriting criteria, concentrations within the portfolio and specific industry and general economic conditions. The operating performance of financial institutions is also impacted by changes in interest rates, the availability and cost of funds, the intensity of competition and the degree of governmental regulation.
Certain Bonds may be insured or guaranteed by insurance companies listed below. The claims-paying ability of each of these companies, unless otherwise indicated, was rated AAA by Standard & Poor's or another nationally recognized rating organization at the time the insured Bonds were purchased by the Fund. The ratings are subject to change at any time at the discretion of the rating agencies. In the event that the rating of an Insured Fund is reduced, the Sponsors are authorized to direct the Trustee to obtain other insurance on behalf of the Fund. The insurance policies guarantee the timely payment of principal and interest on the Bonds but do not guarantee their market value or the value of the Units. The insurance policies generally do not provide for accelerated payments of principal or cover redemptions resulting from events of taxability.
The following summary information relating to the listed insurance companies has been obtained from publicly available information:
Insurance companies are subject to extensive regulation and supervision where they do business by state insurance commissioners who regulate the standards of solvency which must be maintained, the nature of and limitations on investments, reports of financial condition, and requirements regarding reserves for unearned premiums, losses and other matters. A significant portion of the assets of insurance companies are required by law to be held in reserve against potential claims on policies and is not available to general creditors. Although the federal government does not regulate the business of insurance, federal initiatives including pension regulation, controls on medical care costs, minimum standards for no-fault automobile insurance, national health insurance, tax law changes affecting life insurance companies and repeal of the antitrust exemption for the insurance business can significantly impact the insurance business.
Investment in a single State Trust, as opposed to a Fund which invests in the obligations of several states, may involve some additional risk due to the decreased diversification of economic, political, financial and market risks. A brief description of the factors which may affect the financial condition of the applicable State for any State Trust, together with a summary of tax considerations relating to that State, appear in Part A (or for certain State Trusts, Part C), of the Prospectus; further information is contained in the Information Supplement.
The Sponsors do not know of any pending litigation as of the initial date of deposit which might reasonably be expected to have a material adverse effect upon the Fund. At any time after the initial date of deposit, litigation may be initiated on a variety of grounds, or legislation may be enacted, affecting the Bonds in the Fund. Litigation, for example, challenging the issuance of pollution control revenue bonds under environmental protection statutes may affect the validity of certain Bonds or the tax-free nature of their interest. While the outcome of litigation of this nature can never be entirely predicted, opinions of bond counsel are delivered on the date of issuance of each Bond to the effect that it has been validly issued and that the interest thereon is from federal income tax. From time to time, proposals are introduced in Congress to, among other things, reduce federal income tax rates, impose a flat tax, exempt investment income from tax or abolish the federal income tax and replace it with another form of tax. Enactment of any such legislation could adversely affect the value of the Units. The Fund, however, cannot predict what legislation, if any, in respect of tax rates may be proposed, nor can it predict which proposals, if any, might be enacted.
Also, certain proposals, in the form of state legislative proposals or voter initiatives, seeking to limit real property taxes have been introduced in various states, and an amendment to the constitution of the State of California, providing for strict limitations on real property taxes, has had a significant impact on the taxing powers of local governments and on the financial condition of school districts and local governments in California. In addition, other factors may arise from time to time which potentially may impair the ability of issuers to make payments due on the Bonds. Under the Federal Bankruptcy Code, for example, municipal bond issuers, as well as any underlying corporate obligors or guarantors, may proceed to restructure or otherwise alter the terms of their obligations.
From time to time Congress considers proposals to prospectively and retroactively tax the interest on state and local obligations, such as the Bonds. The Supreme Court clarified in South Carolina v. Baker (decided on April 20, 1988) that the U.S. Constitution does not prohibit Congress from passing a nondiscriminatory tax on interest on state and local obligations. This type of legislation, if enacted into law, could require investors to pay income tax on interest from the Bonds and could adversely affect an investment in Units. See Taxes.
PAYMENT OF THE BONDS AND LIFE OF THE FUND
The size and composition of the Portfolio will change over time. Most of the Bonds are subject to redemption prior to their stated maturity dates pursuant to optional refunding or sinking fund redemption provisions or otherwise. In general, optional refunding redemption provisions are more likely to be exercised when the value of a Bond is at a premium over par than when it is at a discount from par. Some Bonds may be subject to sinking fund and extraordinary redemption provisions which may commence early in the life of the Fund. Additionally, the size and composition of the Fund will be affected by the level of redemptions of Units that may occur from time to time. Principally, this will depend upon the number of investors seeking to sell or redeem their Units and whether or not the Sponsors are able to sell the Units acquired by them in the secondary market. As a result, Units offered in the secondary market may not represent the same face amount of Bonds as on the initial date of deposit. Factors that the Sponsors will consider in determining whether or not to sell Units acquired in the secondary market include the diversity of the Portfolio, the size of the Fund relative to its original size, the ratio of Fund expenses to income, the Fund's current and long-term returns, the degree to which Units may be selling at a premium over par and the cost of maintaining a current prospectus for the Fund. These factors may also lead the Sponsors to seek to terminate the Fund earlier than its mandatory termination date.
The Fund will be terminated no later than the mandatory termination date specified in Part A of the Prospectus. It will terminate earlier upon the disposition of the last Bond or upon the consent of investors holding 51% of the Units. The Fund may also be terminated earlier by the Sponsors once the total assets of the Fund have fallen below the minimum value specified in Part A of the Prospectus. A decision by the Sponsors to terminate the Fund early will be based on factors similar to those considered by the Sponsors in determining whether to continue the sale of Units in the secondary market.
Notice of impending termination will be provided to investors and thereafter units will no longer be redeemable. On or shortly before termination, the Fund will seek to dispose of any Bonds remaining in the Portfolio although any Bond unable to be sold at a reasonable price may continue to be held by the Trustee in a liquidating trust pending its final disposition. A proportional share of the expenses associated with termination, including brokerage costs in disposing of Bonds, will be borne by investors remaining at that time. This may have the effect of reducing the amount of proceeds those investors are to receive in any final distribution.
Up to 40% of the value of the Portfolio may be attributable to guarantees or similar security provided by corporate entities. These guarantees or other security may constitute restricted securities that cannot be sold publicly by the Trustee without registration under the Securities Act of 1933, as amended. The Sponsors nevertheless believe that, should a sale of the Bonds guaranteed or secured be necessary in order to meet redemption of Units, the Trustee should be able to consummate a sale with institutional investors.
The principal trading market for the Bonds will generally be in the over-the-counter market and the existence of a liquid trading market for the Bonds may depend on whether dealers will make a market in them. There can be no assurance that a liquid trading market will exist for any of the Bonds, especially since the Fund may be restricted under the Investment Company Act of 1940 from selling Bonds to any Sponsor. The value of the Portfolio will be adversely affected if trading markets for the Bonds are limited or absent.
Units are available from any of the Sponsors, Underwriters and other broker-dealers at the Public Offering Price plus accrued interest on the Units. The Public Offering Price varies each Business Day with changes in the value of the Portfolio and other assets and liabilities of the Fund.
Net accrued interest and principal cash, if any, are added to the Public Offering Price, the Sponsors' Repurchase Price and the Redemption Price per Unit. This represents the interest accrued on the Bonds, net of Fund expenses, from the initial date of deposit to, but not including, the settlement date for Units (less any prior distributions of interest income to investors). Bonds deposited also carry accrued but unpaid interest up to the initial date of deposit. To avoid having investors pay this additional accrued interest (which earns no return) when they purchase Units, the Trustee advances and distributes this amount to the Sponsors; it recovers this advance from interest received on the Bonds. Because of varying interest payment dates on the Bonds, accrued interest at any time will exceed the interest actually received by the Fund.
Because accrued interest on the Bonds is not received by the Fund at a constant rate throughout the year, any Monthly Income Distribution may be more or less than the interest actually received by the Fund. To eliminate fluctuations in the Monthly Income Distribution, a portion of the Public Offering Price may consist of cash in an amount necessary for the Trustee to provide approximately equal distributions. Upon the sale or redemption of Units, investors will receive their proportionate share of this cash. In addition, if a Bond is sold, redeemed or otherwise disposed of, the Fund will periodically distribute to investors the portion of this cash that is attributable to the Bond.
The regular Monthly Income Distribution is stated in Part A of the Prospectus and will change as the composition of the Portfolio changes over time.
PUBLIC OFFERING PRICE--THE FOLLOWING SECTIONS APPLY TO TWO DIFFERENT TYPES OF DEFINED MUNICIPAL FUNDS. INVESTORS SHOULD NOTE THE EXACT NAME OF THE FUND ON THE COVER OF PART A OF THE PROSPECTUS TO MAKE SURE THEY REFER TO THE CORRECT SECTION BELOW.
SECTION A--MUNICIPAL INVESTMENT TRUST FUND
In the initial offering period, the Public Offering Price is based on the next offer side evaluation of the Bonds, and includes a sales charge based on the number of Units of a single Fund or Trust purchased on the same or any preceding day by a single purchaser. See Initial Offering sales charge schedule in Appendix C. The purchaser or his dealer must notify the Sponsors at the time of purchase of any previous purchase to be aggregated and supply sufficient information to permit confirmation of eligibility; acceptance of the purchase order is subject to confirmation. Purchases of Fund Units may not be aggregated with purchases of any other unit trust. This procedure may be amended or terminated at any time without notice.
In the secondary market (after the initial offering period), the Public Offering Price is based on the bid side evaluation of the Bonds, and includes a sales charge based (a) on the number of Units of the Fund and any other Series of Municipal Investment Trust Fund purchased in the secondary market on the same day by a single purchaser (see Secondary Market sales charge schedule in Appendix C) and (b) the maturities of the underlying Bonds (see Effective Sales Charge Schedule in Appendix C). To qualify for a reduced sales charge, the dealer must confirm that the sale is to a single purchaser or is purchased for its own account and not for distribution. For these purposes, Units held in the name of the purchaser's spouse or child under 21 years of age are deemed to be purchased by a single purchaser. A trustee or other fiduciary purchasing securities for a single trust estate or single fiduciary account is also considered a single purchaser.
In the secondary market, the Public Offering Price is further reduced depending on the maturities of the various Bonds in the Portfolio, by determining a sales charge percentage for each Bond, as stated in Effective Sales Charge in Appendix C. The sales charges so determined, multiplied by the bid side evaluation of the Bonds, are aggregated and the total divided by the number of Units outstanding to determine the Effective Sales Charge. On any purchase, the Effective Sales Charge is multiplied by the applicable secondary market sales charge percentage (depending on the number of Units purchased) in order to determine the sales charge component of the Public Offering Price.
SECTION B--DEFINED ASSET FUNDS MUNICIPAL SERIES
During the initial offering period for at least the first three months of the Fund, the Public Offering Price (and the Initial Repurchase Price) is based on the higher, offer side evaluation of the Bonds at the next Evaluation Time after the order is received. In the secondary market (after the initial offering period), the Public Offering Price (and the Sponsors' Repurchase Price and the Redemption Price) is based on the lower, bid side evaluation of the Bonds.
Investors will be subject to differing types and amounts of sales charge depending upon the timing of their purchases and redemptions of Units. A periodic deferred sales charge will be payable quarterly through about the fifth anniversary of the Fund from a portion of the interest on and principal of Bonds reserved for that purpose. Commencing on the first anniversary of the Fund, the Public Offering Price will also include an up-front sales charge applied to the value of the Bonds in the Portfolio. Lastly, investors redeeming their Units prior to the fourth anniversary of the Fund will be charged a contingent deferred sales charge payable out of the redemption proceeds of their Units. These charges may be less than you would pay to buy and hold a comparable managed fund. A complete schedule of sales charges appears in Appendix B. The Sponsors have received an opinion of their counsel that the deferred sales charge described in this Prospectus is consistent with an exemptive order received from the SEC.
Employees of certain Sponsors and Sponsor affiliates and non-employee directors of Merrill Lynch & Co. Inc. may purchase Units at any time at prices including a sales charge of not less than $5 per Unit.
Evaluations are determined by the independent Evaluator on each Business Day. This excludes Saturdays, Sundays and the following holidays as observed by the New York Stock Exchange: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. Bond evaluations are based on closing sales prices (unless the Evaluator deems these prices inappropriate). If closing sales prices are not available, the evaluation is generally determined on the basis of current bid or offer prices for the Bonds or comparable securities or by appraisal or by any combination of these methods. In the past, the bid prices of publicly offered tax-exempt issues have been lower than the offer prices by as much as 3 1/2% or more of face amount in the case of inactively traded issues and as little as 1/2 of 1% in the case of actively traded issues, but the difference between the offer and bid prices has averaged between 1 and 2% of face amount. Neither the Sponsors, the Trustee or the Evaluator will be liable for errors in the Evaluator's judgment. The fees of the Evaluator will be borne by the Fund.
Certificates for Units are issued upon request and may be transferred by paying any taxes or governmental charges and by complying with the requirements for redeeming Certificates (see How To Sell Units--Trustee's Redemption of Units). Certain Sponsors collect additional charges for registering and shipping Certificates to purchasers. Lost or mutilated Certificates can be replaced upon delivery of satisfactory indemnity and payment of costs.
You can sell your Units at any time without a fee. The Sponsors (although not obligated to do so) will normally buy any Units offered for sale at the repurchase price next computed after receipt of the order. The Sponsors have maintained secondary markets in Defined Asset Funds for over 20 years. Primarily because of the sales charge and fluctuations in the market value of the Bonds, the sale price may be less than the cost of your Units. You should consult your financial professional for current market prices to determine if other broker-dealers or banks are offering higher prices for Units.
The Sponsors may discontinue this market without prior notice if the supply of Units exceeds demand or for other business reasons; in that event, the Sponsors may still purchase Units at the redemption price as a service to investors. The Sponsors may reoffer or redeem Units repurchased.
You may redeem your Units by sending the Trustee a redemption request together with any certificates you hold. Certificates must be properly endorsed or accompanied by a written transfer instrument with signatures guaranteed by an eligible institution. In certain instances, additional documents may be required such as a certificate of death, trust instrument, certificate of corporate authority or appointment as executor, administrator or guardian. If the Sponsors are maintaining a market for Units, they will purchase any Units tendered at the repurchase price described above. While Defined Asset Funds Municipal Series have a declining deferred sales charge payable on redemption (see Appendix B), a Municipal Investment Trust Fund has no back-end load or 12b-1 fees, so there is never a fee for cashing in your investment (see Appendix C). If they do not purchase Units tendered, the Trustee is authorized in its discretion to sell Units in the over-the-counter market if it believes it will obtain a higher net price for the redeeming investor.
By the seventh calendar day after tender you will be mailed an amount equal to the Redemption Price per Unit. Because of market movements or changes in the Portfolio, this price may be more or less than the cost of your Units. The Redemption Price per Unit is computed each Business Day by adding the value of the Bonds, net accrued interest, cash and the value of any other Fund assets; deducting unpaid taxes or other governmental charges, accrued but unpaid Fund expenses, unreimbursed Trustee advances, cash held to redeem Units or for distribution to investors and the value of any other Fund liabilities; and dividing the result by the number of outstanding Units.
For Defined Asset Funds Municipal Series, Bonds are evaluated on the offer side during the initial offering period and for at least the first three months of the Fund (even in the secondary market) and on the bid side thereafter. For a Municipal Investment Trust Fund, Bonds are evaluated on the offer side during the initial offering period and on the bid side thereafter.
If cash is not available in the Fund's Income and Capital Accounts to pay redemptions, the Trustee may sell Bonds selected by the Agent for the Sponsors based on market and credit factors determined to be in the best interest of the Fund. These sales are often made at times when the Bonds would not otherwise be sold and may result in lower prices than might be realized otherwise and will also reduce the size and diversity of the Fund.
Redemptions may be suspended or payment postponed if the New York Stock Exchange is closed other than for customary weekend and holiday closings, if the SEC determines that trading on that Exchange is restricted or that an emergency exists making disposal or evaluation of the Bonds not reasonably practicable, or for any other period permitted by the SEC.
Some of the Bonds may have been purchased on a when-issued basis or may have a delayed delivery. Since interest on these Bonds does not begin to accrue until the date of their delivery to the Fund, the Trustee's annual fee and expenses may be reduced to provide tax-exempt income to investors for this non-accrual period. If a when-issued Bond is not delivered until later than expected and the amount of the Trustee's annual fee and expenses is insufficient to cover the additional accrued interest, the Sponsors will treat the contracts
Bonds. The Trustee is compensated for its fee reduction by drawing on the letter of credit deposited by the Sponsors before the settlement date for these Bonds and depositing the proceeds in a non-interest bearing account for the Fund.
Interest received is credited to an Income Account and other receipts to a Capital Account. A Reserve Account may be created by withdrawing from the Income and Capital Accounts amounts considered appropriate by the Trustee to reserve for any material amount that may be payable out of the Fund.
Each Unit receives an equal share of monthly distributions of interest income net of estimated expenses. Interest on the Bonds is generally received by the Fund on a semi-annual or annual basis. Because interest on the Bonds is not received at a constant rate throughout the year, any Monthly Income Distribution may be more or less than the interest actually received. To eliminate fluctuations in the Monthly Income Distribution, the Trustee will advance amounts necessary to provide approximately equal interest distributions; it will be reimbursed, without interest, from interest received on the Bonds, but the Trustee is compensated, in part, by holding the Fund's cash balances in non-interest bearing accounts. Along with the Monthly Income Distributions, the Trustee will distribute the investor's pro rata share of principal received from any disposition of a Bond to the extent available for distribution. In addition, for Defined Asset Funds Municipal Series, distributions of amounts necessary to pay the deferred portion of the sales charge will be made from the Capital and Income Accounts to an account maintained by the Trustee for purposes of satisfying investors' sales charge obligations.
The initial estimated annual income per Unit, after deducting estimated annual Fund expenses (and, for Defined Asset Funds Municipal Series, the portion of the deferred sales charge payable from interest income) as stated in Part A of the Prospectus, will change as Bonds mature, are called or sold or otherwise disposed of, as replacement bonds are deposited and as Fund expenses change. Because the Portfolio is not actively managed, income distributions will generally not be affected by changes in interest rates. Depending on the financial conditions of the issuers of the Bonds, the amount of income should be substantially maintained as long as the Portfolio remains unchanged; however, optional bond redemptions or other Portfolio changes may occur more frequently when interest rates decline, which would result in early returns of principal and possibly earlier termination of the Fund.
Estimated Current Return shows the estimated annual cash to be received from interest-bearing bonds in a Portfolio (net of estimated annual expenses) divided by the Public Offering Price (including the maximum sales charge). Estimated Long Term Return is a measure of the estimated return over the estimated life of the Trust. This represents an average of the yields to maturity (or in certain cases, to an earlier call date) of the individual Bonds in the Portfolio, adjusted to reflect the maximum sales charge and estimated expenses. The average yield for the Portfolio is derived by weighting each Bond's yield by its market value and the time remaining to the call or maturity date, depending on how the Bond is priced. Unlike Estimated Current Return, Estimated Long Term Return takes into account maturities, discounts and premiums of the underlying Bonds.
No return estimate can be predictive of your actual return because returns will vary with purchase price (including sales charges), how long units are held, changes in Portfolio composition, changes in interest income and changes in fees and expenses. Therefore, Estimated Current Return and Estimated Long Term Return are designed to be comparative rather than predictive. A yield calculation which is more comparable to an individual Bond may be higher or lower than Estimated Current Return or Estimated Long Term Return which are more comparable to return calculations used by other investment products.
Distributions will be paid in cash unless the investor elects to have distributions reinvested without sales charge in the Municipal Fund Accumulation Program, Inc. The Program is an open-end management investment company whose investment objective is to obtain income exempt from regular federal income taxes by investing in a diversified portfolio of state, municipal and public authority bonds rated A or better or with comparable credit characteristics. Reinvesting compounds earnings free from federal tax. Investors participating in the Program will be subject to state and local income taxes to the same extent as if the distributions had been received in cash, and most of the income on the
Program is subject to state and local income taxes. For more complete information about the Program, including charges and expenses, request the Program's prospectus from the Trustee. Read it carefully before you decide to participate. Written notice of election to participate must be received by the Trustee at least ten days before the Record Day for the first distribution to which the election is to apply.
Estimated annual Fund expenses are listed in Part A of the Prospectus; if actual expenses exceed the estimate, the excess will be borne by the Fund. The Trustee's annual fee is payable in monthly installments. The Trustee also benefits when it holds cash for the Fund in non-interest bearing accounts. Possible additional charges include Trustee fees and expenses for maintaining the Fund's registration statement current with Federal and State authorities, extraordinary services, costs of indemnifying the Trustee and the Sponsors, costs of action taken to protect the Fund and other legal fees and expenses, Fund termination expenses and any governmental charges. The Trustee has a lien on Fund assets to secure reimbursement of these amounts and may sell Bonds for this purpose if cash is not available. The Sponsors receive an annual fee of a maximum of $0.35 per $1,000 face amount to reimburse them for the cost of providing Portfolio supervisory services to the Fund. While the fee may exceed their costs of providing these services to the Fund, the total supervision fees from all Defined Asset Funds Municipal Series will not exceed their costs for these services to all of those Series during any calendar year; and the total supervision fees from all Series of Municipal Investment Trust Fund will not exceed their costs for these services to all of those Series during any calendar year. The Sponsors may also be reimbursed for their costs of providing bookkeeping and administrative services to the Fund, currently estimated at $0.10 per Unit. The Trustee's, Sponsors' and Evaluator's fees may be adjusted for inflation without investors' approval.
All or a portion of expenses incurred in establishing the Fund, including the cost of the initial preparation of documents relating to the Fund, Federal and State registration fees, the initial fees and expenses of the Trustee, legal expenses and any other out-of-pocket expenses will be paid by the Fund and amortized over five years. Advertising and selling expenses will be paid from the Underwriting Account at no charge to the Fund. Sales charges on Defined Asset Funds range from under 1.0% to 5.5%. This may be less than you might pay to buy and hold a comparable managed fund. Defined Asset Funds can be a cost-effective way to purchase and hold investments. Annual operating expenses are generally lower than for managed funds. Because Defined Asset Funds have no management fees, limited transaction costs and no ongoing marketing expenses, operating expenses are generally less than 0.25% a year. When compounded annually, small differences in expense ratios can make a big difference in your investment results. Because our portfolios rarely hold any significant amount of cash, your money is more fully invested.
The following discussion addresses only the U.S. federal and certain New York State and City income tax consequences under current law of Units held as capital assets and does not address the tax consequences of Units held by dealers, financial institutions or insurance companies or other investors with special circumstances.
In the opinion of Davis Polk & Wardwell, special counsel for the Sponsors, under existing law:
The Fund is not an association taxable as a corporation for federal income tax purposes. Each investor will be considered the owner of a pro rata portion of each Bond in the Fund under the grantor trust rules of Sections 671-679 of the Internal Revenue Code of 1986, as amended (the 'Code'). Each investor will be considered to have received the interest and accrued the original issue discount, if any, on his pro rata portion of each Bond when interest on the Bond is received or original issue discount is accrued by the Fund. The investor's basis in his Units will be equal to the cost of his Units, including any up-front sales charge and the organizational expenses borne by the investor.
When an investor pays for accrued interest, the investor's confirmation of purchase will report to him the amount of accrued interest for which he paid. These investors will receive the accrued interest amount as part of their first monthly distribution. Accordingly, these investors should reduce their tax basis by the accrued interest amount after the first monthly distribution.
An investor will recognize taxable gain or loss when all or part of his pro rata portion of a Bond is disposed of by the Fund. An investor will also be considered to have disposed of all or a portion of his pro rata portion of each Bond when he sells or redeems all or some of his Units. An investor who is treated as having acquired his pro rata portion of a Bond
at a premium will be required to amortize the premium over the term of the Bond. The amortization is only a reduction of basis for the investor's pro rata portion of the Bond and does not result in any deduction against the investor's income. Therefore, under some circumstances, an investor may recognize taxable gain when his pro rata portion of a Bond is disposed of for an amount equal to or less than his original tax basis therefor.
Under Section 265 of the Code, a non-corporate investor is not entitled to a deduction for his pro rata share of fees and expenses of the Fund, because the fees and expenses are incurred in connection with the production of tax-exempt income. Further, if borrowed funds are used by an investor to purchase or carry Units of the Fund, interest on this indebtedness will not be deductible for federal income tax purposes. In addition, under rules used by the Internal Revenue Service, the purchase of Units may be considered to have been made with borrowed funds even though the borrowed funds are not directly traceable to the purchase of Units.
Under the income tax laws of the State and City of New York, the Fund is not an association taxable as a corporation and income received by the Fund will be treated as the income of the investors in the same manner as for federal income tax purposes, but will not be tax-exempt except to the extent such income is earned by bonds in the Fund that are otherwise tax-exempt for New York purposes.
The foregoing discussion relates only to U.S. federal and certain aspects of New York State and City income taxes. Depending on their state of residence, investors may be subject to state and local taxation and should consult their own tax advisers in this regard.
In the opinion of bond counsel rendered on the date of issuance of each Bond, the interest on each Bond is excludable from gross income under existing law for regular federal income tax purposes (except in certain circumstances depending on the investor) but may be subject to state and local taxes, and interest on some or all of the Bonds may become subject to regular federal income tax, perhaps retroactively to their date of issuance, as a result of changes in federal law or as a result of the failure of issuers (or other users of the proceeds of the Bonds) to comply with certain ongoing requirements. If the interest on a Bond should be determined to be taxable, the Bond would generally have to be sold at a substantial discount. In addition, investors could be required to pay income tax on interest received prior to the date on which the interest is determined to be taxable.
Neither the Sponsors nor Davis Polk & Wardwell have made or will make any review of the proceedings relating to the issuance of the Bonds or the basis for these opinions and there can be no assurance that the issuer (and other users) will comply with any ongoing requirements necessary for a Bond to maintain its tax-exempt character.
The Internal Revenue Service is currently engaged in a program of intensive audits of certain tax-exempt hospital and health care facility organizations. Although these audits have not yet been completed, it has been reported that the tax-exempt status of some of these organizations may be revoked. At this time, it is uncertain whether any of the hospital and health care facility obligations held by the Fund will be affected by such audit proceedings.
The Trustee keeps a register of the names, addresses and holdings of all investors. The Trustee also keeps records of the transactions of the Fund, including a current list of the Bonds and a copy of the Indenture, and supplemental information on the operations of the Fund and the risks associated with the Bonds held by the Fund, which may be inspected by investors at reasonable times during business hours.
With each distribution, the Trustee includes a statement of the interest and any other receipts being distributed. Within five days after deposit of Bonds in exchange or substitution for Bonds (or contracts) previously deposited, the Trustee will send a notice to each investor, identifying both the Bonds removed and the replacement bonds deposited. The Trustee sends each investor of record an annual report summarizing transactions in the Fund's accounts and amounts distributed during the year and Bonds held, the number of Units outstanding and the Redemption Price at year end, the interest received by the Fund on the Bonds, the gross proceeds received by the Fund from the disposition of any Bond (resulting from redemption or payment at maturity or sale of any Bond), and the fees and expenses paid by the Fund, among other matters. The Trustee will also furnish annual information returns to each investor and to the
Internal Revenue Service. Investors are required to report to the Internal Revenue Service the amount of tax-exempt interest received during the year. Investors may obtain copies of Bond evaluations from the Trustee to enable them to comply with federal and state tax reporting requirements. Fund accounts are audited annually by independent accountants selected by the Sponsors. Audited financial statements are available from the Trustee on request.
The Fund is a 'unit investment trust' created under New York law by a Trust Indenture among the Sponsors, the Trustee and the Evaluator. This Prospectus summarizes various provisions of the Indenture, but each statement is qualified in its entirety by reference to the Indenture.
The Indenture may be amended by the Sponsors and the Trustee without consent by investors to cure ambiguities or to correct or supplement any defective or inconsistent provision, to make any amendment required by the SEC or other governmental agency or to make any other change not materially adverse to the interest of investors (as determined in good faith by the Sponsors). The Indenture may also generally be amended upon consent of investors holding 51% of the Units. No amendment may reduce the interest of any investor in the Fund without the investor's consent or reduce the percentage of Units required to consent to any amendment without unanimous consent of investors. Investors will be notified on the substance of any amendment.
The Trustee may resign upon notice to the Sponsors. It may be removed by investors holding 51% of the Units at any time or by the Sponsors without the consent of investors if it becomes incapable of acting or bankrupt, its affairs are taken over by public authorities, or if under certain conditions the Sponsors determine in good faith that its replacement is in the best interest of the investors. The Evaluator may resign or be removed by the Sponsors and the Trustee without the investors' consent. The resignation or removal of either becomes effective upon acceptance of appointment by a successor; in this case, the Sponsors will use their best efforts to appoint a successor promptly; however, if upon resignation no successor has accepted appointment within 30 days after notification, the resigning Trustee or Evaluator may apply to a court of competent jurisdiction to appoint a successor.
Any Sponsor may resign so long as one Sponsor with a net worth of $2,000,000 remains and is agreeable to the resignation. A new Sponsor may be appointed by the remaining Sponsors and the Trustee to assume the duties of the resigning Sponsor. If there is only one Sponsor and it fails to perform its duties or becomes incapable of acting or bankrupt or its affairs are taken over by public authorities, the Trustee may appoint a successor Sponsor at reasonable rates of compensation, terminate the Indenture and liquidate the Fund or continue to act as Trustee without a Sponsor. Merrill Lynch, Pierce, Fenner & Smith Incorporated has been appointed as Agent for the Sponsors by the other Sponsors.
The Sponsors, the Trustee and the Evaluator are not liable to investors or any other party for any act or omission in the conduct of their responsibilities absent bad faith, willful misfeasance, negligence (gross negligence in the case of a Sponsor or the Evaluator) or reckless disregard of duty. The Indenture contains customary provisions limiting the liability of the Trustee.
The legality of the Units has been passed upon by Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York 10017, as special counsel for the Sponsors.
The Statement of Condition in the Prospectus was audited by Deloitte & Touche LLP, independent accountants, as stated in their opinion. It is included in reliance upon that opinion given on the authority of that firm as experts in accounting and auditing.
The Trustee and its address are stated on the back cover of the Prospectus. The Trustee is subject to supervision by the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and either the Comptroller of the Currency or state banking authorities.
The Sponsors are listed on the back cover of the Prospectus. They may include Merrill Lynch, Pierce, Fenner & Smith Incorporated, a wholly-owned subsidiary of Merrill Lynch Co. Inc.; Smith Barney Inc., an indirect wholly- owned subsidiary of The Travelers Inc.; Prudential Securities Incorporated, an indirect wholly-owned subsidiary of the Prudential Insurance Company of America; Dean Witter Reynolds, Inc., a principal operating subsidiary of Dean Witter Discover & Co. and PaineWebber Incorporated, a wholly-owned subsidiary of PaineWebber Group Inc. Each Sponsor, or one of its predecessor corporations, has acted as Sponsor of a number of series of unit investment trusts. Each Sponsor has acted as principal underwriter and managing underwriter of other investment companies. The Sponsors, in addition to participating as members of various selling groups or as agents of other investment companies, execute orders on behalf of investment companies for the purchase and sale of securities of these companies and sell securities to these companies in their capacities as brokers or dealers in securities.
In the initial offering period Units will be distributed to the public through the Underwriting Account and dealers who are members of the National Association of Securities Dealers, Inc. The initial offering period is 30 days or less if all Units are sold. If some Units initially offered have not been sold, the Sponsors may extend the initial offering period for up to four additional successive 30-day periods.
The Sponsors intend to qualify Units for sale in all states in which qualification is deemed necessary through the Underwriting Account and by dealers who are members of the National Association of Securities Dealers, Inc.; however, Units of a State trust will be offered for sale only in the State for which the trust is named, except that Units of a New Jersey trust will also be offered in Connecticut, Units of a Florida trust will also be offered in New York and Units of a New York trust will also be offered in Connecticut, Florida and Puerto Rico. The Sponsors do not intend to qualify Units for sale in any foreign countries and this Prospectus does not constitute an offer to sell Units in any country where Units cannot lawfully be sold. Sales to dealers and to introducing dealers, if any, will initially be made at prices which represent a concession from the Public Offering Price, but the Agent for the Sponsors reserves the right to change the rate of any concession from time to time. Any dealer or introducing dealer may reallow a concession up to the concession to dealers.
Upon sale of the Units, the Underwriters will be entitled to receive sales charges. The Sponsors also realize a profit or loss on deposit of the Bonds equal to the difference between the cost of the Bonds to the Fund (based on the offer side evaluation on the initial date of deposit) and the Sponsors' cost of the Bonds. In addition, a Sponsor or Underwriter may realize profits or sustain losses on Bonds it deposits in the Fund which were acquired from underwriting syndicates of which it was a member. During the initial offering period, the Underwriting Account also may realize profits or sustain losses as a result of fluctuations after the initial date of deposit in the Public Offering Price of the Units. In maintaining a secondary market for Units, the Sponsors will also realize profits or sustain losses in the amount of any difference between the prices at which they buy Units and the prices at which they resell these Units (which include the sales charge) or the prices at which they redeem the Units. Cash, if any, made available by buyers of Units to the Sponsors prior to a settlement date for the purchase of Units may be used in the Sponsors' businesses to the extent permitted by Rule 15c3-3 under the Securities Exchange Act of 1934 and may be of benefit to the Sponsors.
Information on the performance of the Fund for various periods, on the basis of changes in Unit price plus the amount of income and principal distributions reinvested, may be included from time to time in advertisements, sales literature, reports and other information furnished to current or prospective investors. Total return figures are not averaged, and may not reflect deduction of the sales charge, which would decrease the return. Average annualized return figures reflect deduction of the maximum sales charge. No provision is made for any income taxes payable.
Past performance may not be indicative of future results. The Fund is not actively managed. Unit price and return fluctuate with the value of the Bonds in the Portfolio, so there may be a gain or loss when Units are sold.
Fund performance may be compared to performance on the same basis (with distributions reinvested) of Moody's Municipal Bond Averages or performance data from publications such as Lipper Analytical Services, Inc., Morningstar Publications, Inc., Money Magazine, The New York Times, U.S. News and World Report, Barron's Business Week, CDA Investment Technology, Inc., Forbes Magazine or Fortune Magazine. As with other performance data, performance comparisons should not be considered representative of the Fund's relative performance for any future period.
Municipal Investment Trust Funds have provided investors with tax-free income for more than 30 years. For decades informed investors have purchased unit investment trusts for dependability and professional selection of investments. Defined Asset Funds' philosophy is to allow investors to 'buy with knowledge' (because, unlike managed funds, the portfolio of municipal bonds and the return are relatively fixed) and 'hold with confidence' (because the portfolio is professionally selected and regularly reviewed). Defined Asset Funds offers an array of simple and convenient investment choices, suited to fit a wide variety of personal financial goals--a buy and hold strategy for capital accumulation, such as for children's education or retirement, or attractive, regular current income consistent with the preservation of principal. Tax-exempt income can help investors keep more today for a more secure financial future. It can also be important in planning because tax brackets may increase with higher earnings or changes in tax laws. Unit investment trusts are particularly suited for the many investors who prefer to seek long-term income by purchasing sound investments and holding them, rather than through active trading. Few individuals have the knowledge, resources or capital to buy and hold a diversified portfolio on their own; it would generally take a considerable sum of money to obtain the breadth and diversity that Defined Asset Funds offer. One's investment objectives may call for a combination of Defined Asset Funds.
Defined Asset Funds reflect a buy and hold strategy that the Sponsors believe can be more effective and cheaper than active management. This strategy is premised on selection criteria and procedures, diversification and regular monitoring by investment professionals. Various advertisements and sales literature may summarize the results of economic studies concerning how stock market movement has tended to be concentrated and how longer-term investments can tend to reduce risk.
One of the most important investment decisions you face may be how to allocate your investments among asset classes. Diversification among different kinds of investments can balance the risks and rewards of each one. Most investment experts recommend stocks for long-term capital growth. Long-term corporate bonds offer relatively high rates of interest income. By purchasing both defined equity and defined bond funds, investors can receive attractive current income, as well as growth potential, offering some protection against inflation. From time to time various advertisements, sales literature, reports and other information furnished to current or prospective investors may present the average annual compounded rate of return of selected asset classes over various periods of time, compared to the rate of inflation over the same periods.
EXCHANGE OPTION--MUNICIPAL INVESTMENT TRUST FUND ONLY.
You may exchange Fund Units for units of certain other Defined Asset Funds subject only to a reduced sales charge. You may exchange your units of any Municipal Investment Trust Fund Intermediate Term Series with a regular maximum sales charge of at least 3.25%, of any other Defined Asset Fund with a regular maximum sales charge of at least 3.50%, or of any unaffiliated unit trust with a regular maximum sales charge of at least 3.0%, for Units of this Fund at their relative net asset values, subject only to a reduced sales charge, or to any remaining Deferred Sales Charge, as applicable.
To make an exchange, you should contact your financial professional to find out what suitable Exchange Funds are available and to obtain a prospectus. You may acquire units of only those Exchange Funds in which the Sponsors are maintaining a secondary market and which are lawfully for sale in the state where you reside. Except for the reduced sales charge, an exchange is a taxable event normally requiring recognition of any gain or loss on the units exchanged. However, the Internal Revenue Service may seek to disallow a loss if the portfolio of the units acquired is not materially different from the portfolio of the units exchanged; you should consult your own tax advisor. If the proceeds of units exchanged are insufficient to acquire a whole number of Exchange Fund units, you may pay the difference in cash (not exceeding the price of a single unit acquired).
As the Sponsors are not obligated to maintain a secondary market in any series, there can be no assurance that units of a desired series will be available for exchange. The Exchange Option may be amended or terminated at any time without notice.
Upon writing or calling the Trustee shown on the back cover of Part A of this Prospectus, investors will receive at no cost to the investor supplemental information about the Fund, which has been filed with the SEC. The supplemental information includes more detailed risk factor disclosure about the types of Bonds that may be part of the Fund's Portfolio, general risk disclosure concerning any letters of credit or insurance securing certain Bonds, and general information about the structure and operation of the Fund.
DESCRIPTION OF RATINGS (AS DESCRIBED BY THE RATING COMPANIES THEMSELVES)
STANDARD & POOR'S RATINGS GROUP, A DIVISION OF MCGRAW-HILL, INC.
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 highest 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 than debt in higher rated categories.
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 a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories.
BB, B, CCC, CC--Debt rated BB, B, CCC and CC is regarded, on balance, as predominately speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.
The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
A provisional rating, indicated by 'p' following a rating, assumes the successful completion of the project being financed by the issuance of the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion.
* Continuance of the rating is contingent upon S&P's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows.
NR--Indicates that no rating has been requested, that there is insufficient information on which to base a rating or that Standard & Poor's does not rate a particular type of obligation as a matter of policy.
Aaa--Bonds which are rated Aaa are judged to be the best quality. They carry the smallest degree of investment risk and are generally referred to as 'gilt edge'. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
Aa--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.
A--Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are 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 which are rated B generally lack characteristics of the 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.
Rating symbols may include numerical modifiers 1, 2 or 3. The numerical modifier 1 indicates that the security ranks at the high end, 2 in the mid-range, and 3 nearer the low end, of the generic category. These modifiers of rating symbols give investors a more precise indication of relative debt quality in each of the historically defined categories.
Conditional ratings, indicated by 'Con.', are sometimes given when the security for the bond depends upon the completion of some act or the fulfillment of some condition. Such bonds are given a conditional rating that denotes their probable credit stature upon completion of that act or fulfillment of that condition.
NR--Should no rating be assigned, the reason may be one of the following: (a) an application for rating was not received or accepted; (b) the issue or issuer belongs to a group of securities that are not rated as a matter of policy; (c) there is a lack of essential data pertaining to the issue or issuer or (d) the issue was privately placed, in which case the rating is not published in Moody's publications.
AAA--These bonds are considered to be investment grade and of the highest quality. The obligor has an extraordinary ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events.
AA--These bonds are considered to be investment grade and of high quality. The obligor's ability to pay interest and repay principal, while very strong, is somewhat less than for AAA rated securities or more subject to possible change over the term of the issue.
A--These bonds are considered to be investment grade and of good quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
BBB--These bonds are considered to be investment grade and of satisfactory quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however are more likely to weaken this ability than bonds with higher ratings.
A '+' or a '-' sign after a rating symbol indicates relative standing in its rating.
DUFF & PHELPS CREDIT RATING CO.
AAA--Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury debt.
AA--High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic condtions.
A--Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress.
A '+' or a '-' sign after a rating symbol indicates relative standing in its rating.
SALES CHARGE SCHEDULES FOR DEFINED ASSET FUNDS, MUNICIPAL SERIES
DEFERRED AND UP-FRONT SALES CHARGES. Units purchased during the first year of the Fund will be subject to periodic deferred and contingent deferred sales charges. Units purchased in the second through fifth year will be subject to an up-front sales charge as well as periodic deferred and contingent deferred sales charges. Units purchased thereafter will be subject only to an up-front sales charge. During the first five years of the Fund, a fixed periodic deferred sales charge of $2.75 per Unit is payable on 20 quarterly payment dates occurring on the 10th day of February, May, August and November, commencing no earlier than 45 days after the initial date of deposit. Investors purchasing Units on the initial date of deposit and holding for at least five years, for example, would incur total periodic deferred sales charges of $55.00 per Unit. Because of the time value of money, however, as of the initial date of deposit this periodic deferred sales charge obligation would, at current interest rates, equate to an up-front sales charge of approximately 4.75%.
The Public Offering Price subsequent to the Initial Date of Deposit will fluctuate. As the periodic deferred sales charge is a fixed dollar amount irrespective of the Public Offering Price, it will represent a varying percentage of the Public Offering Price. An up-front sales charge will be imposed on all unit purchases after the first year of the Fund. The following table illustrates the combined maximum up-front and periodic deferred sales charges that would be incurred by an investor who purchases Units at the beginning of each of the first five years of the Fund (based on a constant Unit price) and holds them through the fifth year of the Fund:
CONTINGENT DEFERRED SALES CHARGE. Units redeemed or repurchased within 4 years after the Fund's initial date of deposit will not only incur the periodic deferred sales charge until the quarter of redemption or repurchase but will also be subject to a contingent deferred sales charge:
YEAR SINCE FUND'S CONTINGENT DEFERRED INITIAL DATE OF SALES CHARGE PER
The contingent deferred sales charge is waived on any redemption or repurchase of Units after the death (including the death of a single joint tenant with rights of survivorship) or disability (as defined in the Internal Revenue Code) of an investor, provided the redemption or repurchase is requested within one year of the death or initial determination of disability. The Sponsors may require receipt of satisfactory proof of disability before releasing the portion of the proceeds representing the amount of the contingent deferred sales charge waived.
To assist investors in understanding the total costs of purchasing units during the first four years of the Fund and disposing of those units by the fifth year, the following tables set forth the maximum combined up-front, periodic and contingent deferred sales charges that would be incurred (assuming a constant Unit price) by an investor:
UNITS PURCHASED ON FIRST ANNIVERSARY OF FUND
SALES CHARGE SCHEDULES FOR MUNICIPAL INVESTMENT TRUST FUND
ACTUAL SALES CHARGE AS DEALER CONCESSION AS PERCENT OF EFFECTIVE PERCENT OF EFFECTIVE NUMBER OF UNITS SALES CHARGE SALES CHARGE 1,000 or more 35 22.75
EFFECTIVE SALES CHARGE COMMENCING JANUARY 16, 1996
TIME TO OF BID SIDE OF PUBLIC Less than six months 0% 0% Six months to less than 1 year 0.503 0.50 1 year to less than 2 years 1.010 1.00 2 years to less than 3 years 1.523 1.50 3 years to less than 4 years 2.302 2.25 4 years to less than 5 years 2.828 2.75 5 years to less than 6 years 3.093 3.00 6 years to less than 7 years 3.359 3.25 7 years to less than 8 years 3.627 3.50 8 years to less than 9 years 4.167 4.00 9 years to less than 12 years 4.439 4.25 12 years to less than 15 years 4.712 4.50 15 years or more 5.820 5.50
For this purpose, a Bond will be considered to mature on its stated maturity date unless: it has been called for redemption; (although not called) its yield to maturity is more than 40 basis points higher than its yield to any call date; funds or securities have been placed in escrow to redeem it on an earlier date; or the Bond is subject to a mandatory tender. In each of these cases the earlier date will be considered the maturity date.
Pierce, Fenner & Smith Incorporated Monthly Payment Series--564 Defined Asset Funds (A Unit Investment Trust) P.O. Box 9051 This Prospectus does not contain all of Princeton, N.J. 08543-9051 the information with respect to the (609) 282-8500 investment company set forth in its Smith Barney Inc. registration statement and exhibits Unit Trust Department relating thereto which have been filed 388 Greenwich Street--23rd Floor with the Securities and Exchange New York, NY 10013 Commission, Washington, D.C. under the 1-800-223-2532 Securities Act of 1933 and the PaineWebber Incorporated Investment Company Act of 1940, and to 1200 Harbor Blvd. which reference is hereby made. (201) 902-3000 No person is authorized to give any Prudential Securities Incorporated information or to make any One Seaport Plaza representations with respect to this 199 Water Street investment company not contained in New York, N.Y. 10292 this Prospectus; and any information or (212) 776-1000 representation not contained herein Dean Witter Reynolds Inc. must not be relied upon as having been Two World Trade Center--59th Floor authorized. New York, N.Y. 10048 ------------------------------ (212) 392-2222 When Units of this Fund are no longer EVALUATOR: available this Prospectus may be used Kenny Information Systems, as a preliminary prospectus for a a division of J. J. Kenny Co., Inc. future series, and investors should 65 Broadway note the following: New York, N.Y. 10006-2511 Information contained herein is subject TRUSTEE: to amendment. A registration statement The Bank of New York relating to securities of a future (a New York Banking Corporation) series has been filed with the P.O. Box 974 Securities and Exchange Commission. Wall Street Division These securities may not be sold nor New York, NY 10268-0974 may offers to buy be accepted prior to 1-800-221-7771 the time the registration statement becomes effective. This Prospectus 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 State in which such offer solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.
ADDITIONAL INFORMATION NOT INCLUDED IN THE PROSPECTUS
A. The following information relating to the Depositors is incorporated by reference to the SEC filings indicated and made a part of this Registration Statement.
The Sponsors undertake that they will not instruct the Trustee to accept from (i) Asset Guaranty Reinsurance Company, Municipal Bond Investors Assurance Corporation or any other insurance company affiliated with any of the Sponsors, in settlement of any claim, less than an amount sufficient to pay any principal or interest (and, in the case of a taxability redemption, premium) then due on any Security in accordance with the municipal bond guaranty insurance policy attached to such Security or (ii) any affiliate of the Sponsors who has any obligation with respect to any Security, less than the full amount due pursuant to the obligation, unless such instructions have been approved by the Securities and Exchange Commission pursuant to Rule 17d-1 under the Investment Company Act of 1940.
SERIES OF MUNICIPAL INVESTMENT TRUST FUND, EQUITY INCOME FUND AND DEFINED ASSET FUNDS MUNICIPAL INSURED SERIES DESIGNATED PURSUANT TO RULE 487 UNDER THE SECURITIES ACT OF 1933
Thirty-Eighth Intermediate Term Series................. 2-84267 Four Hundred Thirty-Eighth Monthly Payment Series...... 33-16561 One Hundred Thirty-Eighth Intermediate Term Series..... 33-30946 One Hundred Fortieth Intermediate Term Series.......... 33-31142 Equity Income Fund, Select Ten Portfolio--1995 Spring Defined Asset Funds Municipal Insured Series................ 33-54565
The Registration Statement on Form S-6 comprises the following papers and documents:
The facing sheet of Form S-6.
The Cross-Reference Sheet (incorporated by reference to the Cross-Reference Sheet to the Registration Statement of Defined Asset Funds Municipal Series, 1933 Act File No. 33-54565).
Additional Information not included in the Prospectus (Part II).
1.1 --Form of Trust Indenture (incorporated by reference to Exhibit 1.1 to the Registration Statement of Municipal Investment Trust Fund, Multistate Series-89, 1933 Act File No. 33-58531). 1.1.1 --Form of Standard Terms and Conditions of Trust Effective October 21, 1993 (incorporated by reference to Exhibit 1.1.1 to the Registration Statement of Municipal Investment Trust Fund, Multistate Series-48, 1933 Act File No. 33-50247). 1.2 --Form of Master Agreement Among Underwriters (incorporated by reference to Exhibit 1.2 to the Registration Statement of The Corporate Income Fund, One Hundred Ninety-Fourth Monthly Payment Series, 1933 Act File No. 2-90925). 2.1 --Form of Certificate of Beneficial Interest (included in Exhibit 1.1.1). 3.1 --Opinion of counsel as to the legality of the securities being issued including their consent to the use of their names under the headings 'Taxes' and 'Miscellaneous--Legal Opinion' in the Prospectus. 4.1 --Consent of the Evaluator. 5.1 --Consent of independent accountants. 9.1 --Information Supplement (incorporated by reference to Exhibit 9.1 to the Registration Statement of Municipal Investment Trust Fund, Insured Series 226, 1933 Act File No. 33-61281).
The registrant hereby identifies the series numbers of Municipal Investment Trust Fund, Equity Income Fund and Defined Asset Funds Municipal Insured Series listed on page R-1 for the purposes of the representations required by Rule 487 and represents the following:
1) That the portfolio securities deposited in the series as to which this registration statement is being filed do not differ materially in type or quality from those deposited in such previous series;
2) That, except to the extent necessary to identify the specific portfolio securities deposited in, and to provide essential information for, the series with respect to which this registration statement is being filed, this registration statement does not contain disclosures that differ in any material respect from those contained in the registration statements for such previous series as to which the effective date was determined by the Commission or the staff; and
3) That it has complied with Rule 460 under the Securities Act of 1933.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED IN THE CITY OF NEW YORK AND STATE OF NEW YORK ON THE 12TH DAY OF JANUARY, 1996.
SIGNATURES APPEAR ON PAGES R-3, R-4, R-5, R-6 AND R-7.
A majority of the members of the Board of Directors of Merrill Lynch, Pierce, Fenner & Smith Incorporated has signed this Registration Statement or Amendment to the Registration Statement pursuant to Powers of Attorney authorizing the person signing this Registration Statement or Amendment to the Registration Statement to do so on behalf of such members.
A majority of the members of the Board of Directors of Smith Barney Inc. has signed this Registration Statement or Amendment to the Registration Statement pursuant to Powers of Attorney authorizing the person signing this Registration Statement or Amendment to the Registration Statement to do so on behalf of such members.
A majority of the members of the Executive Committee of the Board of Directors of PaineWebber Incorporated has signed this Registration Statement or Amendment to the Registration Statement pursuant to Powers of Attorney authorizing the person signing this Registration Statement or Amendment to the Registration Statement to do so on behalf of such members.
A majority of the members of the Board of Directors of Prudential Securities Incorporated has signed this Registration Statement or Amendment to the Registration Statement pursuant to Powers of Attorney authorizing the person signing this Registration Statement or Amendment to the Registration Statement to do so on behalf of such members.
A majority of the members of the Board of Directors of Dean Witter Reynolds Inc. has signed this Registration Statement or Amendment to the Registration Statement pursuant to Powers of Attorney authorizing the person signing this Registration Statement or Amendment to the Registration Statement to do so on behalf of such members.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
By the following persons, who constitute Powers of Attorney have been filed the Board of Directors of Merrill Form SE and the following 1933 Act Fenner & Smith Incorporated: Number: 33-43466 and 33-51607
(As authorized signatory for Merrill Lynch, Pierce, Fenner & Smith Incorporated and Attorney-in-fact for the persons listed above)
By the following persons, who constitute a majority of Powers of Attorney the Board of Directors of Smith Barney Inc.: have been filed File Number:
Attorney-in-fact for the persons listed above)
By the following persons, who constitute Powers of Attorney have been filed the Executive Committee of the Board the following 1933 Act File of PaineWebber Incorporated:
(As authorized signatory for PaineWebber Incorporated and Attorney-in-fact for the persons listed above)
By the following persons, who constitute a majority of Powers of Attorney the Board of Directors of Prudential Securities have been filed Incorporated: under Form SE and Act File Number:
(As authorized signatory for Prudential Securities Incorporated and Attorney-in-fact for the persons
By the following persons, who constitute Powers of Attorney have been filed a majority of under Form SE and the following the Board of Directors of Dean Witter 1933 Act File Number: 33-17085 Reynolds Inc.:
(As authorized signatory for Dean Witter Reynolds Inc. and Attorney-in-fact for the persons listed above) | 487 | 487 | 1996-01-12T00:00:00 | 1996-01-12T08:17:26 |
0000950147-96-000009 | 0000950147-96-000009_0000.txt | [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 Identification No.)
38 South Audley Street, London, England W1Y 5DH N/A (Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
40 Lowndes Street, London, England SWIX 9HK (Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether 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 registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No
24,999,236 shares, $.01 par value, as of September 30, 1995 (Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date)
Part I - Financial Information (unaudited)
Consolidated Balance Sheet September 30, 1995 and December 31, 1994................................................... 3
three and nine months ended September 30, 1994 and 1995................. 5
Consolidated Statements of Cash Flows nine months ended September 30, 1994 and 1995........................... 6
Notes to Financial Statements........................................... 7
Management's Discussion and Analysis of Financial Condition and Results of Operations .................................... 8
Part II - Other Information 9
The financial statements are unaudited. However, the management of registrant believes that all necessary adjustments (which include only normal recurring adjustments) have been reflected to present fairly the financial position of registrant at September 30, 1995 and December 31, 1994 and the results of its operations and the changes in its financial position for the nine months ended September 30, 1994 and 1995 and the results of its operations for three and nine months ended September 30, 1994 and 1995.
LITTLE PRINCE PRODUCTIONS LIMITED AND SUBSIDIARY
Cash and cash equivalents $ 4,122 $ 5,241
Investment in U.S. Government Bond Fund 683 10,900
Prepaid expenses and taxes -- 612
Loan to officer of company 2,000 2,000
Amount due from Riparian Securities Limited -- 2,770
Due from former partner in Joint Venture 5,000 18,930
Total current assets 11,805 40,453
PROPERTY AND EQUIPMENT - AT COST
Furniture, fixtures and equipment -- --
Less: Accumulated depreciation -- --
Net property and equipment -- --
Production and distribution rights 5,625 7,500
Investment in joint ventures 3,728 3,728
Total other assets 9,353 11,228
LITTLE PRINCE PRODUCTIONS LIMITED AND SUBSIDIARY
Accounts Payable $ 150,067 $ 159,145
Provision for legal fees 10,000 20,000
Accrued audit fees 16,000 27,500
Provision for secretarial services 4,000 7,500
Short term loans from major shareholder 78,808 --
Total current liabilities 258,875 214,145
Common stock $0.01 par value
Issued and outstanding - 24,999,236 shares 249,992 249,992
Additional paid-in capital 3,006,891 3,006,891
Total shareholders' deficit -237,717 -162,464
TOTAL LIABILITIES AND SHAREHOLDERS' $ 21,158 $ 51,681
LITTLE PRINCE PRODUCTIONS LIMITED AND SUBSIDIARY
LITTLE PRINCE PRODUCTIONS LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Adjustments to reconcile net loss to Net Cash Provided by Operating Activities: Change in Asset and Liabilities: Accounts Receivable and Other Debtors 17,312 97,185 Increase/(Decrease) in Liabilities: Accounts payable and Accrued Expenses -34,078 159,706 Effect of foreign currency exchange rate changes on cash and cash equivalents -- -- Adjustment on disposal of subsidiary -- -287,428 NET CASH - OPERATING ACTIVITIES -90,144 278,062 INVESTING ACTIVITIES: Proceeds on disposal of subsidiary -- 1 Proceeds on disposal of US Government Bonds 10,217 --
NET CASH - INVESTING ACTIVITIES 10,217 1 New short term loans 78,808 -- Repayment of loans -- -315,283 Cash released on disposal of subsidiary -- -2,290
NET CASH - FINANCING ACTIVITIES 78,808 -298,949
AND CASH EQUIVALENTS -1,119 -20,886
CASH AND CASH EQUIVALENTS -
CASH AND CASH EQUIVALENTS - END 4,122 9,047
LITTLE PRINCE PRODUCTIONS LIMITED AND SUBSIDIARY
The balance sheet as of September 30, 1995, the statements of operations for the three and nine months ended September 30, 1994 and 1995, and the statement of cash flows for the nine months ended September 30, 1994 and 1995 have been prepared by registrant without audit. The accompanying unaudited interim financial statements include all adjustments (consisting only of those of a normal recurring nature) necessary for a fair statement of the results for the interim periods.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in registrant's Form 10-K for the year ended December 31, 1994.
LITTLE PRINCE PRODUCTIONS LIMITED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On August 22, 1994, in order to substantially reduce the deficit on shareholders equity, registrant exchanged agreements with Riparian Securities Limited ("Riparian"), its legal advisors and the then officers and directors of the company, whereby 11,000,000 shares in the common stock of the company were to be issued for $495,146. Of this total consideration, $32,500 was for cash with the remaining $462,656 applied to the cancellation of liabilities. These agreements were completed on October 3, 1994. These agreements are more fully discussed in Registrant's 10-K for the year ended December 31, 1994.
On January 17, 1995 Riparian transferred its entire holding to the Patchouli Foundation ("Patchouli"), a Liechtenstein Stiftung and as at March 31, 1995 Patchouli owned 25% of the issued and outstanding common stock of the company.
In order to reduce outstanding liabilities relating to legal, audit and secretarial services and also to meet the excess of continuing operating costs of Registrant over income; including those costs associated with meeting the regulatory requirements of registrant, $10,217 was realized from the sale of investments at book value during the nine months ended September 30, 1995 of which $717 was realized in the three months ended September 30, 1995. In addition, in the nine months ended September 30, 1995 Patchouli advanced funds by way of loans to Registrant totalling $78,808 of which $12,548 was advanced in the three months ended September 30, 1995. Patchouli has continued to advance further funds since that date.
Management does not believe that Registrant has the ability to raise adequate resources from its existing revenue operations. Registrant is therefore dependent in the short term from continued loans from Patchouli and in the longer term upon increasing its authorized share capital in order to acquire through the issue of additional shares in its common stock a suitable business to satisfy the minimum financial criteria for inclusion in the National Association of Security Dealers, Inc. automated quotation system ("NASDAQ") as previously stated in Registrant's Form 10-K for the year ended December 31, 1994.
Management intends to call a meeting of Registrant's shareholders for the purpose of, among other things, increasing the amount of authorized capital stock.
Registrant had no material commitments for capital expenditure at either September 30, 1995 or December 31, 1994.
Income in the quarter arose from fees received from the licensing of various theatrical productions. This income did not reflect any change in the business of Registrant but typified the nature of the business and timing of the income generated.
LITTLE PRINCE PRODUCTIONS LIMITED AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Throughout the nine months ended September 30, 1995 management's primary task has been to deal with the preparation and completion of the various financial and regulatory documentation which Registrant has been required to file, some of which had been overdue. All filings are now up to date. The majority of the operating costs of $89,592 incurred in the nine months ended September 30, 1995 related specifically to the audit, accounting, secretarial and legal costs associated with the preparation of the aforementioned documentation. Included within the total for operating costs for the quarter to September 30, 1995 is a charge of $13,930 by way of a provision against the loans due from a former partner in a joint venture in order to reflect management's doubts as to their recoverability.
On December 18, 1990, an action against the Parent company commenced before the Tribunal de Grande Instance of Paris, France. The Plaintiff was seeking a judicial declaration of the termination of the agreement to engage in the exploitation of certain ancillary and subsidiary rights in connection with the literary work entitled "The Little Prince," an illustrated story by the French author, Antoine de Saint-Exupery (the "Agreement"), together with reimbursement of all sums received and damages and legal fees of approximately $200,000. In February 1992, an agreement was reached to settle the above matter whereby the Parent Company would receive $200,000 in return for giving up certain foreign rights as follows: $50,000 payable upon full performance of the Settlement Agreement and four payments of $25,000 every 3 months thereafter with a final payment of $50,000 by November 1993. All monies have now been received. Accrued legal expenses thereon of $150,692 were payable. The settlement also stipulates that the Parent must abandon the corporate name "Little Prince Productions Ltd." within 18 months from February 6, 1992. As at the date of this report, the name of the company has not been changed nor has any action been commenced by the plaintiff.
Submission of Vote to Security Holders
No matters have been submitted to the vote of Security Holders in the quarter.
Exhibits and Reports on Form 8-K
Exhibits filed herewith: None Forms 8-K filed in quarter: None
Pursuant to the requirements of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
P. N. Chapman, Chief Financial Officer, duly authorized to sign this report on its behalf | 10-Q | 10-Q | 1996-01-12T00:00:00 | 1996-01-11T18:20:40 |
0000883053-96-000008 | 0000883053-96-000008_0001.txt | <DESCRIPTION>STICKER, CROSS REFERENCE SHEETS & S-1 THRU S-4
* PRELIMINARY PROSPECTUS DATED 01/12/96 *
The attached final Prospectus for a prior Series is hereby used as a preliminary Prospectus for the above-stated Series. The narrative information and structure of the attached final Prospectus will be substantially the same as that of the final Prospectus for this Series. Although the attached Prospectus includes trusts as indicated therein, the specific trusts included in this Series when deposited may differ from such trusts. Information with respect to the actual trusts to be included, pricing, the number of Units, dates and summary information regarding the characteristics of securities to be deposited in this Series is not now available and will be different since each Series has a unique Portfolio. Accordingly the information contained herein with regard to the previous Series should be considered as being included for informational purposes only. Ratings of the securities in this Series are expected to be comparable to those of the securities deposited in the previous Series. However, the Estimated Current Return for this Series will depend on the interest rates and offering prices of the securities in this Series and may vary materially from that of the previous Series.
* A registration statement relating to the units of this Series has been * * filed with the Securities and Exchange Commission but has not yet * * become effective. Information contained herein is subject to comple- * * tion or amendment. Such Units may not be sold nor may offers to buy * * be accepted prior to the time the registration statement becomes * * effective. This Prospectus shall not constitute an offer to sell * * or the solicitation of an offer to buy nor shall there be any sale * * of the Units in any state in which such offer, solicitation or sale * * would be unlawful prior to registration or qualification under the * * securities laws of any such state. *
Statement of differences between electronic filing and printed document. Pursuant to Rule 499(c) (7) under the Securities Act of 1933 and Rule 0-11 under the Investment Company Act of 1940, Registrant hereby identifies those differences in the foregoing document between the electronic format in which it is filed and the printed form in which it will be circulated: (1) The printed and distributed prospectus may be paged differently because the printed document may contain a different amount of information on each page from that contained in the electronic transmission. (2) On the cover page, in the index and on the last page of the printed document, solid vertical bars will appear. (3) In the printed document, footnote symbols may include a "dagger" or multiple "dagger". The "dagger" symbol is represented as # in the electronic document. (4) The printed and distributed prospectus will not contain the preliminary prospectus legend included at the beginning of the first prospectus page.
NUVEEN TAX-FREE UNIT TRUST, SERIES 848
Pursuant to Rule 404(c) of Regulation C under the Securities Act of 1933
(Form N-8B-2 Items Required by Instruction 1 as to Prospectus on Form S-6)
ITEM NUMBER HEADING IN PROSPECTUS
I. ORGANIZATION AND GENERAL INFORMATION
1. (a) Name of trust ) Prospectus Part-A Cover Page (b) Title of securities issued )
2. Name and address of Depositor ) Information About the Sponsor
3. Name and address of Trustee ) Information About the Trustee
4. Name and address of principal ) Information About the Sponsor
5. Organization of trust ) What Is The Nuveen Tax-Free ) Unit Trust?
6. Execution and termination of ) What Is The Nuveen Tax-Free Trust Agreement ) Unit Trust? ) Information About the Trustee
7. Changes of Name *
II. GENERAL DESCRIPTION OF THE TRUST AND SECURITIES OF THE TRUST
10. General Information regarding ) Summary of Portfolios trust's securities ) Why and How are the Bonds Insured? Made to Unitholders? ) Ownership and Transfer of Units ) How Units May Be Redeemed ) How Bonds May Be Removed From ) Information About the Trustee ) Information About the Sponsor
) What Is The Tax Status of ) Unitholders?
11. Type of securities comprising ) What Is The Nuveen Tax-Free units ) Unit Trust? ) What Are The Objectives Of ) The Trusts? Why and How are the Bonds Insured?
12. Certain information regarding ) *
13. (a)Load, fees, expenses, etc. ) Part A-Essential Information ) How Is The Public Offering Price ) Determined? ) What Is Accrued Interest? ) What Is The Estimated Current ) Return? ) How Was The Price Of The Bonds ) Determined At The Date of Deposit? ) What Are Normal Trust Operating ) Expenses? ) When Are Distributions Made ) to Certificateholders? ) How Detailed Are Reports To Certificateholders?
(b)Certain information regarding ) *
(c)Certain percentages ) How Is the Public Offering Price ) Determined? ) What Is The Estimated Current ) Return? ) How Was The Price of the Bonds ) Determined At The Date of Deposit? ) What is Accrued Interest?
(d)Certain other fees, etc. ) How Was The Price Of The Bonds payable by holders ) Determined At The Date of Deposit? ) What Are Normal Trust Operating ) Expenses? ) Ownership and Transfer of Units
(e)Certain profits receivable ) Composition of Trusts by depositor, principal under- ) writer, trustee or affiliated ) How Units May Be Purchased By
14. Issuance of trust's securities ) Summary of Portfolios ) When Are Distributions Made ) To Unitholders? ) Ownership and Transfer of Units ) How Units May Be Redeemed
15. Receipt and handling of payments ) *
16. Acquisition and Disposition of ) What Is The Nuveen Tax-Free Underlying Securities ) Unit Trust? ) Why and How are the Bonds Insured? ) How Units May Be Redeemed ) How Bonds May Be Removed From
17. Withdrawal or redemption ) Market For Units ) How Units May Be Redeemed ) How Units May Be Purchased By
18. (a)Receipt and disposition of income ) Summary of Portfolios Made To Unitholders? ) How Detailed Are Reports To ) Unitholders?
(b)Reinvestment of distributions ) Accumulation Plan
(c)Reserves or special funds ) Summary of Portfolios ) Made To Unitholders?
(d)Schedule of distributions ) *
19. Records, accounts and reports ) When Are Distributions Made ) To Unitholders? ) How Detailed Are Reports To ) Unitholders?
20. Certain miscellaneous provisions of ) Information About the Trustee Trust Agreement ) Information About the Sponsor
21. Loans to security holders ) *
22. Limitations on liability ) Summary of Portfolios ) Information About The Trustee
23. Bond arrangements ) *
24. Other material provisions of Trust ) *
III. ORGANIZATION, PERSONNEL AND AFFILIATED PERSONS OF DEPOSITOR
25. Organization of Depositor ) Information About the Sponsor
26. Fees received by Depositor ) *
27. Business of Depositor ) Information About the Sponsor
28. Certain information as to officials ) * and affiliated persons of Depositor )
29. Voting Securities of Depositor ) Information About the Sponsor
30. Persons controlling Depositor ) 31. Payments by Depositor for certain ) services rendered to trust ) 32. Payments by Depositor for certain ) other services rendered to trust ) 33. Remuneration of employees of Depositor) for certain services rendered to trust) 34. Remuneration of other persons for ) certain services rendered to trust )
IV. DISTRIBUTION AND REDEMPTION OF SECURITIES
35. Distribution of trust's securities by ) 36. Suspension of sales of trust's ) 37. Revocation of authority to distribute )
38. (a)Method of distribution ) (b)Underwriting agreements ) How Units of The Trusts Are ) Distributed To The Public
39. (a)Organization of principal ) ) Information About The Sponsor (b)NASD membership of principal )
40. Certain fees received by principal ) *
41. (a)Business of principal underwriter ) (b)Branch offices of principal under- ) * (c)Salesmen of principal underwriter )
42. Ownership of trust's securities by ) * 43. Certain brokerage commissions received) *
44. (a)Method of valuation ) Part A-Essential Information ) How Is The Public Offering Price ) Determined? ) How Was The Price Of The Bonds ) Determined At The Date of Deposit? ) What Are Normal Trust Operating ) Expenses?
(b)Schedule as to offering price ) *
(c)Variation in offering price to ) How Is the Public Offering Price certain persons ) Determined? ) What Is Accrued Interest? ) How Was The Price Of The Bonds ) Determined At The Date of Deposit?
45. Suspension of redemption rights ) *
46. (a)Redemption valuation ) Unit Value and Evaluation ) How Units May Be Redeemed ) How Units May Be Purchased By
(b)Schedule as to redemption price ) *
47. Maintenance of position in underlying ) How Is the Public Offering Price securities ) Determined? ) How Units May Be Purchased By
V. INFORMATION CONCERNING THE TRUSTEE OR CUSTODIAN
48. Organization and regulation of Trustee) Information About The Trustee
49. Fees and expenses of Trustee ) Part A-Essential Information ) What Are Normal Trust Operating ) Expenses?
50. Trustee's lien ) What Are Normal Trust Operating ) Expenses? ) When Are Distributions Made ) To Unitholders?
VI. INFORMATION CONCERNING INSURANCE OF HOLDERS OF SECURITIES
51. Insurance of holders of trust's ) *
52. (a)Provisions of trust agreement with ) What Are Normal Trust Operating respect to selection or elimination) Expenses? of underlying securities ) How Units May Be Redeemed With- ) How Bonds May Be Removed From
(b)Transactions involving elimination ) *
(c)Policy regarding substitution or ) Summary of Portfolio elimination of underlying ) Composition of Trusts securities ) How Bonds May Be Removed From
(d)Fundamental policy not otherwise ) *
53. Tax status of trust ) What Is The Tax Status Of ) Unitholders?
VIII. FINANCIAL AND STATISTICAL INFORMATION
54. Trust's securities during last ten years) *
*Inapplicable, omitted, answer negative or not required.
A. BONDING ARRANGEMENTS OF DEPOSITOR:
The Depositor has obtained the following Stockbrokers Blanket Bonds for its officers, directors and employees:
United Pacific Insurance Co. $10,000,000
Aetna Casualty and Surety $10,000,000
St. Paul Insurance Co. $ 6,000,000
B. This Registration Statement comprises the following papers and documents:
The Registration Statement will contain multiple seperate prospectuses. Each prospectus will relate to an individual unit investment trust and will consist of a Part A, a Part B and an Information Supplement. Each prospectus wil be identical with the exception of the respective Part A which will contain the financial information specific to such underlying unit investment trust.
1. With the exception of the information included in the state specific appendices to the Information Supplement, which will vary depending upon the make-up of a Fund or updated to reflect current events, any amendment to a Fund's Information Supplement will be subject to the review of the staff of the Securities and Exchange Commission prior to
2. The Information Supplement to the Trust will not include third party financial information.
Pursuant to the requirements of the Securities Act of 1933, the Registrant, Nuveen Tax-Free Unit Trust, Series 848, has duly caused this Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized in the City of Chicago and State of Illinois on 01/12/96.
NUVEEN TAX-FREE UNIT TRUST, SERIES 848
By JOHN NUVEEN & CO. INCORPORATED
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated:
Richard J. Franke Chairman, Board of Directors, ) Chief Executive Officer and ) Donald E. Sveen President, Chief Operating ) Anthony T. Dean Executive Vice President and )Larry Woods Martin Timothy T. Schwertfeger Executive Vice President and ) John P. Amboian Chief Financial Officer and ) O. Walter Renfftlen Vice President and Controller )
*The titles of the persons named herein represent their capacity in and relationship to John Nuveen & Co. Incorporated, the Depositor.
**The powers of attorney were filed on Form SE for Messrs. Franke, Sveen, Renfftlen, Dean and Schwertfeger with the Amendment to the Registration Statement on Form S-6 of Nuveen Tax-Exempt Unit Trust, Series 671 (File No. 33-49175). The Power of Attorney for Messr. Amboian was filed with the Amendment to the Registration Statement on Form S-6 of Nuveen Tax- Exempt Unit Trust, Series 823 (File No. 33-62325).
CONSENT OF CHAPMAN AND CUTLER
The consent of Chapman and Cutler to the use of its name in the Prospectus included in the Registration Statement will be filed by Amendment.
The consents of special counsel to the Fund for state tax matters to the use of their names in the Prospectus included in the Registration Statement will be filed by Amendment.
CONSENT OF STANDARD + POOR'S CORPORATION
The consent of Standard + Poor's Corporation to the use of its name in the Prospectus included in the Registration Statement will be filed by Amendment.
CONSENT OF KENNY S+P EVALUATION SERVICES
The consent of Kenny S+P Evaluation Services to the use of its name in the Prospectus included in the Registration Statement will be filed by Amendment.
CONSENT OF CARTER, LEDYARD & MILBURN
The consent of Carter, Ledyard & Milburn to the use of its name in the Prospectus included in the Registration Statement will be filed by Amendment.
CONSENT OF ARTHUR ANDERSEN LLP
The consent of Arthur Andersen LLP to the use of its report and to the reference to such firm in the Prospectus included in the Registration Statement will be filed by Amendment. | S-6EL24 | EX-99 | 1996-01-12T00:00:00 | 1996-01-12T15:54:26 |
0000950124-96-000219 | 0000950124-96-000219_0000.txt | Pricing Supplement dated January 11, 1996 Rule 424(b)(5) (To Prospectus dated November 6 , 1995 and File No. 33-63311 Prospectus Supplement dated November 17, 1995)
Principal Amount: $60,000,000 Interest Rate: 6.32% Agent's Discount or Commission: 0.600 % Stated Maturity: 02-01-03 Net Proceeds to Issuer: $59,640,000 Original Issue Date: 01-17-96 INTEREST PAYMENT DATES: February 1 and August 1
REGULAR RECORD DATES: January 15 next preceding a February 1 Interest Payment Date or July 15 next preceding an August 1 Interest
[X] The Notes cannot be redeemed prior to Stated Maturity [ ] The Notes may be redeemed prior to Stated Maturity Initial Redemption Date: Initial Redemption Percentage: Annual Redemption Percentage Reduction: _______% until Redemption Percentage is 100% of the principal amount.
[X] The Notes cannot be repaid prior to Stated Maturity [ ] The Notes can be repaid prior to Stated Maturity at the option of the holder of the Notes. Optional Repayment Dates:
ORIGINAL ISSUES DISCOUNT: [ ] Yes [X] No Total Amount of OID: Yield to Maturity: Initial Accrual Period:
FORM: [X] Book-Entry [ ] Certificated
AGENT(S): [X] Merrill Lynch & Co. Amount Placed: $ 18,000,000 [X] Smith Barney Inc. Amount Placed: 15,000,000 [X] Donaldson, Lufkin & Jenrette Securities Corporation Amount Placed: 15,000,000 [X] First Chicago Capital Markets, Inc. Amount Placed: 12,000,000 [ ] Other______________________ Amount Placed: ____________
AGENT ACTING IN THE CAPACITY AS INDICATED BELOW: [X] Agent [ ] Principal
[ ] The Notes are being offered at varying prices related to prevailing market prices at the time of resale. [ ] The Notes are being offered at a fixed initial public offering price of ____% of Principal Amount.
The Notes are being offered at a fixed initial public offering price of 100% of Principal Amount. | 424B5 | 424B5 | 1996-01-12T00:00:00 | 1996-01-12T15:56:31 |
0000950147-96-000014 | 0000950147-96-000014_0003.txt | AMENDED AND RESTATED REPLACEMENT REVOLVING LINE OF CREDIT
For value received, CH MORTGAGE COMPANY, a Colorado corporation formerly known as American Western Mortgage Company ("Maker"), promises to pay to the order of BANK ONE, ARIZONA, NA at its office at 241 North Central Avenue, Phoenix, Arizona 85004, or at such other place as the holder hereof may from time to time designate in writing, the principal sum of TWENTY-FIVE MILLION AND NO/100 DOLLARS ($25,000,000.00), or so much thereof as shall from time to time be disbursed and outstanding under that certain Amended and Restated Mortgage Warehousing Credit and Security Agreement (as it may be amended, modified, extended, and renewed and replaced from time to time, the "Credit Agreement") dated July 1, 1995 herewith between Maker and the payee named above, together with accrued interest from the date of disbursement on the unpaid principal at the applicable rate as set forth in Section 4. The payee named above shall have no obligation to make any Advances hereunder except in accordance with the Credit Agreement. This note (as it may be amended, modified, extended, and renewed from time to time, the "Note") is issued pursuant to, entitled to the benefits of, and referred to as the "Note" in the Credit Agreement. In the event of any inconsistency between the provisions of this Note and the provisions of the Credit Agreement, the Credit Agreement shall control. Capitalized terms used herein without definition shall have the meanings set forth in the Credit Agreement.
Absent the occurrence of an Event of Default hereunder or under any of the Credit Agreement, this Note, and other documents evidencing or securing the loans contemplated by the Credit Agreement (collectively the "Credit Agreement Documents"), the unpaid principal balance hereof, together with all unpaid interest accrued thereon, and all other amounts payable by Maker under the terms of the Credit Agreement Documents, shall be due and payable on December 1, 1996 (the "Maturity Date"). If the Maturity Date should fall (whether by acceleration or otherwise) on a day that is not a Business Day, payment of the outstanding principal shall be made on the next succeeding Business Day and such extension of time shall be included in computing the interest included in such payment.
PREPAYMENT. Maker may prepay the outstanding principal balance hereof in whole or in part at any time prior to the Maturity Date without penalty or premium as stated in such notice by Maker.
(a) Absent an Event of Default hereunder or under any of the Credit Agreement Documents, each Advance made hereunder shall bear interest from the date advanced at the applicable rate from time to time ("Interest Rate") as follows:
(i) To the extent Maker shall elect as provided in this Note and to the extent not otherwise provided in this Note, interest shall accrue on the unpaid principal of an Advance at the Fixed Rate. Interest at the Fixed Rate shall be computed on the basis of a 360 day year and accrue on a daily basis for the actual number of days elapsed.
(ii) Except to the extent that Advances bear interest at the Fixed Rate, as defined herein, pursuant to this Note, interest shall accrue on the unpaid principal of all Advances at the Average Libor Rate, calculated during each calendar month (or partial month). Interest at the Libor Rate shall be computed on the basis of a 360 day year and accrue on a daily basis for the actual number of days elapsed.
As used in this Note:
"Average Libor Rate" means the mathematical average of the Libor Rate in effect during the applicable period of time to which the calculation relates.
"Balance Calculation Period" means the period covered by Maker's monthly account analysis statement prepared by the payee hereof and used by the payee hereof to determine Maker's Compensating Balances.
"Balances Deficiency" has the meaning set forth in Section (f) below.
"Balances Deficiency Fee" has the meaning set forth in Section (f) below.
"Business Day" means a day of the year on which banks are not required or authorized to close in Phoenix, Arizona, and, with respect to a Libor Advance, a day on which dealings are carried on in the London interbank market.
"Compensating Balances" means the value to the payee hereof (net of all service charges, all reserve requirements, FDIC insurance assessments and other costs, fees, expenses and amounts incurred by the payee hereof on account of such balances) of Maker's average daily, free, collected, non-interest bearing compensating balances maintained at Bank One, Arizona, NA, as determined by the payee hereof and set forth on Maker's monthly account analysis statement prepared by the payee hereof. In determining free, collected, non-interest bearing compensating balances, there shall be subtracted any uncollected or returned checks, and there shall be no adjustment for reserve requirements, FDIC insurance assessments or other costs incurred by the payee hereof on account of such balances.
"Fixed Rate" means the rate of three percent (3%) per annum.
"Fixed Rate Advance" means an Advance that bears or is requested to bear interest at the Fixed Rate.
"Libor Advance" means an Advance that bears or is requested to bear interest at the Libor Rate.
"Libor Rate" means the rate per annum equal to the sum of (i) one and three-quarters percent (1.75%) per annum, and (ii) the per annum rate of interest determined by the holder hereof, based on Telerate System reports or such other source as may be selected by the holder hereof, to be the "London Interbank Offered Rate" at which deposits in United States dollars are offered by major banks in London, England, for a 30-day interest period.
"Prime Rate" means the rate per annum most recently announced by Bank One, Arizona, NA, or its successors, in Phoenix, Arizona, as its " prime rate," as in effect from time to time. The Prime Rate is not necessarily the best or lowest rate offered by said bank, and said bank may lend to its customers at rates that are at, above, or below, the Prime Rate.
"Regulatory Change" means any change effective after the date of this Note in United States federal, state, or foreign law, regulations, or rules or the adoption or making after such date of any interpretation, directive, or request applying to a class of banks including the holder hereof, of or under any United States federal, state, or foreign law, regulation or rule (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof.
(b) If Maker desires that any Advances are to bear interest at the Fixed Rate, Maker shall deliver notice thereof to the holder at least one (1) Business Day prior to the first day of the Balance Calculation Period (i.e., the first day of a calendar month), which notice shall specify the amount of Advances that are to bear interest at the Fixed Rate. If Maker elects to have interest accrue on any Advances at the Fixed Rate, then the unpaid amount of such Advances shall bear interest from and including the first day of such Balance Calculation Period.
Maker may on any Business Day, upon written notice to and received by the holder hereof not later than 12:00 p.m. (Phoenix, Arizona local time) on the first Business Day prior to the date of the proposed conversion, convert any Advance of one type into an Advance of the other type; provided, however, that any conversion of a Fixed Rate Advance to a Libor Advance shall only be made on the last day of the applicable Balance Calculation Period. Each such notice of a conversion shall specify the date of such conversion and the Advance(s) to be converted, and any conversion of a Libor Advance to a Fixed Rate Advance shall comply with subparagraph (b) above.
(c) Notwithstanding any provision of the Credit Agreement Documents to the contrary, the holder hereof shall be entitled to fund and maintain its funding of all or any part of any Advance in any manner it sees fit.
If, due to any Regulatory Change, there shall be any increase in the cost to the holder hereof of agreeing to make or making, funding, or maintaining Libor Advances (including, without limitation, any increase in any applicable reserve requirement), then Maker shall from time to time, upon demand by the holder hereof, pay to the holder hereof such amounts as the holder hereof may reasonably determine to be necessary to compensate the holder hereof for any additional costs that the holder hereof reasonably determines are attributable to such Regulatory Change and the holder hereof will notify the Maker of any Regulatory Change that will entitle the holder hereof to compensation pursuant to this paragraph as promptly as practicable, but in any event within 90 days after the holder hereof obtains knowledge thereof; provided, however, that if the holder hereof fails to give such notice within 90 days after it obtains knowledge of such a Regulatory Change, the holder hereof shall, with respect to compensation payable in respect of any costs resulting from such Regulatory Change, only be entitled to payment for costs incurred from and after the date that the holder hereof does give such notice. the holder hereof will furnish to Maker a certificate setting forth in reasonable detail the basis for the amount of each request by the holder hereof for compensation under this paragraph. Determinations by the holder hereof of the amounts required to compensate the holder hereof shall be conclusive, absent manifest error. the holder hereof shall be entitled to compensation in connection with any Regulatory Change only for costs actually incurred by the holder hereof.
Notwithstanding any provision of the Credit Agreement Documents, if the holder hereof shall notify Maker that as a result of a Regulatory Change it is unlawful for the holder hereof to make Advances at the Libor Rate, or to fund or maintain Libor Rate Advances, (i) the obligations of the holder hereof to make Advances at the Libor Rate and to convert Advances to the Libor Rate shall be suspended until the holder hereof shall notify Maker that the circumstances causing such suspension no longer exist, and (ii) in the event such Regulatory Change makes the maintenance of Advances at the Libor Rate unlawful, Maker shall forthwith prepay in full all Advances then outstanding, together with interest accrued thereon and all amounts in connection with such prepayment specified in the paragraph in this Note titled "PREPAYMENT," unless Maker, within five (5) Business Days of notice from the holder hereof, (i) converts all Libor Rate Advances then outstanding into Fixed Rate Advances pursuant to the conversion procedures in this Note, and pays all amounts in connection with such prepayments or conversions specified in the paragraph in this Note titled "PREPAYMENT," and (ii) enters into an agreement with Holder setting forth an alternative interest rate to be used pursuant to this Note.
Notwithstanding any other provision of the Credit Agreement Documents, if prior to the commencement of any Interest Period, the holder hereof shall determine (i) that United States dollar deposits in the amount of any Libor Advance to be outstanding during such Interest Period are not readily available to the holder hereof in the London interbank market, or (ii) by reason of circumstances affecting the London interbank market, adequate and reasonable means do not exist for ascertaining the Libor Rate for such Interest Period in the manner prescribed above in the definition of "Libor Rate," then the holder hereof shall promptly give notice thereof to Maker, Maker shall forthwith prepay in full all Advances then outstanding, together with interest accrued thereon and all amounts in connection with such prepayment specified in the paragraph in this Note titled "PREPAYMENT," unless Maker, within five (5) Business Days of notice from the holder hereof, (i) converts all Libor Rate Advances then outstanding into Fixed Rate Advances pursuant to the conversion procedures in this Note, and pays all amounts in connection with such prepayments or conversions specified in the paragraph in this Note titled "PREPAYMENT," and (ii) enters into an agreement with Holder setting forth an alternative interest rate to be used pursuant to this Note.
(d) During any Balance Calculation Period where interest is accruing on any Advances at the Fixed Rate, if the average daily Compensating Balances maintained by Maker with Bank One, Arizona, NA are less than an amount equal to the average daily aggregate unpaid principal balance of all Fixed Rate Advances during such Balance Calculation Period (such deficiency being referred to herein as the "Balances Deficiency"), Maker will pay to the payee hereof a fee (the "Balances Deficiency Fee") for said Balance Calculation Period on the Balances Deficiency at a per annum rate equal to the Average Libor Rate during such Balance Calculation Period minus one and one-quarter percent (1.25%) (computed on the basis of a 360-day year and applied to the actual number of days elapsed during the Balance Calculation Period). Any Balances Deficiency Fee payable hereunder shall be due and payable monthly after each Balance Calculation Period within two (2) Business Days after receipt by Maker from the payee hereof of a statement therefor containing the calculations made to determine such Balances Deficiency Fee, which statement shall be conclusive absent manifest error.
(e) All payments of principal and interest and other amounts due hereunder shall be made (i) without deduction of any present and future taxes, levies, imposts, deductions, charges or withholdings, which amounts shall be paid by Maker, and (ii) without any other set off. Maker will pay the amounts necessary such that the gross amount of the principal and interest and other amounts received by the holder hereof is not less than that required by this Note.
(f) Interest hereunder shall be payable by Maker to the holder hereof on the first (1st) day of each and every month during the term of this Note commencing with the first (1st) day of the first month following the date hereof. If any payment of interest to be made by Maker hereunder shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing the interest in such payment.
(g) Payments of principal shall be due as provided in the Credit Agreement.
Principal and interest are payable in lawful money of the United States of America.
6. APPLICATION OF PAYMENTS/LATE CHARGE.
(a) Absent the occurrence of an Event of Default hereunder or under any of the other Credit Agreement Documents, any payments received by the holder hereof pursuant to the terms hereof shall be applied in the manner set forth in the Credit Agreement or, if not so set forth, in such order as the holder hereof may, in its sole discretion, elect. Any payments received by the holder hereof after the occurrence of an Event of Default hereunder or under any of the Credit Agreement Documents shall be applied in such order as the holder hereof may, in its sole discretion, elect.
(b) If any payment of interest is not received by the holder hereof within fifteen (15) days of the due date thereof, then in addition to the remedies conferred upon the holder pursuant to Section 9 hereof and the other Credit Agreement Documents, a late charge of four percent (4%) of the amount due and unpaid will be added to the delinquent amount to compensate the holder hereof for the expense of handling the delinquency for such payment; provided, however, that the obligation to pay a late charge shall be subject to the provisions hereof limiting the charging, collection, and receipt of interest to the Maximum Rate.
This Note is secured by and is entitled to the benefits of the Credit Agreement. The provisions of the Credit Agreement are incorporated herein by reference as if set forth in full, and this Note is subject to all of the covenants and conditions contained in the Credit Agreement. This Note is guaranteed by the Guaranty.
The occurrence of any of the following shall be deemed to be an event of default ("Event of Default") hereunder:
(a) Failure of Maker to make a payment of principal or interest within fifteen (15) days of the due date thereof or failure of Maker to make any other payment or perform any obligation hereunder; or
(b) The occurrence of an Event of Default under any of the other Credit Agreement Documents.
Upon the occurrence of an Event of Default, the entire balance of principal together with all accrued interest thereon, and all other amounts payable by Maker under the Credit Agreement Documents shall, at the option of the holder hereof and without demand or notice, immediately become due and payable. Upon the occurrence of an Event of Default (and so long as such Event of Default shall continue), the entire balance of principal hereof, together with all accrued interest thereon, all other amounts due under the Credit Agreement Documents, and any judgment for such principal, interest, and other amounts, at the option of the holder hereof, shall bear interest equal to the lesser of (i) the Default Rate; or (ii) the Maximum Rate. No delay or omission on the part of the holder hereof in exercising any right under this Note or under any of the other Credit Agreement Documents hereof shall operate as a waiver of such right. The remedies of the holder hereof, as provided in this Note and in the Credit Agreement or any other instrument securing this Note, shall be cumulative and concurrent, and may be pursued singularly, successively or together, at the sole discretion of the holder hereof, and may be exercised as often as occasion therefor shall arise.
Maker, endorsers, guarantors, and sureties of this Note hereby waive diligence, demand for payment, presentment for payment, protest, notice of nonpayment, notice of protest, notice of intent to accelerate, notice of acceleration, notice of dishonor, and notice of nonpayment, and all other notices or demands of any kind and expressly agree that, without in any way affecting the liability of Maker, endorsers, guarantors, or sureties, the holder hereof may extend any maturity date or the time for payment of any installment due hereunder, otherwise modify the Credit Agreement Documents, accept additional security, release any Person liable, and release any security or guaranty. Maker, endorsers, guarantors, and sureties waive, to the full extent permitted by law, the right to plead any and all statutes of limitations as a defense.
11. CHANGE, DISCHARGE, TERMINATION, OR WAIVER.
No provision of this Note may be changed, discharged, terminated, or waived except in a writing signed by the party against whom enforcement of the change, discharge, termination, or waiver is sought. No failure on the part of the holder hereof to exercise and no delay by the holder hereof in exercising any right or remedy under this Note or under the law shall operate as a waiver thereof.
If this Note is not paid when due or if any Event of Default occurs, Maker promises to pay all costs of enforcement and collection and preparation therefor, including but not limited to, reasonable attorneys' fees, whether or not any action or proceeding is brought to enforce the provisions hereof (including, without limitation, all such costs incurred in connection with any bankruptcy, receivership, or other court proceedings (whether at the trial or appellate level)).
If any provision of this Note is unenforceable, the enforceability of the other provisions shall not be affected and they shall remain in full force and effect.
Maker hereby agrees to pay an effective rate of interest that is the sum of the interest rate provided for herein, together with any additional rate of interest resulting from any other charges of interest or in the nature of interest paid or to be paid in connection with the Credit Agreement, including without limitation, any fees to be paid by Maker pursuant to the provisions of the Credit Agreement Documents; provided, however, that in no event shall the amounts payable herein exceed the Maximum Rate.
In this Note the singular shall include the plural and the masculine shall include the feminine and neuter gender, and vice versa.
Headings at the beginning of each numbered section of this Note are intended solely for convenience and are not part of this Note.
This Note shall be governed by and construed in accordance with the laws of the State of Arizona, without giving effect to conflict of laws principles.
The Credit Agreement Documents contain the complete understanding and agreement of the holder hereof and Maker and supersede all prior representations, warranties, agreements, arrangements, understandings, and negotiations.
The Credit Agreement Documents will be binding upon, and inure to the benefit of, the holder hereof, Maker, and their respective successors and assigns. Maker may not delegate its obligations under the Credit Agreement Documents.
20. TIME OF THE ESSENCE.
Time is of the essence with regard to each provision of the Credit Agreement Documents as to which time is a factor.
The relationship of the parties hereto is that of borrower and lender and it is expressly understood and agreed that nothing contained in this Note or in the Credit Agreement shall be interpreted or construed to make Maker and Payee partners, joint venturers or participants in any other legal relationship except for borrower and lender.
This Note and all of the other Credit Agreement Documents are intended to be performed in accordance with, and only to the extent permitted by, all applicable usury laws. If any provision hereof or of any of the other Credit Agreement Documents or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the application of such provision to any other person or circumstance nor the remainder of the instrument in which such provision is contained shall be affected thereby and shall be enforced to the greatest extent permitted by law. It is expressly stipulated and agreed to be the intent of the holder hereof to at all times comply with the usury and other applicable laws now or hereafter governing the interest payable on the indebtedness evidenced by this Note. If the applicable law is ever revised, repealed or judicially interpreted so as to render usurious any amount called for under this Note or under any of the other Credit Agreement Documents, or contracted for, charged, taken, reserved or received with respect to the indebtedness evidence by this Note, or if the holder's exercise of the option to accelerate the maturity of this Note, or if any prepayment by Maker results in Maker having paid any interest in excess of that permitted by law, then it is the express intent of Maker and the holder hereof that all excess amount theretofore collected by Holder be credited on the principal balance of this Note (or, if this Note and all other indebtedness arising under or pursuant to the other Credit Agreement Documents have been paid in full, refunded to Maker), and the provisions of this Note and the other Credit Agreement Documents immediately be deemed reformed and the amounts thereafter collectable hereunder and thereunder reduced, without the necessity of the execution of any new document, so as to comply with the then applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder or thereunder. All sums paid, or agreed to be paid, by Maker for the use, forbearance, detention, taking, charging, receiving or reserving of the indebtedness of Maker to the holder hereof under this Note or arising under or pursuant to the other Credit Agreement Documents shall, to the maximum extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the usury ceiling from time to time in effect and applicable to such indebtedness for so long as such indebtedness is outstanding. To the extent federal law permits the holder hereof to contract for, charge or receive a greater amount of interest, the holder hereof will rely on federal law, for the purpose of determining the Maximum Rate. Notwithstanding anything to the contrary contained herein or in any of the other Credit Agreement Documents, it is not the intention of the holder hereof to accelerate the maturity of any interest that has not accrued at the time of such acceleration or to collect unearned interest at the time of such acceleration.
If the laws of the State of Texas are ever deemed to govern this Note notwithstanding the parties' expressed intent to the contrary, the parties agree that TEX. REV. CIV. STAT. ANN. art 5069 Ch. 15 (which regulated certain revolving loan accounts and revolving tri-party accounts) shall in no event apply to this Note. Further, to the extent that TEX. REV. CIV. STAT. ANN. art 5069-1.04, as amended, is applicable to this Note, the "indicated rate ceiling" specified in such article is the applicable ceiling; provided that, if any applicable law permits greater interest, the law permitting the greatest interest shall apply.
Notices under this Note will be given in the manner set forth in the Credit Agreement.
This Note is a replacement of that Replacement Promissory Note dated July 1, 1995 in the principal amount of $25,000,000.00 made by Maker and payable to the holder hereof.
CH MORTGAGE COMPANY, a Colorado corporation formerly known as American Western Mortgage
By: /s/ Julie E. Collins "Maker" | 10-Q | EX-10.2 | 1996-01-12T00:00:00 | 1996-01-12T16:40:21 |
0000823535-96-000006 | 0000823535-96-000006_0009.txt | FIDELITY MANAGEMENT & RESEARCH COMPANY AGREEMENT made this 1st day of 19 , by and between Fidelity Boston Street Trust, a Massachsuetts business trust which may issue one or more series of shares of beneficial interest (hereinafter called the "Fund"), on behalf of Fidelity Target Timeline 2003 (hereinafter called the "Portfolio"), and Fidelity Management & Research Company, a Massachusetts corporation (hereinafter called the "Adviser") as set forth in its entirety below. 1. (a) Investment Advisory Services. The Adviser undertakes to act as investment adviser of the Portfolio and shall, subject to the supervision of the Fund's Board of Trustees, direct the investments of the Portfolio in accordance with the investment objective, policies and limitations as provided in the Portfolio's Prospectus or other governing instruments, as amended from time to time, the Investment Company Act of 1940 and rules thereunder, as amended from time to time (the "1940 Act"), and such other limitations as the Portfolio may impose by notice in writing to the Adviser. The Adviser shall also furnish for the use of the Portfolio office space and all necessary office facilities, equipment and personnel for servicing the investments of the Portfolio; and shall pay the salaries and fees of all officers of the Fund, of all Trustees of the Fund who are "interested persons" of the Fund or of the Adviser and of all personnel of the Fund or the Adviser performing services relating to research, statistical and investment activities. The Adviser is authorized, in its discretion and without prior consultation with the Portfolio, to buy, sell, lend and otherwise trade in any stocks, bonds and other securities and investment instruments on behalf of the Portfolio. The investment policies and all other actions of the Portfolio are and shall at all times be subject to the control and direction of the Fund's Board of Trustees. (b) Management Services. The Adviser shall perform (or arrange for the performance by its affiliates of) the management and administrative services necessary for the operation of the Fund. The Adviser shall, subject to the supervision of the Board of Trustees, perform various services for the Portfolio, including but not limited to: (i) providing the Portfolio with office space, equipment and facilities (which may be its own) for maintaining its organization; (ii) on behalf of the Portfolio, supervising relations with, and monitoring the performance of, custodians, depositories, transfer and pricing agents, accountants, attorneys, underwriters, brokers and dealers, insurers and other persons in any capacity deemed to be necessary or desirable; (iii) preparing all general shareholder communications, including shareholder reports; (iv) conducting shareholder relations; (v) maintaining the Fund's existence and its records; (vi) during such times as shares are publicly offered, maintaining the registration and qualification of the Portfolio's shares under federal and state law; and (vii) investigating the development of and developing and implementing, if appropriate, management and shareholder services designed to enhance the value or convenience of the Portfolio as an investment vehicle. The Adviser shall also furnish such reports, evaluations, information or analyses to the Fund as the Fund's Board of Trustees may request from time to time or as the Adviser may deem to be desirable. The Adviser shall make recommendations to the Fund's Board of Trustees with respect to Fund policies, and shall carry out such policies as are adopted by the Trustees. The Adviser shall, subject to review by the Board of Trustees, furnish such other services as the Adviser shall from time to time determine to be necessary or useful to perform its obligations under this Contract. (c) The Adviser shall place all orders for the purchase and sale of portfolio securities for the Portfolio's account with brokers or dealers selected by the Adviser, which may include brokers or dealers affiliated with the Adviser. The Adviser shall use its best efforts to seek to execute portfolio transactions at prices which are advantageous to the Portfolio and at commission rates which are reasonable in relation to the benefits received. In selecting brokers or dealers qualified to execute a particular transaction, brokers or dealers may be selected who also provide brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) to the Portfolio and/or the other accounts over which the Adviser or its affiliates exercise investment discretion. The Adviser is authorized to pay a broker or dealer who provides such brokerage and research services a commission for executing a portfolio transaction for the Portfolio which is in excess of the amount of commission another broker or dealer would have charged for effecting that transaction if the Adviser 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 or dealer. This determination may be viewed in terms of either that particular transaction or the overall responsibilities which the Adviser and its affiliates have with respect to accounts over which they exercise investment discretion. The Trustees of the Fund shall periodically review the commissions paid by the Portfolio to determine if the commissions paid over representative periods of time were reasonable in relation to the benefits to the Portfolio. The Adviser shall, in acting hereunder, be an independent contractor. The Adviser shall not be an agent of the Portfolio. 2. It is understood that the Trustees, officers and shareholders of the Fund are or may be or become interested in the Adviser as directors, officers or otherwise and that directors, officers and stockholders of the Adviser are or may be or become similarly interested in the Fund, and that the Adviser may be or become interested in the Fund as a shareholder or otherwise. 3. The Adviser will be compensated on the following basis for the services and facilities to be furnished hereunder. The Adviser shall receive a monthly management fee, payable monthly as soon as practicable after the last day of each month, composed of a Group Fee and an Individual Fund Fee. (a) Group Fee Rate. The Group Fee Rate shall be based upon the monthly average of the net assets of the registered investment companies having Advisory and Service or Management Contracts with the Adviser (computed in the manner set forth in the fund's Declaration of Trust or other organizational document) determined as of the close of business on each business day throughout the month. The Group Fee Rate shall be determined on a cumulative basis pursuant to the following schedule: Average Net Assets Annualized Fee Rate (for each level)
0 - $ 3 billion .3700%
(b) Individual Fund Fee Rate. The Individual Fund Fee Rate shall be .30%. The sum of the Group Fee Rate, calculated as described above to the nearest millionth, and the Individual Fund Fee Rate shall constitute the Annual Management Fee Rate. One-twelfth of the Annual Management Fee Rate shall be applied to the average of the net assets of the Portfolio (computed in the manner set forth in the Fund's Declaration of Trust or other organizational document) determined as of the close of business on each business day throughout the month. (c) In case of termination of this Contract during any month, the fee for that month shall be reduced proportionately on the basis of the number of business days during which it is in effect, and the fee computed upon the average net assets for the business days it is so in effect for that month. 4. It is understood that the Portfolio will pay all its expenses, which expenses payable by the Portfolio shall include, without limitation, (i) interest and taxes; (ii) brokerage commissions and other costs in connection with the purchase or sale of securities and other investment instruments; (iii) fees and expenses of the Fund's Trustees other than those who are "interested persons" of the Fund or the Adviser; (iv) legal and audit expenses; (v) custodian, registrar and transfer agent fees and expenses; (vi) fees and expenses related to the registration and qualification of the Fund and the Portfolio's shares for distribution under state and federal securities laws; (vii) expenses of printing and mailing reports and notices and proxy material to shareholders of the Portfolio; (viii) all other expenses incidental to holding meetings of the Portfolio's shareholders, including proxy solicitations therefor; (ix) a pro rata share, based on relative net assets of the Portfolio and other registered investment companies having Advisory and Service or Management Contracts with the Adviser, of 50% of insurance premiums for fidelity and other coverage; (x) its proportionate share of association membership dues; (xi) expenses of typesetting for printing Prospectuses and Statements of Additional Information and supplements thereto; (xii) expenses of printing and mailing Prospectuses and Statements of Additional Information and supplements thereto sent to existing shareholders; and (xiii) such non-recurring or extraordinary expenses as may arise, including those relating to actions, suits or proceedings to which the Portfolio is a party and the legal obligation which the Portfolio may have to indemnify the Fund's Trustees and officers with respect thereto. 5. The services of the Adviser to the Portfolio are not to be deemed exclusive, the Adviser being free to render services to others and engage in other activities, provided, however, that such other services and activities do not, during the term of this Contract, interfere, in a material manner, with the Adviser's ability to meet all of its obligations with respect to rendering services to the Portfolio hereunder. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Portfolio or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security or other investment instrument. 6. (a) Subject to prior termination as provided in sub-paragraph (d) of this paragraph 6, this Contract shall continue in force until June 30, 1996 and indefinitely thereafter, but only so long as the continuance after such date shall be specifically approved at least annually by vote of the Trustees of the Fund or by vote of a majority of the outstanding voting securities of the Portfolio. (b) This Contract may be modified by mutual consent, such consent on the part of the Fund to be authorized by vote of a majority of the outstanding voting securities of the Portfolio. (c) In addition to the requirements of sub-paragraphs (a) and (b) of this paragraph 6, the terms of any continuance or modification of this Contract must have been approved by the vote of a majority of those Trustees of the Fund who are not parties to the Contract or interested persons of any such party, cast in person at a meeting called for the purpose of voting on such approval. (d) Either party hereto may, at any time on sixty (60) days' prior written notice to the other, terminate this Contract, without payment of any penalty, by action of its Trustees or Board of Directors, as the case may be, or with respect to the Portfolio by vote of a majority of the outstanding voting securities of the Portfolio. This Contract shall terminate automatically in the event of its assignment. 7. The Adviser is hereby expressly put on notice of the limitation of shareholder liability as set forth in the Fund's Declaration of Trust or other organizational document and agrees that the obligations assumed by the Fund pursuant to this Contract shall be limited in all cases to the Portfolio and its assets, and the Adviser shall not seek satisfaction of any such obligation from the shareholders or any shareholder of the Portfolio or any other Portfolios of the Fund. In addition, the Adviser shall not seek satisfaction of any such obligations from the Trustees or any individual Trustee. The Adviser understands that the rights and obligations of any Portfolio under the Declaration of Trust or other organizational document are separate and distinct from those of any and all other Portfolios. 8. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts, without giving effect to the choice of laws provisions thereof.
The terms "vote of a majority of the outstanding voting securities," "assignment," and "interested persons," when used herein, shall have the respective meanings specified in the 1940 Act, as now in effect or as hereafter amended, and subject to such orders as may be granted by the Securities and Exchange Commission. IN WITNESS WHEREOF the parties have caused this instrument to be signed in their behalf by their respective officers thereunto duly authorized, and their respective seals to be hereunto affixed, all as of the date written above. on behalf of Fidelity Target Timeline 2003 FIDELITY MANAGEMENT & RESEARCH COMPANY | 485BPOS | EX-99.B5C | 1996-01-12T00:00:00 | 1996-01-12T16:08:42 |
0000950124-96-000214 | 0000950124-96-000214_0000.txt | As filed with the Securities and Exchange Commission
1933 Act Registration Number 33-85982 1940 Act Registration Number 811-8846
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 2 [x]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
(Exact Name of Registrant as Specified in Charter)
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(Name and Address of Agent for Service)
Copies of all communications to:
DONALD F. BURT, ESQ. RANDY M. PAVLICK CLINE, WILLIAMS, WRIGHT, SUNSTONE FINANCIAL GROUP, INC. JOHNSON & OLDFATHER 207 E. BUFFALO STREET, SUITE 400 1900 FIRSTIER BANK BUILDING MILWAUKEE, WI 53202
Approximate Date of Proposed Public Offering: As soon as practicable after the Registration Statement becomes effective.
It is proposed that this filing will become effective March 29, 1996 pursuant to paragraph (a)(2) of Rule 485.
This Registration Statement relates to an indefinite number of shares of the Registrant pursuant to Rule 24f-2 under the Securities Act of 1933. The Registrant has not filed a notice pursuant to Rule 24f-2(a)(1) for the reason that Registrant sold no securities in reliance upon Rule 24f-2 during its fiscal year ended March 31, 1995.
Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C to this Registration Statement.
FIRST OMAHA SMALL CAP VALUE FUND
First National Bank of Omaha For current yield, purchase, Investment Adviser and redemption information, Custodian and Transfer Agent call (800) OMAHA-03
First Omaha Funds, Inc. (the "Company") is an open-end management investment company. The Company includes the First Omaha Small Cap Value Fund, the First Omaha Equity Fund, the First Omaha Short/Intermediate Fixed Income Fund, the First Omaha Fixed Income Fund and the First Omaha U.S. Government Obligations Fund (such Funds are hereinafter singularly referred to as a "Fund" and collectively referred to as the "First Omaha Funds" or the "Funds"), each of which is a no-load, diversified investment portfolio of the Company. The Directors of the Company have divided the Company's common stock ("Shares") into series, each of which relates to a particular Fund. This Prospectus relates only to the Shares of the First Omaha Small Cap Value Fund.
FIRST OMAHA SMALL CAP VALUE FUND (the "Fund" or the "Small Cap Value Fund") seeks as its investment objective long-term capital appreciation. The Fund will invest primarily in common stocks and securities that are convertible into common stocks issued by companies having small to mid-size market capitalizations. The Fund may also invest, under normal market conditions, in other equity securities and in fixed income securities. The Fund's net asset value will fluctuate as the value of its portfolio changes in response to changing market prices and other factors.
First National Bank of Omaha, Omaha, Nebraska (the "Adviser"), a subsidiary of First National of Nebraska, Inc. ("FNN"), acts as the investment adviser to the Fund.
THE SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, THE FIRST NATIONAL BANK OF OMAHA, FNN OR ANY OF THEIR AFFILIATES. SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL AGENCY. AN INVESTMENT IN THE FUND INVOLVES CERTAIN INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a prospective investor ought to know before investing. Investors should read this Prospectus and retain it for future reference. Additional information about the Fund, contained in a Statement of Additional Information, has been filed with the Securities and Exchange Commission and is available upon request without charge by writing to the Fund at its address or by calling the Fund at the telephone number shown above. The Statement of Additional Information bears the same date as this Prospectus and is incorporated by reference in its entirety into this Prospectus.
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 March 29, 1996
No person has been authorized to give any information or to 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 by the Distributor in any jurisdiction in which such offering may not lawfully be made.
The Company was organized to acquire the assets, and continue the business, of four investment portfolios of The Sessions Group, an Ohio business trust, which acquisition occurred on April 10, 1995. The Fund was created by action of the Company's Board of Directors on December 5, 1995.
The purpose of the above table is to assist a potential purchaser of the Fund's Shares in understanding the various costs and expenses that an investor in the Fund will bear directly or indirectly. Such expenses do not include any fees charged by the Adviser or any of its affiliates or any Banks or their affiliates to their customer accounts for automatic investment, cash management and other services. See "How to Purchase and Redeem Shares - Minimum Investment." See "MANAGEMENT OF THE COMPANY" and "GENERAL INFORMATION" for a more complete discussion of the Shareholder transaction expenses and annual operating expenses for the Fund.
(1) The Adviser and the Administrator, respectively, have agreed with the Company to reduce voluntarily the amount of the administration, custodian and administrative servicing fees. Absent the voluntary administration, custodian and administrative servicing fee reductions, Other Expenses and Total Fund Operating Expenses as a percentage of average net assets for the Fund are estimated to be .69% and 1.54%, respectively. (See "MANAGEMENT OF THE COMPANY--Investment Adviser" and "Administrative Services Plan.")
(2) The Company has adopted a Rule 12b-1 Plan pursuant to which the Fund is authorized to pay a periodic amount, representing distribution expenses, calculated at an annual rate not to exceed 0.25% of the average daily net asset value of the Fund. As of the date of this Prospectus, however, there are no Related Agreements under the Rule 12b-l Plan with respect to the Fund in effect and no fees under the Rule 12b-l Plan are being paid by the Fund.
(3) "Other Expenses" include administration fees and estimates of legal, accounting and miscellaneous expenses to be incurred during the current fiscal year. As of the date of this Prospectus, no administrative servicing fees were being paid by the Fund.
From time to time, performance information for the Fund showing its average annual total return, aggregate total return and/or yield may be presented in advertisements, sales literature and Shareholder reports. SUCH PERFORMANCE FIGURES ARE BASED ON HISTORIC EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Average annual total return will be calculated for the period since the commencement of operations for the Fund. Average return is measured by comparing the value of an investment in the Fund at the beginning of the relevant period to the redeemable value of the investment at the end of the period (assuming immediate reinvestment of any dividends or capital gains distributions), which figure is then annualized. Aggregate total return is calculated similarly to average annual total return except that the return figure is aggregated over the relevant period instead of annualized. Yield will be computed by dividing the Fund's net investment income per share (as calculated on a yield to maturity basis) earned during a recent 30-day period by the Fund's per share maximum offering price (reduced by any undeclared earned income expected to be paid shortly as a dividend) on the last day of the period and annualizing the result.
In addition, from time to time, the Fund may present its distribution rate in supplemental sales literature and in Shareholder reports both of which must be accompanied or preceded by a Prospectus. Distribution rates will be computed by dividing the distribution per share made by the Fund over a 12-month period by the maximum offering price per share. The calculation of income in the distribution rate includes both income and capital gain dividends and does not reflect unrealized gains or losses, although the Fund may also present a distribution rate excluding the effect of capital gains. The distribution rate differs from the yield, because it includes capital items which are often non-recurring in nature, whereas yield does not include such items. Distribution rate information will be accompanied by the standardized yield and total return data.
Investors may also judge the performance of the Fund by comparing or referencing its performance to the performance of other mutual funds with comparable investment objectives and policies through various mutual fund or market indices and to data prepared by various services which indices or data may be published by such services or by other services or publications. For example, the total return and yield of the Fund's Shares may be compared to data prepared by Lipper Analytical Services, Inc. In addition, the total return of the Fund may be compared to the S&P 500 Index, the S&P 400 Index, the NASDAQ Composite Index, an index of unmanaged groups of common stocks of domestic companies that are quoted on the National Association of Securities Dealers Automated Quotation System or the Dow Jones Industrial Average, a recognized unmanaged index of common stocks of 30 industrial companies listed on the New York Stock Exchange. Total Return and yield data as reported in national financial publications, such as Money Magazine, Forbes, Barron's, Morningstar Mutual Funds, The Wall Street Journal and the New York Times, or in publications of a local or regional nature, may also be used in comparing the performance of the Fund. In addition to performance information, general information about the Fund that appears in such publications may be included in advertisements, sales literature and reports to Shareholders.
Yield and total return are generally functions of market conditions, interest rates, types of investments held and operating expenses. Consequently, current yields and total return will fluctuate and are not necessarily representative of future results. Any fees charged by the Adviser or any of its affiliates with respect to customer accounts for investing in Shares of the Fund will not be included in performance calculations; such fees, if charged, will reduce the actual performance from that quoted. In addition, if the Adviser and Administrator voluntarily reduce all or part of their respective fees for the Fund, as discussed above, the yield and total return of the Fund will be higher than it would otherwise be in the absence of such voluntary fee reductions.
The investment objective of the Small Cap Value Fund is long-term capital appreciation. This investment objective is a fundamental policy and, as such, may not be changed without a vote of the holders of a majority of the outstanding Shares of the Fund (as defined in "GENERAL INFORMATION- Miscellaneous"). There can be no assurance that the investment objective of the Fund will be achieved.
THE SMALL CAP VALUE FUND
Under normal market conditions, the Fund will invest at least 65% of its total assets in common stocks and securities convertible into common stocks (such as convertible bonds, convertible preferred stocks, warrants, options and rights) issued by companies having small to mid-size market capitalization. For these purposes "small to mid-size market capitalization" means market capitalization smaller than approximately the largest one-fourth of companies listed on the New York Stock Exchange. The Adviser expects that most of such companies will have market capitalization in the $200 million -
$1 billion range. Although current dividend or interest income will not be a factor in the selection of investments, the Adviser intends to seek companies whose record of earnings and/or dividend growth may be indications of capital appreciation potential. The Adviser will generally seek to invest in companies whose stock is trading at prices below book value or the Adviser's perception of actual value.
The Fund may also invest up to 35% of the value of its total assets in preferred stocks, common stocks other than those described above, corporate bonds, notes, warrants, and short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, repurchase agreements, and obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Fund will only invest in short-term obligations, including securities of investment companies holding themselves out as "money market" funds, for purposes of portfolio liquidity to meet redemption requirements and short-term investment needs. During temporary defensive periods as determined by the Adviser, the Fund may hold up to 100% of its total assets in high quality short-term obligations including domestic bank certificates of deposit, bankers' acceptances and repurchase agreements secured by bank instruments. However, to the extent that the Fund is so invested in debt obligations, the Fund may not achieve its investment objective.
Subject to the foregoing limitations, the Fund will invest only in corporate debt securities (including convertible securities) which are rated at the time of purchase within the four highest rating groups assigned by one or statistical rating organizations ("NRSROs"), e.g., Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"), or, if unrated, which the Adviser deems present attractive opportunities and are of comparable quality. For a description of the rating symbols of the NRSROs, see the Appendix to the Statement of Additional Information. For a discussion of debt securities rated within the fourth highest rating groups assigned by Moody's and S&P, see "Risk Factors" herein.
Equity securities such as those in which the Fund may invest are more volatile and carry more risk than some other investments, including investments in high grade fixed income securities. Depending upon the performance of the Fund's investments, the net asset value per share of the Fund may fluctuate. The emphasis on appreciation and smaller capitalization companies may result in even greater risk than is inherent in other equity investment alternatives. The Fund will likely have somewhat greater volatility than the stock market generally, as measured by the S&P 500 Index.
The Fund may also invest in securities described in the following paragraphs to the extent indicated.
The Fund may invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Obligations of the U.S. Treasury include "stripped" U.S. Treasury obligations such as Treasury Receipts, representing either future interest or principal payments. Stripped securities are issued at a discount to their "face value" and may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors. Stripped U.S. Treasury obligations will include (1) coupons that have been stripped from U.S. Treasury bonds, which may be held through the Federal Reserve Bank's book-entry system called "Separate Trading of Registered Interest and Principal of Securities" ("STRIPS") or through a program entitled "Coupon Under Book-Entry Safekeeping" ("CUBES"), or (2) U.S. Treasury securities that are stripped by investment banks and sold under proprietary names. Securities stripped by investment banks may not be as liquid as STRIPS and CUBES and are not viewed by the staff of the Securities and Exchange Commission ("Commission") as U.S. Government securities for purposes of the Investment Company Act of 1940, as amended (the "1940 Act").
Obligations of certain agencies and instrumentalities of the U.S. Government, such as the Government National Mortgage Association, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Student Loan Marketing Association and the Federal Home Loan Banks, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law. The Fund will invest in the obligations of such agencies or instrumentalities only when the Adviser believes that the credit risk with respect thereto is minimal.
Securities held by the Fund may be subject to repurchase agreements. Under the terms of a repurchase agreement, the Fund would acquire securities in exchange for cash from member banks of the Federal Deposit Insurance Corporation and/or from registered broker-dealers which the Adviser deems credit-worthy under guidelines approved by the Company's Board of Directors. The seller agrees to repurchase such securities at a mutually agreed-upon date and price. The repurchase price generally equals the price paid by the Fund plus interest negotiated on the basis of current short-term rates, which may be more or less than the rate on the underlying portfolio securities. Securities subject to repurchase agreements must be of the same type and quality as those in which the Fund may invest directly. The seller under a repurchase agreement will be required to maintain at all times the value of collateral held pursuant to the agreement at not less than the repurchase price (including accrued interest) plus the transaction costs, including loss of interest, that the Fund reasonably could expect to incur if the seller defaults. This requirement will be continually monitored by the Adviser. If the seller were to default on its repurchase obligation or become insolvent, the Fund would suffer a loss if the proceeds from a sale of the underlying portfolio securities were less than the repurchase price under the agreement, or the disposition of such securities by the Fund were delayed pending court action. Repurchase agreements are considered to be loans by an investment company under the 1940 Act. For further information about repurchase agreements, see "INVESTMENT OBJECTIVES AND POLICIES-Additional Information on Portfolio Instruments-Repurchase Agreements" in the Statement of Additional Information.
The Fund may borrow funds for temporary purposes by entering into reverse repurchase agreements in accordance with the investment restrictions described below. Pursuant to such agreements, the Fund would sell certain of its securities to financial institutions such as banks and broker-dealers, and agree to repurchase them at a mutually agreed-upon date and price. The Fund intends to enter into reverse repurchase agreements only to avoid otherwise selling securities during unfavorable market conditions to meet redemptions. At the time the Fund enters into a reverse repurchase agreement, it will place in a segregated custodial account assets such as U.S. Government securities or other liquid high-grade debt securities consistent with the Fund's investment restrictions having a value equal to the repurchase price (including accrued interest), and will continually monitor the account to ensure that such equivalent value is maintained at all times. Reverse repurchase agreements involve the risk that the market value of the securities sold by the Fund may decline below the price at which the Fund is obligated to repurchase the securities and that the buyer may default on its obligation to sell such securities back to the Fund. Reverse repurchase agreements are considered borrowings by an investment company under the 1940 Act. For further information about reverse repurchase agreements, see "INVESTMENT OBJECTIVES AND POLICIES-Additional Information on Portfolio Instruments-Reverse Repurchase Agreements" in the Statement of Additional Information.
Except as otherwise disclosed to the Shareholders of the Fund, the Company will not execute portfolio transactions through, acquire portfolio securities issued by, make savings deposits in, or enter into repurchase or reverse repurchase agreements with the Adviser, the Administrator, or their affiliates, and will not give preference to the Adviser's correspondents with respect to such transactions, securities, savings deposits, repurchase agreements, and reverse repurchase agreements.
Consistent with the foregoing investment policies, the Fund may invest up to 10% of its assets in foreign securities, either directly or through the purchase of sponsored and unsponsored American Depository Receipts ("ADRs"). Unsponsored ADRs may be less liquid than sponsored ADRs, and there may be less information available regarding the underlying foreign issuer for unsponsored ADRs. Investment in foreign securities is subject to special investment risks that differ in some respects from those related to investments in securities of U.S. domestic issuers. Such risks include trade balances and imbalances, and related economic policies, future adverse political, economic and social developments, the possible imposition of withholding taxes on interest and dividend income, possible seizure, nationalization, or expropriation of foreign investments or deposits, currency blockage, less stringent disclosure requirements, the possible establishment of exchange controls or taxation at the source, or the adoption of other foreign governmental restrictions. In addition, foreign branches of U.S. banks, foreign banks and foreign issuers may be subject to less stringent reserve requirements and to different accounting, auditing, reporting, and recordkeeping standards than those applicable to domestic branches of U.S. banks and U.S. domestic issuers, and securities markets in foreign countries may be structured differently from and may not be as liquid as the U.S. markets. Where purchases of foreign securities are made in foreign currencies, the Fund may incur currency conversion costs and may be affected favorably or unfavorably by changes in the value of foreign currencies against the U.S. dollar.
The Fund may purchase securities on a when-issued or delayed-delivery basis. These transactions are arrangements in which the Fund purchases securities with payment and delivery scheduled for a future time. The Fund will engage in when-issued and delayed-delivery transactions only for the purpose of acquiring portfolio securities consistent with and in furtherance of its investment objective and policies, not for investment leverage, although such transactions represent a form of leveraging. When-issued securities are securities purchased for delivery beyond the normal settlement date at a stated price and yield and thereby involve a risk that the yield obtained in the transaction will be less than that available in the market when delivery takes place. The Fund will generally not pay for such securities or start earning interest on them until they are received on the settlement date. When the Fund agrees to purchase such securities, however, the Custodian will set aside cash or liquid, high-grade debt obligations equal to the amount of the commitment in a separate account. Securities purchased on a when-issued basis are recorded as an asset and are subject to changes in the value based upon changes in the general level of interest rates. In when-issued and delayed-delivery transactions, the Fund relies on the seller to complete the transaction; the seller's failure to do so may cause the Fund to miss a price or yield considered to be advantageous. The Fund's commitments to purchase when-issued securities will not exceed 25% of the value of its total assets absent unusual market conditions.
In order to generate additional income, the Fund may, from time to time, lend its portfolio securities to broker-dealers, banks, or institutional borrowers of securities. The Fund must receive 100% collateral in the form of cash or U.S. Government securities. This collateral will be valued daily by the Adviser. Should the market value of the loaned securities increase, the borrower must furnish additional collateral to the Fund. During the time portfolio securities are on loan, the borrower pays the Fund any dividends or interest received on such securities. Loans are subject to termination by the Fund or the borrower at any time. While the Fund does not have the right to vote securities on loan, the Fund intends to terminate the loan and regain the right to vote if that is considered important with respect to the investment. In the event the borrower would default in its obligations, the Fund bears the risk of delay in recovery of the portfolio securities and the loss of rights in the collateral. The Fund will enter into loan agreements only with broker-dealers, banks, or other institutions that the Adviser has determined are credit-worthy under guidelines established by the Company's Board of Directors.
Consistent with the Fund's investment objective and policies, the Fund may also invest up to 10% of the value of its total assets in the securities of other investment companies, so long as the aggregate value of the shares acquired from any one such investment company will not exceed 5% of the total assets of the Fund. The Fund will incur additional expenses due to the duplication of expenses as a result of investing in mutual funds. In order to avoid the imposition of additional fees as a result of investing in shares of the First Omaha Money Market Fund, the Adviser, the Administrator and their affiliates will reduce their fees charged to the Fund by an amount equal to the fees charged by such service providers based on a percentage of the Fund's assets attributable to the Fund's investment in the First Omaha Money Market Fund. Additional restrictions on the Fund's investments in the securities of other mutual funds are contained in the Statement of Additional Information.
As described above, the Fund may invest in debt securities within the fourth highest rating group assigned by one or more appropriate NRSROs and comparable unrated securities. Although investment grade, these types of debt considered by Moody's and S&P to have some speculative characteristics, and are more vulnerable to changes in economic conditions, higher interest rates or adverse issuer-specific developments which are more likely to lead to a weaker capacity to make principal and interest payments than comparable higher rated debt securities.
Should subsequent events cause the rating of a debt security purchased by the Fund to fall below the fourth highest rating category, as the case may be, the Adviser will consider such an event in determining whether the Fund should continue to hold that security. The Adviser expects that it would not retain more than 5% of the assets of the Fund in such downgraded securities. In no event, however, would the Fund be required to liquidate any such portfolio security where the Fund would suffer a loss on the sale of such security.
Under normal market conditions, the Fund will invest primarily in common stocks, some of which will be traded in the over-the-counter market. In contrast to the securities exchanges, the over-the-counter market is not a centralized facility which limits trading activity to securities of companies which initially satisfy certain defined standards. Any security can be traded in the over-the-counter market as long as an individual or firm is willing to make a market in the security. Because there are no minimum requirements for a company's assets or earnings or the number of its stockholders in order for its stock to be traded over-the-counter, there is great diversity in the size and profitability of companies whose stocks trade in this market, ranging from relatively small little-known companies to well established corporations.
Generally, the volume of trading in an unlisted common stock is less than the volume of trading in a listed common stock. This means that the degree of market liquidity of some stocks in which the Fund invests may be relatively limited. When the Fund disposes of such a stock it may have to offer the shares at a discount from recent prices or sell the shares in small lots over an extended period of time.
Some securities issued by companies with a small capitalization present greater risks and may be subject to large, abrupt or erratic fluctuations in price due, in part, to such factors as the issuer's dependence upon key personnel, the lack of internal resources, the inability to obtain funds from external sources, and dependence on a new product or service for which there is no firmly established market. Fluctuations in the price of some of the stocks owned by the Fund, therefore, could cause the net asset value of the Fund to vary significantly.
The Fund is subject to a number of investment restrictions that may be changed only by a vote of a majority of the outstanding Shares of the Fund (see "GENERAL INFORMATION-Miscellaneous").
1. Purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government or its agencies or after such purchase, (a) more than 5% of the value of the Fund's total assets would be invested in such issuer or (b) the Fund would hold more than 10% of the outstanding voting securities of such issuer, except that up to 25% of the value of the Fund's total assets may be invested without regard to such limitations. There is no limit to the percentage of assets that may be invested in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities.
2. Purchase any securities which would cause more than 25% of the value of the Fund's total assets at the time of purchase to be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and repurchase agreements secured by obligations of the U.S. Government or its agencies or instrumentalities; (b) wholly owned finance companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of their parents; and (c) utilities will be divided according to their services. For example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry.
3. Borrow money or issue senior securities, except that the Fund may borrow from banks or enter into reverse repurchase agreements for temporary purposes in amounts up to 10% of the value of its total assets at the time of such borrowing; or mortgage, pledge or hypothecate any assets, except in connection with any such borrowing and in amounts not in excess of the lesser of the dollar amounts borrowed or
10% of the value of the Fund's total assets at the time of its borrowing. The Fund will not purchase securities while its borrowings (including reverse repurchase agreements) exceed 5% of its total assets.
4. Make loans, except that the Fund may purchase or hold debt instruments and lend portfolio securities in accordance with its investment objective and policies, and may enter into repurchase agreements.
The following additional investment restriction may be changed without the vote of a majority of the outstanding Shares of the Fund. The Fund may not purchase or otherwise acquire any securities if, as a result, more than 5% of the Fund's net assets would be invested in securities that are illiquid.
In addition to the above investment restrictions, the Fund is subject to certain other investment restrictions set forth under "INVESTMENT OBJECTIVES AND POLICIES-Investment Restrictions" in the Statement of Additional Information.
The net asset value of the Fund is determined and its Shares are priced as of 4:00 p.m. (Eastern Time) (the "Valuation Time") on each Business Day. A "Business Day" of the Fund is a day on which the New York Stock Exchange is open for trading and any other day (other than a day on which no Shares of the Fund are tendered for redemption and no order to purchase Shares is received) during which there is sufficient trading in the Fund's portfolio instruments that its net asset value per Share might be materially affected. The New York Stock Exchange will not be opened in observation of the following holidays: New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset value per Share for purposes of pricing purchases and redemptions is calculated by dividing the value of all securities and other assets belonging to the Fund, less the liabilities charged to the Fund, by the number of the Fund's outstanding Shares. The net asset value per share of the Fund will fluctuate as the value of its investment portfolio changes.
The securities of the Fund will be valued at market value. If market quotations are not available, securities will be valued by a method which the Board of Directors believes accurately reflects a fair value. For further information about valuation of investments, see "NET ASSET VALUE" in the Statement of Additional Information.
HOW TO PURCHASE AND REDEEM SHARES
Shares of the Fund are sold on a continuous basis by the Company's Distributor, Sunstone Financial Group, Inc. The principal office of the Distributor is 207 East Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. If you wish to purchase Shares, telephone the Company at (800) OMAHA-03.
Shares may be purchased directly by investors or through procedures established by the Distributor in connection with requirements of qualified accounts maintained by or on behalf of certain persons ("Customers") by the Adviser or its correspondent or affiliated banks (collectively, the "Banks").
Shares of the Fund sold to the Banks acting in a fiduciary, advisory, custodial, or other similar capacity on behalf of Customers will normally be held of record by the Banks. With respect to Shares of the Fund so sold, it is the responsibility of the particular Bank to transmit purchase or redemption orders to the Company and to deliver federal funds for purchase on a timely basis. Beneficial ownership of Shares will be recorded by the Banks and reflected in the account statements provided by the Banks to Customers. A Bank will exercise voting authority for those Shares for which it is granted authority by the Customer.
Investors may also purchase Shares of the Fund by completing and signing an Account Registration Form and mailing it, together with a check (or other negotiable bank draft or money order) in at least the minimum initial purchase amount, payable to the Fund, to the First Omaha Funds, Inc., P.O. Box 419022, Kansas City, Missouri 64141-6022. Subsequent purchases of Shares of that Fund may be made at any time by mailing a check (or other negotiable bank draft or money order) payable to the Fund, to the above address.
If an Account Registration Form has been previously received by the Company, investors may also purchase Shares by wiring funds to the Fund's Custodian. Prior to wiring any such funds and in order to ensure that wire orders are invested promptly, investors must call the Company at (800) OMAHA-03 to obtain instructions regarding the bank account number into which the funds should be wired and other pertinent information.
Shares of the Fund are purchased at the net asset value per Share (see "VALUATION OF SHARES") next determined after receipt by the Company of an order to purchase Shares. Purchases of Shares of the Fund will be effected only on a Business Day (as defined in "VALUATION OF SHARES") of the Fund. An order received prior to the Valuation Time on any Business Day will be executed at the net asset value determined as of the Valuation Time on the date of receipt. An order received after the Valuation Time on any Business Day will be executed at the net asset value determined as of the Valuation Time on the next Business Day of the Fund.
Except as otherwise discussed below under "Auto Invest Plan," the minimum investment is $500 for the initial purchase of Shares of the Fund and $50 for subsequent purchases. The subsequent purchase minimum may be waived if purchases are made in connection with an Individual Retirement Account ("IRA") and both the initial and subsequent minimum investments may be waived if purchases are made in connection with a payroll deduction plan.
There is no initial sales charge imposed by the Fund in connection with the purchase of Shares. Depending upon the terms of a particular Customer's account, the Banks or their affiliates may charge a Customer account fees for automatic investment and other cash management services provided in connection with investment in the Fund. Information concerning these services and any charges may be obtained from the Banks. This Prospectus should be read in conjunction with any such information received from the Banks.
The Fund reserves the right to reject any order for the purchase of its Shares in whole or in part. Every Shareholder will receive a confirmation of each new transaction in his or her account, which will also show the total number of Shares owned by the Shareholder and the number of Shares being held in safekeeping by the Transfer Agent for the account of the Shareholder. Reports of purchases and redemptions of Shares by Banks on behalf of their Customers will be sent by the Banks to their Customers. Shareholders may rely on these statements in lieu of certificates. Certificates representing Shares will not be issued.
The Company's Auto Invest Plan enables Shareholders to make regular monthly or quarterly purchases of Shares of the Fund through automatic deduction from their bank accounts, provided that the Shareholder's bank is a member of the Federal Reserve and the Automated Clearing House (ACH) system. With Shareholder authorization the Transfer Agent will deduct the amount specified (subject to the applicable minimums) from the Shareholder's bank account which proceeds will automatically be invested in Shares of the Fund at the public offering price on the date of such deduction. The required minimum initial investment when opening an account using the Auto Invest Plan is $100; the minimum amount for subsequent investments is $50. To participate in the Auto Invest Plan, Shareholders should complete the appropriate section of the Account Registration Form which can be acquired by calling the Company at (800) OMAHA-03. For a Shareholder to change the Auto Invest instructions, the request must be made in writing to the Company at: P.O. Box 419022, Kansas City, Missouri 64141-6022.
Shares of the Fund may be exchanged without payment of any fees for Shares of each of the other First Omaha Funds at their respective net asset values, provided the amount to be exchanged meets the applicable minimum investment requirements and the exchange is made in states where it is legally authorized. An exchange is considered a sale of Shares and will result in a capital gain or loss for federal income tax purposes.
A Shareholder wishing to exchange his or her Shares may do so by contacting the Company at (800) OMAHA-03 or by providing written instructions to the Company. Any Shareholder who wishes to make an exchange should review information in the Company's current prospectus regarding the First Omaha Fund in which he or she wishes to invest before making the exchange. For a discussion of risks associated with unauthorized telephone exchanges, see "Redemption by Telephone" below.
The Company reserves the right to modify or terminate the expanded exchange privilege upon 60 days written notice to each Shareholder prior to the modification or termination taking effect.
Shares may ordinarily be redeemed by mail or by telephone. However, all or part of a Customer's Shares may be redeemed in accordance with instructions and limitations pertaining to his or her account at a Bank. For example, if a Customer has agreed with a Bank to maintain a minimum balance in his or her account with the Bank, and the balance in that account falls below that minimum, the Customer may be obliged to redeem, or the Bank may redeem on behalf of the Customer, all or part of the Customer's Shares of the Fund to the extent necessary to maintain the required minimum balance. The minimum balance required by any such Bank may be higher than the minimum required by the Company.
A written request for redemption must be received by the Transfer Agent in order to honor the request. The Transfer Agent's address is: First National Bank of Omaha, P.O. Box 419022, Kansas City, Missouri 64141-6022. The Transfer Agent will require a signature guarantee by an eligible guarantor institution. The signature guarantee requirement will be waived if the following conditions apply: (1) the redemption check is payable to the Shareholder(s) of record, and (2) the redemption check is mailed to the
Shareholder(s) at the address of record or mailed or wired to a commercial bank account previously designated on the Account Registration Form. There is no charge for having redemption proceeds mailed to a designated bank account. To change the address to which a redemption check is to be mailed, a written request therefor must be received by the Transfer Agent. In connection with such request, the Transfer Agent will require a signature guarantee by an eligible guarantor institution. For purposes of this policy, the term "eligible guarantor institution" shall include banks, brokers, dealers, credit unions, securities exchanges and associations, clearing agencies and savings associations as those terms are defined in the Securities Act of 1934. The Transfer Agent reserves the right to reject any signature guarantee if (1) it has reason to believe that the signature is not genuine, (2) it has reason to believe that the transaction would otherwise be improper, or (3) the guarantor institution is a broker or dealer that is neither a member of a clearing corporation nor maintains net capital of at least $100,000.
If a Shareholder has so designated on the Account Registration Form, a Shareholder may request the redemption of Shares by telephone and have the payment of redemption requests sent through ACH to a federally insured depository account previously designated by the Shareholder on the Account Registration Form or mailed directly to the Shareholder at the Shareholder's address as recorded by the Transfer Agent. IF YOU HAVE PAYMENT SENT THROUGH ACH, PLEASE ALLOW 24 TO 48 HOURS FOR AVAILABLE FUNDS. There is currently no charge for having payment of redemption requests mailed or sent through ACH to a designated bank account. Such ACH redemption requests may be made by the Shareholder by telephone to the Company. For telephone redemptions, call the Company at (800) OMAHA-03.
Neither the Fund nor its service providers will be liable for any loss, damages, expense or cost arising out of any telephone redemption effected in accordance with the Fund's telephone redemption procedures, acting upon instructions reasonably believed to be genuine. The Fund will employ procedures designed to provide reasonable assurance that instructions by telephone are genuine; if these procedures are not followed, the Fund or its service providers may be liable for any losses due to unauthorized or fraudulent instructions. These procedures include recording all phone conversations, sending confirmations to Shareholders within 72 hours of the telephone transaction, verification of account name and account number or tax identification number, and sending redemption proceeds only to the address of record or to a previously authorized bank account. If, due to temporary adverse conditions, investors are unable to effect telephone transactions, Shareholders may also mail the redemption request to the Transfer Agent at the address listed above under "HOW TO PURCHASE AND REDEEM SHARES-Redemption by Mail."
The Auto Withdrawal Plan enables Shareholders of the Funds to make regular monthly or quarterly redemptions of Shares. With Shareholder authorization, the Transfer Agent will automatically redeem Shares at the net asset value on the dates of the withdrawal and have a check in the amount specified mailed to the Shareholder. The required minimum withdrawal is $100. To participate in the Auto Withdrawal Plan, Shareholders should call (800) OMAHA-03 for more information. Purchases of additional Shares concurrent with withdrawals may be disadvantageous to certain Shareholders because of tax liabilities. For a Shareholder to change the Auto Withdrawal instructions, the request must be made in writing to the Company.
Redemption orders are effected at the net asset value per Share next determined after the Shares are properly tendered for redemption, as described above. Payment to Shareholders for Shares redeemed will be made within seven days after receipt by the Distributor of the request for redemption. However, to the greatest extent possible, the Fund will attempt to honor requests from Shareholders for next day payments upon redemption of Shares if the request for redemption is received by the Distributor before 4:00 p.m., Eastern Time, on a Business Day or, if the request for redemption is received after 4:00 p.m., Eastern Time, to honor requests for payment on the second Business Day, unless it would be disadvantageous to the Fund or the Shareholders of the Fund to sell or liquidate portfolio securities in an amount sufficient to satisfy requests for payments in that manner.
At various times, the Company may be requested to redeem Shares for which it has not yet received good payment. In such circumstances, the Company may delay the forwarding of proceeds for up to 15 days until payment has been collected for the purchase of such Shares. The Company intends to pay cash for under abnormal conditions which make payment in cash unwise, the Company may make payment wholly or partly in portfolio securities at their then market value equal to the redemption price, which portfolio securities may or may not be liquid. In such cases, an investor may incur brokerage costs in converting such securities to cash.
Due to the relatively high cost of handling small investments, each Fund reserves the right to redeem, at net asset value, the Shares of any Shareholder if, because of redemptions of Shares by or on behalf of the Shareholder (but not as a result of a decrease in the market prices of such Shares or the establishment of an account with less than $500 using the Auto Invest Plan or pursuant to a payroll deduction plan), the account of such Shareholder has a value of less than $500. Accordingly, an investor purchasing Shares of the Fund in only the minimum investment amount may be subject to such involuntary redemption if he or she thereafter redeems some of his or her Shares. Before the Fund 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 an amount which will increase the value of the account to at least $500.
See "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION" in the Statement of Additional Information for examples of when the Company may suspend the right of redemption in light of the Company's responsibilities under the 1940 Act.
The net investment income of the Fund is declared monthly as a dividend to Shareholders. Such dividends are generally declared at the close of business on the day of declaration and paid monthly. Distributable net realized capital gains are distributed at least annually. A Shareholder of the Fund will automatically receive all distributions in additional full and fractional Shares of the Fund at the net asset value as of the date of payment unless the Shareholder elects to receive such dividends in cash. Such election, or any revocation thereof, must be made in writing to the Fund, addressed to the First Omaha Funds, Inc. P.O. Box 419022, Kansas City, Missouri 64141-6022, and will become effective with respect to dividends having record dates after its receipt by the Transfer Agent. Dividends are paid in cash not later than seven Business Days after a Shareholder's complete redemption of the Shares in the Fund.
The Fund is treated as a separate entity for federal income tax purposes and intends to qualify as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"), for so long as such qualification is in the best interest of the Fund's Shareholders. Qualification as a regulated investment company under the Code requires, among other things, that the regulated investment company distribute to its Shareholders at least 90% of its investment company taxable income. The Fund contemplates declaring as dividends 100% of the Fund's investment company taxable income (before deduction of dividends paid).
In order to avoid the imposition of an excise tax, the Fund is required to distribute annually, prior to calendar year end, 98% of taxable ordinary income on a calendar year basis, 98% of capital gain net income realized in the 12 months preceding October 31, and the balance of undistributed taxable ordinary income and capital gain net income from the prior calendar year. If distributions during the calendar year are less than the required amounts, the Fund would be subject to a nondeductible 4% excise tax on the deficiency.
A Shareholder receiving a distribution of ordinary income and/or an excess of short-term capital gain over net long-term capital loss would treat it as a receipt of ordinary income even if paid in additional Shares and not in cash. Shareholders not subject to federal income tax on their income will not, however, be required to pay federal income tax on any amounts distributed to them. The dividends received deduction for corporations will apply to the aggregate of such ordinary income distributions in the same proportion as the aggregate dividends, if any, qualifying for the dividends received deduction received by the Fund bear to its gross income.
Distribution by the Fund of the excess of net long-term capital gain over net short-term capital loss is taxable to Shareholders as long-term capital gain in the year in which it is received, regardless of how long the Shareholder has held shares. Such distributions are not eligible for the dividends received deduction.
If the net asset value of a Share is reduced below the Shareholder's cost of that Share by the distribution of income or gain realized on the sale of securities, the distribution is a return of invested principal, although taxable as described above.
Prior to purchasing Shares, the impact of dividends or capital gains distributions which are expected to be declared or have been declared, but have not been paid, should be carefully considered. Any such dividends or capital gains distributions paid shortly after a purchase of Shares prior to the record date will have the effect of reducing the per share net asset value of the Shares by the amount of the dividends or distributions. All or a portion of such dividends or distributions, although in effect a return of capital, is subject to tax.
Even though a portion of distributions of net income by the Fund to its Shareholders will be attributable to interest on U.S. Treasury obligations, which may be exempt from state or local tax if received directly by a Shareholder, Shareholders of the Fund may be subject to state and local taxes with respect to their ownership of Shares or their receipt of distributions from the Fund. In addition, to the extent Shareholders receive distributions of income attributable to investments in repurchase agreements by the Fund, such distribution may also be subject to state or local taxes.
The foregoing is intended only as a brief summary of some of the important tax considerations generally affecting the Fund and its Shareholders.
the Fund are urged to consult their tax advisers concerning the application of federal, state and local taxes as such laws and regulations affect their own tax situation.
Shareholders will be advised at least annually as to the income tax consequences of distributions made to them during the year.
Overall responsibility for management of the Company rests with the Board of Directors, who are elected by the Shareholders of the Company's Funds. The Company will be managed by the Directors in accordance with the laws of Nebraska governing corporations. The Directors, in turn, elect the officers of the Company to supervise the day-to-day operations.
The Directors receive fees and are reimbursed for their expenses in connection with each meeting of the Board of Directors they attend. The officers of the Company receive no compensation directly from the Company for performing the duties of their offices. Sunstone receives fees from each of the Funds for acting as Administrator and for providing certain fund accounting services.
First National Bank of Omaha, One First National Center, Omaha, Nebraska 68102, is the investment adviser of the Fund. The Adviser is a subsidiary of First National of Nebraska, a Nebraska corporation, with total assets of approximately $4.5 billion as of June 30, 1994. The Adviser provides a full range of financial and trust services to businesses, individuals, and government entities and has been providing quality trust and investment management service for over 60 years. The Adviser serves Nebraska, as well as other areas of the Midwest. In addition, as of December 31, 1994, the Adviser's Trust Division had approximately $5.2 billion of assets under administration, including approximately $1.9 billion under management.
Subject to the general supervision of the Company's Board of Directors and in accordance with the Fund's investment objective and restrictions, the Adviser manages the investments of the Fund, makes decisions with respect to and places orders for all purchases and sales of the Fund's portfolio securities, and maintains the Fund's records relating to such purchases and sales. All investment decisions for the Fund are made by an investment committee, and no person is primarily responsible for making recommendations to that committee.
For the services provided and expenses assumed pursuant to its investment advisory agreement with the Company, the Adviser receives a fee from the Fund, computed daily and paid monthly, equal to the lesser of (a) a fee at the annual rate of eighty-five one-hundredths of one percent (.85%) (which is higher than the fee charged by most mutual funds), or (b) such other fee as may be agreed upon in writing from time to time by the Company and the Adviser. The Adviser may periodically voluntarily reduce all or a portion of its advisory fee with respect to the Fund to increase the net income of the Fund available for distribution as dividends. The Adviser may not seek reimbursement of such voluntarily reduced fees at a later date. The reduction of such fee will cause the yield and total return of the Fund to be higher than it would be in the absence of such reduction.
Sunstone Financial Group, Inc. (the "Administrator" or the "Distributor", as the context indicates), acts as administrator and distributor for the Fund. Shares of the Fund are sold by the Distributor on a continuous basis. As compensation for its administrative services (which include clerical, compliance, regulatory, fund accounting and other services) and the assumption of related expenses, the Administrator is entitled to a fee, computed daily and payable monthly, at an annual rate of .20% of the Fund's average net assets subject to a minimum fee of $50,000.
The Administrator may periodically voluntarily reduce all or a portion of its administrative fee with respect to the Fund. These waivers may be terminated at any time at the Administrator's discretion. The Administrator may not seek reimbursement of such voluntarily reduced fees at a later date. The reduction of such fee will cause the yield of the Fund to be higher than it would be in the absence of such reduction. The Distributor receives no compensation from the Fund under its Distribution Agreement with the Company, but may receive compensation under the Distribution and Shareholder Service Plan described below.
The Adviser and the Administrator each bear all expenses in connection with the performance of their services as investment adviser and administrator, respectively, other than the cost of securities (including brokerage commissions, and issue and transfer taxes, if any) purchased for the Fund. The Fund will bear the following expenses relating to its operations: organizational expenses, taxes, interest, any brokerage fees and commissions, fees and expenses of the Directors of the Company, Commission fees, state securities qualification fees, costs of preparing and printing Prospectuses for regulatory purposes and for distribution to the Fund's current Shareholders, outside auditing and legal expenses, advisory and administration fees, fees and out-of-pocket expenses of the Administrator, Custodian and Transfer Agent, costs for independent pricing service, certain insurance premiums costs of maintenance of the Company's existence, costs of Shareholders' and Directors' reports and meetings, distribution expenses incurred pursuant to the Distribution and Shareholder Service Plan described below, and any extraordinary expenses incurred in the Fund's operation.
Pursuant to Rule 12b-l under the 1940 Act, the Company has adopted a Distribution and Shareholder Service Plan (the "Plan"), under which the Fund is authorized to pay a periodic amount representing distribution expenses calculated at an annual rate not to exceed twenty-five one-hundredths of one percent (.25%) of the average daily net assets of the Fund. Such amount may be used to pay banks (including the Adviser), broker-dealers and other institutions (a "Participating Organization") for distribution and/or shareholder service assistance pursuant to an agreement between the Distributor and the Participating Organization. Under the Plan, a Participating Organization may include the Distributor, its subsidiaries, and its affiliates.
As of the date of this Prospectus, however, there are no Rule 12b-l Agreements in effect under the Plan with respect to the Fund, and no fees are being paid by the Fund under the Plan.
The Company has adopted an Administrative Services Plan (the "Services Plan") pursuant to which the Fund is authorized to pay compensation to banks and other financial institutions, which may include the Adviser, its correspondent and affiliated banks, and the Distributor (each a "Service Organization"), which agree to provide certain ministerial, record keeping and/or administrative support services for their customers or account holders (collectively, "customers") who are the beneficial or record owner of
Shares of the Fund. In consideration for such services, a Service Organization receives a fee from the Fund, computed daily and paid monthly at an annual rate of up to twenty-five one-hundredths of one percent (.25%) of the average daily net asset value of Shares of the Fund owned beneficially or of record by such Service Organization's customers for whom the Service Organization provides such services.
The servicing agreements adopted under the Services Plan (the "Servicing Agreements") require the Service Organizations receiving such compensation to perform certain ministerial, record keeping and/or administrative support services with respect to the beneficial or record owners of Shares of the Funds, such as processing dividend and distribution payments from the Fund on behalf of customers, providing periodic statements to customers showing their positions in the Shares of the Fund, providing sub-accounting with respect to Shares beneficially owned by such customers and providing customers with a service that invests the assets of their accounts in Shares of the Fund pursuant to specific or pre-authorized instructions.
As authorized by the Services Plan, the Company has entered into a Servicing Agreement with the Adviser pursuant to which the Adviser has agreed to provide certain administrative support services in connection with Shares of the Fund owned of record or beneficially by its customers. Such administrative support services may include, but are not limited to (i) processing dividend and distribution payments from the Fund on behalf of customers; (ii) providing periodic statements to its customers showing their positions in the Shares; (iii) arranging for bank wires; (iv) responding to routine customer inquiries relating to services performed by the Adviser; (v) providing sub-accounting respect to the Shares beneficially owned by the Adviser's customers or the information necessary for sub-accounting; (vi) if required by law, forwarding shareholder communications from the Fund (such as proxies, shareholder reports, annual and semiannual financial statements and dividend, distribution and tax notices) to its customers; (vii) aggregating and processing purchase, exchange, and redemption requests from customers and placing net purchase, exchange, and redemption orders for customers; and (viii) providing customers with a service that invests the assets of their account in the Shares pursuant to specific or pre-authorized instructions. In consideration of such services, the Company, on behalf of the Fund, has agreed to pay the Adviser a monthly fee, computed at the annual rate of twenty-five one-hundredths of one percent (.25%) of the average aggregate net asset value of Shares of the Fund held during the period by customers for whom the Adviser has provided services under the Servicing Agreement. However, the Servicing Agreement with the Advisor provides that no payments may be made under the Service Plan until such time as the Board of Directors of the Company authorizes the commencement of such payments. The Adviser may periodically voluntarily reduce all or a portion of its administrative services fee with respect to the Fund to increase the net income of the Fund available for distribution as dividends. The reduction of such fee will cause the yield and total return of the Fund to be higher than they would be in the absence of such reduction.
The Adviser believes that it possesses the legal authority to perform the services for the Fund contemplated by the Rule 12b-1 Distribution Plan adopted by the Company, its Investment Advisory Agreement and its Custodian Agreement with the Company and administrative support services contemplated by the Servicing Agreement with the Company, as described in this Prospectus, without violation of applicable banking laws and regulations, and has so represented in its Investment Advisory Agreement, its Servicing Agreement and its Custodian Agreement with the Company. Future changes in federal or state statutes and regulations relating to permissible activities of banks or bank holding companies and their subsidiaries and affiliates as well as further judicial or administrative decisions or interpretations of present and future statutes and regulations could change the manner in which the Adviser could continue to perform such services for the Fund. It is not anticipated, however, that any change in the Company's method of operations would affect its net asset value per Share or result in financial losses to any Shareholder. See "MANAGEMENT OF THE COMPANY-Glass-Steagall Act" in the Statement of Additional Information for further discussion of applicable law and regulations.
DESCRIPTION OF THE COMPANY AND ITS SHARES
The Company was organized as a Nebraska corporation on October 12, 1994. The Company consists of five funds, each having its own series of Shares. Each Share represents an equal proportionate interest in a Fund with other Shares of the same Fund, and is entitled to such dividends and distributions out of the income earned on the assets belonging to that Fund as are declared at the discretion of the Directors (see "Miscellaneous" below).
The Articles of Incorporation of the Company permit the Company, by resolution of its Board of Directors, to create new series of common shares relating to new investment portfolios or to subdivide existing series of Shares into subseries or classes. Classes could be utilized to create differing expense and fee structures for investors in the same Fund. Differences could exist, for example, in the sales load, Rule 12b-1 fees or service plan fees applicable to different classes of Shares offered by a particular Fund. Such an arrangement could enable the Company to tailor its marketing efforts to a broader segment of the investing public with a goal of attracting additional investments in the Funds.
While the Board of Directors of the Company has not created any such subseries or classes, it could do so in the future without Shareholder creation of classes would require compliance with regulations the Commission has adopted under the 1940 Act.
Shareholders are entitled to one vote for each Share owned and a proportionate fractional vote for any fraction of a Share owned, and will vote in the aggregate and not by series or fund except as otherwise expressly required by law. For example, Shareholders of each of the Funds will vote in the aggregate with other Shareholders of the Company with respect to the election of Directors and ratification of the selection of independent accountants. However, Shareholders of each of the Funds will vote as a series, and not in the aggregate with other Shareholders of the Company, for purposes of approval of such Fund's Investment Advisory Agreement and the Plan. In connection with any election of Directors, Shareholders are entitled to cumulate their votes by casting the number of votes equal to the number of directorships being filled multiplied by the number of Shares held, and to cast all of such votes for one candidate or to distribute them among several candidates as the Shareholder sees fit.
Overall responsibility for the management of each of the Funds is vested in the Board of Directors of the Company. See "MANAGEMENT OF THE COMPANY-Directors of the Company." Individual Directors are elected by the Shareholders of the Company and may be removed by the Board of Directors or Shareholders of the Company in accordance with the provisions of the Articles of Incorporation and Bylaws of the Company and Nebraska law. See "ADDITIONAL INFORMATION-Miscellaneous" in the Statement of Additional Information for further information.
An annual or special meeting of Shareholders to conduct necessary business is not required by the Articles of Incorporation, the 1940 Act or other authority except, under certain circumstances, to elect Directors, amend the Articles of Incorporation, the Investment Advisory Agreement, the Plan or a Fund's fundamental policies and to satisfy certain other requirements. To the extent that such a meeting is not required, the Company may elect not to have an annual or special meeting. However, the Company has undertaken to hold a meeting of shareholders to consider the removal of any Director if requested by the holders of at least 10% of the Company's outstanding shares.
As of the date of this Prospectus, Miriam M. Allison, President of the Distributor, owned all of the outstanding Shares of the Fund. It is contemplated that the public offering of the shares of the Fund will reduce Ms. Allison's holdings to less than 5% of the total Shares outstanding. Thereafter, it is likely that the Adviser will possess, on behalf of its underlying accounts, voting or investment power with respect to a substantial majority of the outstanding Shares of the Fund and therefore will be presumed to control the Fund within the meaning of the 1940 Act.
First National Bank of Omaha (the "Custodian") serves as custodian for the Fund. Pursuant to the Custodian Agreement with the Company, the Custodian receives compensation from the Fund for such services in an amount equal to a fee, computed daily and paid monthly, at the annual rate of three one-hundredths of one percent (.03%) of the Fund's average daily net assets.
TRANSFER AGENCY AND FUND ACCOUNTING SERVICES
First National Bank of Omaha, One First National Center, Omaha, Nebraska 68102, will serve as the Fund's Transfer Agent pursuant to a Transfer Agency Agreement with the Company dated as of December 20, 1994. Pursuant to such Agreement, the Transfer Agent, among other things, provides, or agrees to cause others to provide, the following services in connection with the Fund's shareholders of record: maintenance of shareholder records for the Fund's shareholders of record; processing shareholder purchase and redemption orders; processing transfers and exchanges of shares of the Fund on the shareholder files and records; processing dividend payments and reinvestments; and assistance in the mailing of shareholder reports and proxy solicitation materials. For such services First National Bank of Omaha receives a fee from the Fund based on the number of shareholders of record, subject to certain minimum amounts from each fund.
DST Systems, Inc., 210 W. 10th Street, Kansas City, Missouri 64105, will serve as sub-transfer agent for the Funds pursuant to a Sub-Transfer Agency Agreement dated as of December 20, 1994 with First National Bank of Omaha. DST Systems, Inc., will perform the principal services as transfer agent for the Fund under such Agreement and will receive a fee from First National Bank of Omaha for such services.
Shareholders will receive unaudited semi-annual reports and annual reports audited by independent public accountants.
As used in this Prospectus and in the Statement of Additional Information, "assets belonging to a Fund" means the consideration received by a Fund upon the issuance or sale of shares in that Fund, together with all income, earnings, profits, and proceeds derived from the investment thereof, including any proceeds from the sale, exchange, or liquidation of such investments, and any funds or amounts derived from any reinvestment of such proceeds, and any general assets of the Company not readily identified as belonging to a particular Fund that are allocated to such Fund by the Company's Board of Directors. The Board of Directors may allocate such general assets in any manner it deems fair and equitable. Determinations by the Board of Directors of the Company as to the timing of the allocation of general liabilities and expenses and as to the timing and allocable portion of any general assets with respect to the Funds are conclusive.
As used in this Prospectus and in the Statement of Additional Information, a "vote of a majority of the outstanding Shares" of the Fund means the affirmative vote, at a meeting of Shareholders duly called, of the lesser of (a) 67% or more of the votes of Shareholders of the Fund present at a meeting at which the holders of more than 50% of the votes attributable to Shareholders of record of the Fund are represented in person or by proxy, or (b) the holders of more than 50% of the outstanding Shares of the Fund.
First National Bank of Omaha
207 E. Buffalo St., Suite 400
Cline, Williams, Wright, Johnson & Oldfather 1900 FirsTier Bank Bldg.
Two Central Park Plaza, Suite 1501
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO 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 NO BE RELIEF UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
PROSPECTUS DATED MARCH 29, 1996
[FIRST OMAHA FAMILY OF FUNDS LOGO] First National Bank of Omaha - Adviser Prospectus dated September 18, 1995
SEPTEMBER 18, 1995 FIRST OMAHA FUNDS - PROSPECTUS
First National Bank of Omaha For current yield, purchase, Investment Adviser and redemption information, Custodian and Transfer Agent call (800) OMAHA-03
First Omaha Funds, Inc. (the "Company") is an open-end management investment company. The Company includes the First Omaha Equity Fund, the First Omaha Short/Intermediate Fixed Income Fund, the First Omaha Fixed Income Fund and the First Omaha U.S. Government Obligations Fund (such Funds are hereinafter singularly referred to as a "Fund" and collectively referred to as the "First Omaha Funds" or the "Funds"), each of which is a no-load, diversified investment portfolio of the Company. The Directors of the Company have divided the Company's common stock ("Shares") into series, each of which relates to a particular Fund.
FIRST OMAHA EQUITY FUND (the "Equity Fund") seeks as its investment objective, long-term growth of capital. The Equity Fund will invest primarily in common stocks and securities that are convertible into common stocks, but may also invest, under normal market conditions, in other equity securities and in fixed income securities. The Equity Fund's net asset value per share will fluctuate as the value of its portfolio changes in response to changing market prices and other factors.
FIRST OMAHA SHORT/INTERMEDIATE FIXED INCOME FUND (the "Short/Intermediate Fund") seeks as its investment objective, to generate current income consistent with preservation of capital. The Short/Intermediate Fund will invest primarily in investment grade fixed income securities, as more fully described below, and, under normal market conditions, will maintain a dollar-weighted average portfolio maturity of two to five years.
FIRST OMAHA FIXED INCOME FUND (the "Fixed Income Fund") seeks as its investment objective, to generate current income consistent with preservation of capital. The Fixed Income Fund will invest primarily in investment grade fixed income securities, as more fully described below. The Short/Intermediate Fund's and the Fixed Income Fund's net asset value per share will fluctuate as the value of its portfolio changes in response to changing market rates of interest and other factors. However, these Funds will seek to preserve capital by not sacrificing safety of principal in order to maximize yield on investments.
FIRST OMAHA U.S. GOVERNMENT OBLIGATIONS FUND (the "Money Market Fund") seeks as its investment objective to maximize current income to the extent consistent with the preservation of capital and maintenance of liquidity. The Money Market Fund will limit its investments to high quality money market instruments including U.S. Treasury bills and notes, other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities and which are backed by the full faith and credit of the U.S. Government and repurchase agreements relating to such securities. Normally, the Money Market Fund will invest at least 65% of its total assets in U.S. Government Securities. The Money Market Fund seeks to maintain a constant net asset value of $1.00 per share, but there can be no assurance the net asset value will not vary. An investment in the Money Market Fund is neither insured nor guaranteed by the U.S. Government.
The Shares of the Funds are not deposits or obligations of, or guaranteed or endorsed by, the First National Bank of Omaha, its parent, First National of Nebraska, Inc. or any of their affiliates. Such Shares are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other governmental agency. An investment in a Fund involves certain investment risks, including the possible loss of principal.
This Prospectus sets forth concisely the information about the Funds that a prospective investor ought to know before investing. Investors should read this Prospectus and retain it for future reference. Additional information about the Funds, contained in a Statement of Additional Information, has been filed with the Securities and Exchange Commission and is available upon request without charge by writing to the Funds at their address or by calling the Funds at the telephone number shown above. The Statement of Additional Information bears the same date as this Prospectus and is incorporated by reference in its entirety into this Prospectus.
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.
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No person has been authorized to give any information or to 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 Funds or their Distributor. This Prospectus does not constitute an offering by the Funds or by the Distributor in any jurisdiction in which such offering may not lawfully be made.
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The Company and the Funds were organized to acquire the assets and continue the business of four substantially identical investment portfolios of The Sessions Group, an Ohio business trust. References herein to the "immediate predecessor" of a Fund refer to the investment portfolio of The Sessions Group which corresponds to such Fund. On April 10, 1995 the Company acquired approximately $326.0 million of assets from The Sessions Group in return for an equivalent dollar amount of Shares of the Company.
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The purpose of the above tables is to assist a potential purchaser of a Fund's Shares in understanding the various costs and expenses that an investor in such Fund will bear directly or indirectly. Such expenses do not include any fees charged by the Adviser or any of its affiliates or any Banks or their affiliates to their customer accounts for automatic investment, cash management and other services. See "How to Purchase and Redeem Shares - Minimum Investment." See "MANAGEMENT OF THE COMPANY" and "GENERAL INFORMATION" for a more complete discussion of the Shareholder transaction expenses and annual operating expenses for each of the Funds.
(1) The Adviser and the Administrator, respectively, have agreed with the Company to reduce voluntarily the amount of the investment advisory, administration, custodian and administrative servicing fees until March 31, 1996. Absent the voluntary investment advisory, administration, custodian and administrative servicing fee reductions, Management Fees, Other Expenses and Total Fund Operating Expenses as a percentage of average net assets for the Equity Fund are estimated to be .75%, .29% and 1.04%, respectively. For the Short/Intermediate Fund they are estimated to be .50%, 50% and 1.00%, respectively. For the Fixed Income Fund they are estimated to be .60%,.35% and .95%, respectively. For the Money Market Fund they are estimated to be .25%, .32% and .57%, respectively. (See "MANAGEMENT OF THE COMPANY-Investment Adviser" and "Administrative Services Plan.")
(2) The Company has adopted a Rule 12b-1 Plan pursuant to which each of the Funds is authorized to pay a periodic amount, representing distribution expenses, calculated at an annual rate not to exceed .25% of the average daily net asset value of such Fund. As of the date of this Prospectus, however, there are no Related Agreements under the Rule 12b-1 Plan with respect to the Funds in effect and no fees under the Rule 12b-1 Plan are being paid by the Funds.
(3) "Other Expenses" include administration fees and estimates of legal, accounting and other miscellaneous expenses to be incurred during the current fiscal year. As of the date of this Prospectus, no administrative servicing fees were being paid by the Funds.
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APRIL 10, 1995(1) TO JULY 31, 1995
(4) Without fees waived, the ratio of net expenses to average net assets would have been 1.04% for the Equity Fund, 1.00% for the Short-Intermediate Fixed Income Fund, 0.95% for the Fixed Income Fund, and 0.57% for the U.S. Government Obligations Fund. The ratio of net investment income to average net assets would have been 2.28% for the Equity Fund, 5.16% for the Short/Intermediate Fixed Income Fund, 6.16% for the Fixed Income Fund, and 5.26% for the U.S. Government Obligations Fund.
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From time to time, performance information for the Equity, Short/Intermediate and Fixed Income Funds showing their respective average annual total return, aggregate total return and/or yield may be presented in advertisements, sales literature and Shareholder reports. SUCH PERFORMANCE FIGURES ARE BASED ON HISTORIC EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Average annual total return will be calculated for the period since the commencement of operations for such Fund (including its immediate predecessor). Average annual total return is measured by comparing the value of an investment in a Fund at the beginning of the relevant period to the redeemable value of the investment at the end of the period (assuming immediate reinvestment of any dividends or capital gains distributions), which figure is then annualized. Aggregate total return is calculated similarly to average annual total return except that the return figure is aggregated over the relevant period instead of annualized. Yield will be computed by dividing a Fund's net investment income per share (as calculated on a yield to maturity basis) earned during a recent 30-day period by that Fund's per share maximum offering price (reduced by any undeclared earned income expected to be paid shortly as a dividend) on the last day of the period and annualizing the result.
From time to time the Money Market Fund may advertise its "yield," "effective yield" and "average annual total return." THE YIELD FIGURES AND THE RETURN FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" of the Money Market Fund refers to the income generated by an investment therein over a seven-day period (which period will be stated in the advertisement). This income 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 Money Market Fund may also present a 30-day yield which is calculated similarly but instead refers to a 30-day period rather than a seven-day period. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in the Money Market Fund is assumed to be reinvested. The "effective yield" is slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. For the seven-day period ended July 31, 1995, the yield of the Money Market Fund was 5.24% and its effective yield was 5.37%.
In addition, from time to time, the Funds may present their distribution rates in supplemental sales literature and in Shareholder reports both of which must be accompanied or preceded by a Prospectus. Distribution rates will be computed by dividing the distributions per share made by a Fund over a 12-month period by the maximum offering price per share. The calculation of income in the distribution rate includes both income and capital gain dividends and does not reflect unrealized gains or losses, although each Fund may also present a distribution rate excluding the effect of capital gains. The distribution rate differs from the yield, because it includes capital items which are often non-recurring in nature, whereas yield does not include such items. Distribution rate information will be accompanied by the standardized yield and total return data.
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Investors may also judge the performance of each Fund by comparing or referencing its performance to the performance of other mutual funds with comparable investment objectives and policies through various mutual fund or market indices and to data prepared by various services which indices or data may be published by such services or by other services or publications. For example, the total return and yield of a Fund's Shares may be compared to data prepared by Lipper Analytical Services, Inc. In addition, the total return of a Fund may be compared to the S&P 500 Index, the S&P 400 Index, the Nasdaq Composite Index, an index of unmanaged groups of common stocks of domestic companies that are quoted on the National Association of Securities Dealers Automated Quotation System, the Dow Jones Industrial Average, a recognized unmanaged index of common stocks of 30 industrial companies listed on the New York Stock Exchange, the Lehman Bros. Mutual Fund Short U.S. Gov't Index, or the Lehman Bros. Gov't/Corp. Bond Index. Total Return and yield data as reported in national financial publications, such as Money Magazine, Forbes, Barron's, Morningstar Mutual Funds, The Wall Street Journal and the New York Times, or in publications of a local or regional nature, may also be used in comparing the performance of the Funds. In addition to performance information, general information about the Funds that appears in such publications may be included in advertisements, sales literature and reports to Shareholders.
Yield and total return are generally functions of market conditions, interest rates, types of investments held and operating expenses. Consequently, current yields and total return will fluctuate and are not necessarily representative of future results. Any fees charged by the Adviser or any of its affiliates with respect to customer accounts for investing in Shares of any of the Funds will not be included in performance calculations; such fees, if charged, will reduce the actual performance from that quoted. In addition, if the Adviser and Sunstone voluntarily reduce all or part of their respective fees for a Fund, as discussed below, the yield and total return of that Fund will be higher than it would otherwise be in the absence of such voluntary fee reductions.
The investment objective of the Equity Fund is long-term growth of capital. The investment objective of each of the Short/Intermediate Fund and the Fixed Income Fund is generation of current income consistent with the preservation of capital. The investment objective of the Money Market Fund is maximum current income to the extent consistent with the preservation of capital and the maintenance of liquidity. These investment objectives are fundamental policies and, as such, may not be changed without a vote of the holders of a majority of the outstanding shares of that Fund (as defined in "GENERAL INFORMATION- Miscellaneous"). There can be no assurance that the investment objective of a Fund will be achieved.
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Under normal market conditions, the Equity Fund will invest at least 65% of the value of its total assets in common stocks and securities convertible into common stocks (i.e., convertible bonds, convertible preferred stock, warrants, options and rights) of companies believed by the Adviser to be large capitalization companies with a record of good earnings and/or dividend growth. For purposes of the foregoing policy, "large capitalization" means companies having market capital comparable to the market capitalization of the largest one-third of the companies listed on the New York Stock Exchange. The Equity Fund may also invest up to 35% of the value of its total assets in preferred stocks, common stocks other than those described above, corporate bonds, notes, warrants, and short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, repurchase agreements, and obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Equity Fund will only invest in short-term obligations, including securities of investment companies holding themselves out as "money market" funds, for purposes of portfolio liquidity to meet redemption requirements and short-term investment needs. During temporary defensive periods as determined by the Adviser, the Equity Fund may hold up to 100% of its total assets in high quality short-term obligations including obligations issued or guaranteed by the U.S. government or its agencies or instrumentalities, domestic bank certificates of deposit, bankers' acceptances and repurchase agreements secured by bank instruments or U.S. government obligations. However, to the extent that the Equity Fund is so invested in debt obligations, such Fund may not achieve its investment objective.
Subject to the foregoing limitations, the Equity Fund will invest only in corporate debt securities (including convertible securities) which are rated at the time of purchase within the four highest rating groups assigned by one or more nationally recognized statistical rating organizations ("NRSROs"), e.g., Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation ("S&P"), or, if unrated, which the Adviser deems present attractive opportunities and are of comparable quality. For a description of the rating symbols of the NRSROs, see the Appendix to the Statement of Additional Information. For a discussion of debt securities rated within the fourth highest rating groups assigned by Moody's and S&P, see "Risk Factors" herein.
Equity securities such as those in which the Equity Fund may invest are more volatile and carry more risk than some other investments, including investments in high grade fixed income funds. Depending upon the performance of the Equity Fund's investments, the net asset value per share of the Equity Fund may fluctuate.
THE SHORT/INTERMEDIATE FUND AND THE FIXED INCOME FUND
Under normal market conditions, the Short/Intermediate Fund will invest at least 65% of the value of its total assets in investment grade fixed income securities consisting of bonds, debentures, notes, mortgage-
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related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and fixed income securities convertible into, or exchangeable for, common stocks. However, up to 35% of the value of its total assets may be invested in preferred stocks. In addition, a portion of the Short/Intermediate Fund may, from time to time, be invested in income participation loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Some of the securities in which the Short/Intermediate Fund invests may have warrants or options attached. Under current market conditions, the Short/Intermediate Fund expects to maintain a dollar-weighted average portfolio maturity of two to five years. For purposes of calculating such average maturity, the maturity of each instrument will be its ultimate maturity date, unless it is probable the issuer will take advantage of a maturity-shortening device such as a call, refunding or redemption provision, in which case the probable date of use of such device will be used.
Under normal market conditions, the Fixed Income Fund will invest at least 65% of the value of its total assets in investment grade fixed income securities consisting of bonds, debentures, notes, mortgage-related securities, state, municipal or industrial revenue bonds, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and fixed income securities convertible into, or exchangeable for, common stocks. However, up to 35% of the value of its total assets may be invested in preferred stocks. In addition, a portion of the Fixed Income Fund may, from time to time, be invested in income participation loans and participation certificates in pools of mortgages issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Some of the securities in which the Fixed Income Fund invests may have warrants or options attached.
The Short/Intermediate Fund and the Fixed Income Fund may each invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, and other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. Obligations of the U.S. Treasury include "stripped" U.S. Treasury obligations such as Treasury Receipts, representing either future interest or principal payments. Stripped securities are issued at a discount to their "face value" and may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors. Stripped U.S. Treasury obligations will include (1) coupons that have been stripped from U.S. Treasury bonds, which may be held through the Federal Reserve Bank's book-entry system called "Separate Trading of Registered Interest and Principal of Securities" ("STRIPS") or through a program entitled "Coupon Under Book-Entry Safekeeping" ("CUBES"), or (2) U.S. Treasury securities that are stripped by investment banks and sold under proprietary names. Securities stripped by investment banks may not be as liquid as STRIPS and CUBES and are not viewed by the staff of the Securities and Exchange Commission ("Commission") as U.S. Government securities for purposes of the Investment Company Act of 1940, as amended (the "1940 Act").
Obligations of certain agencies and instrumentalities of the U.S. Govermnent,
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National Mortgage Association, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Student Loan Marketing Association and the Federal Home Loan Banks, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation, are supported only by the credit of the imstrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law. The Short/Intermediate Fund and the Fixed Income Fund will invest in the obligations of such agencies or instrumentalities only when the Adviser believes that the credit risk with respect thereto is minimal.
The Short/Intermediate Fund and the Fixed Income Fund each also expect to invest in bonds, notes and debentures of a wide range of U.S. corporate issuers. Such obligations, in the case of debentures, will represent unsecured promises to pay, and in the case of notes and bonds, may be secured by mortgages on real property or security interests in personal property and will in most cases differ in their interest rates, maturities and times of issuance.
The Short/Intermediate Fund and the Fixed Income Fund will invest only in corporate debt securities which are rated at the time of purchase within the four highest rating groups for corporate debt securities assigned by one or more appropriate NRSROs or, if unrated, which the Adviser deems present attractive opportunities and are of comparable quality. For a description of the ratings of the NRSROs, see the Appendix to the Statement of Additional Information. For a discussion of debt securities rated within the fourth highest rating group assigned by the NRSROs, see "Risk Factors" herein.
The Short/Intermediate Fund and the Fixed Income Fund may each also invest in short-term obligations (with maturities of 12 months or less) consisting of domestic and foreign commercial paper (including variable amount master demand notes), bankers' acceptances, certificates of deposit and time deposits of domestic and foreign branches of U.S. banks and foreign banks, and repurchase agreements. The Short/Intermediate Fund and the Fixed Income Fund may also each invest in securities of investment companies holding themselves out as "money market" funds, subject to the limitations described more fully below.
The Short/Intermediate Fund and the Fixed Income Fund may each invest in obligations of the Export-Import Bank of the United States, in U.S. dollar denominated international bonds for which the primary trading market is in the United States ("Yankee Bonds"), or for which the primary trading market is abroad ("Eurodollar Bonds"), and in Canadian Bonds and bonds issued by institutions organized for a specific purpose, such as the World Bank and the European Economic Community, by two or more sovereign governments ("Supranational Agency Bonds").
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Such Funds may invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities or by nongovernmental entities which are rated, at the time of purchase, within the four highest bond rating categories assigned by one or more appropriate NRSROs, or, if unrated, which the Adviser deems are of comparable quality. Under normal market conditions, a Fund's investment in mortgage-related securities will not exceed 25% of the value of its total assets. Such mortgage-related securities have mortgage obligations backing such securities, including among others, conventional thirty year fixed rate mortgage obligations, graduated payment mortgage obligations, fifteen year mortgage obligations and adjustable rate mortgage obligations. All of these mortgage obligations can be used to create pass through securities. A pass-through security is created when mortgage obligations are pooled together and undivided interests in the pool or pools are sold. The cash flow from the mortgage obligations is passed through to the holders of the securities in the form of periodic payments of interest, principal and prepayments (net of a service fee). Prepayments occur when the holder of an individual mortgage obligation prepays the remaining principal before the mortgage obligation's scheduled maturity date. As a result of the pass-through of prepayments of principal on the underlying securities, mortgage-backed securities are often subject to more rapid prepayment of principal than their stated maturity would indicate. Because the prepayment characteristics of the underlying mortgage obligations vary, it is not possible to predict accurately the realized yield or average life of a particular issue of pass-through certificates. Prepayment rates are important because of their effect on the yield and price of the securities. Accelerated prepayments have an adverse impact on yields for pass-throughs purchased at a premium (i.e., a price in excess of principal amount) and may involve additional risk of loss of principal because the premium may not have been fully amortized at the time the obligation is repaid. The opposite is true for pass-throughs purchased at a discount. The Short/Intermediate Fund and the Fixed Income Fund may each purchase mortgage-related securities at a premium or a discount. Reinvestment of principal payments may occur at higher or lower rates than the original yield on such securities. Due to the prepayment feature and the need to reinvest payments and prepayments of principal at current rates, mortgage-related securities can be less effective than typical bonds of similar maturities at maintaining yields during periods of declining interest rates. Like other fixed income securities, when interest rates rise the value of a mortgage-related security generally will decline; however, when rates decline the value of a mortgage-related security with prepayment features may not increase as much as that of other fixed income securities, as such securities may be prone to prepayment, which decreases their life. Accordingly, such securities may be more volatile than other fixed income securities.
Also included among the mortgage-related securities that such Funds may purchase are collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits ("REMICs"). CMOs may be collateralized by whole mortgage loans but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association, and their income streams. Certain CMOs and REMICs are issued by private issuers. Such securities may be eligible for purchase by the Short/Intermediate Fund and the Fixed Income Fund if: (1) the issuer has obtained an exemptive order from
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the Commission regarding purchases by investment companies of equity interests of other investment companies, or (2) such purchase is within the limitations imposed by Section 12 of the 1940 Act.
The Short/Intermediate Fund and the Fixed Income Fund may also invest in corporate fixed income securities (including bonds, debentures and notes) and asset-backed securities such as Certificates of Automobile Receivables ("CARs") and Certificates of Amortized Revolving Debts ("CARDs"), each of which must be rated at the time of purchase within the four highest rating groups assigned by one or more appropriate NRSROs. For a description of the fourth highest rating group, see "Risk Factors" below.
Certain debt securities such as, but not limited to, mortgage-backed securities, CMOs, asset-backed securities and securitized loan receivables, as well as securities subject to prepayment of principal prior to the stated maturity date, are expected to be repaid prior to their stated maturity dates. As a result, the effective maturity of these securities is expected to be shorter than the stated maturity. For purposes of compliance with stated maturity policies and calculation of the Short/Intermediate Fund's and the Fixed Income Fund's weighted average maturity, the effective maturity of such securities will be used.
An increase in interest rates will generally reduce the value of the investments in the Short/Intermediate Fund and the Fixed Income Fund, and a decline in interest rates will generally increase the value of those investments. Depending upon the prevailing market conditions, the Adviser may purchase debt securities at a discount from face value, which produces a yield greater than the coupon rate. Conversely, if debt securities are purchased at a premium over face value, the yield will be lower than the coupon rate. In making investment decisions, the Adviser will consider many factors other than current yield, including the preservation of capital, maturity, and yield to maturity.
The Money Market Fund invests exclusively in United States dollar-denominated instruments which the Directors of the Company and the Adviser determine present minimal credit risks and which at the time of acquisition are rated by one or more appropriate NRSROs in one of the two highest rating categories for short-term debt obligations or, if not rated, are determined to be of comparable quality to those instruments so rated. The Fund will not invest more than 5% of its assets in securities rated in the second highest category. All securities or instruments in which the Money Market Fund invests have remaining maturities of 397 calendar days or less. The dollar-weighted average maturity of the securities in the Money Market Fund will not exceed 90 days.
The Money Market Fund may invest in a variety of U.S. Treasury obligations, differing in their interest rates, maturities, and times of issuance, and other obligations which are issued or guaranteed by the U.S. Government or its agencies or instrumentalities and which are backed by the full faith and credit of the U.S. Government.
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Obligations of the U.S. Treasury include "stripped" U.S. Treasury obligations such as Treasury Receipts, representing either future interest or principal payments. Stripped securities are issued at a discount to their "face value" and may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors. Obligations of the agencies and instrumentalities of the U.S. Government which are backed by the full faith and credit of the U.S. Government include those of the Government National Mortgage Association and of the Export-Import Bank of the United States. See the discussion of U.S. Government securities above under "INVESTMENT OBJECTIVES AND POLICIES-The Short/Intermediate Fund and the Fixed Income Fund."
The Funds may also invest in securities described in the following paragraphs to the extent indicated.
REPURCHASE AGREEMENTS - Securities held by each of the Funds may be subject to repurchase agreements. Under the terms of a repurchase agreement, a Fund would acquire securities in exchange for cash from member banks of the Federal Deposit Insurance Corporation and/or from registered broker-dealers which the Adviser deems creditworthy under guidelines approved by the Company's Board of Directors. The seller agrees to repurchase such securities at a mutually agreed-upon date and price. The repurchase price generally equals the price paid by a Fund plus interest negotiated on the basis of current short-term rates, which may be more or less than the rate on the underlying portfolio securities. Securities subject to repurchase agreements must be of the same type and quality as those in which a Fund may invest directly. The seller under a repurchase agreement will be required to maintain at all times the value of collateral held pursuant to the agreement at not less than the repurchase price (including accrued interest) plus the transaction costs, including loss of interest, that such Fund reasonably could expect to incur if the seller defaults. This requirement will be continually monitored by the Adviser. If the seller were to default on its repurchase obligation or become insolvent, that Fund would suffer a loss if the proceeds from a sale of the underlying portfolio securities were less than the repurchase price under the agreement, or the disposition of such securities by such Fund were delayed pending court action. Repurchase agreements are considered to be loans by an investment company under the 1940 Act. For further information about repurchase agreements, see "INVESTMENT OBJECTIVES AND POLICIES-Additional Information on Portfolio Instruments-Repurchase Agreements" in the Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS - Each of the Funds may borrow funds for temporary purposes by entering into reverse repurchase agreements in accordance with the investment restrictions described below. Pursuant to such agreements, a Fund would sell certain of its securities to financial institutions such as banks and broker-dealers, and agree to repurchase them at a mutually agreed-upon date and price. The Funds intend to enter into reverse repurchase agreements only to avoid otherwise selling securities during unfavorable market conditions to meet redemptions. At the time a Fund enters into a reverse repurchase agreement,
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it will place in a segregated custodial account assets such as U.S. Government securities or other liquid high-grade debt securities consistent with such Fund's investment restrictions having a value equal to the repurchase price (including accrued interest), and will continually monitor the account to ensure that such equivalent value is maintained at all times. Reverse repurchase agreements involve the risk that the market value of the securities sold by a Fund may decline below the price at which such Fund is obligated to repurchase the securities and that the buyer may default on its obligation to sell such securities back to the Fund. Reverse repurchase agreements are considered borrowings by an investment company under the 1940 Act. For further information about reverse repurchase agreements, see "INVESTMENT OBJECTIVES AND POLICIES-Additional Information on Portfolio Instruments-Reverse Repurchase Agreements" in the Statement of Additional Information.
Except as otherwise disclosed to the Shareholders of a Fund, the Company will not execute portfolio transactions through, acquire portfolio securities issued by, make savings deposits in, or enter into repurchase or reverse repurchase agreements with the Adviser, Sunstone, or their affiliates, and will not give preference to the Adviser's correspondents with respect to such transactions, securities, savings deposits, repurchase agreements, and reverse repurchase agreements.
FOREIGN SECURITIES - Consistent with the foregoing investment policies, each of the Funds (excluding the Money Market Fund) may invest up to 10% of its assets in foreign securities, either directly or through the purchase of sponsored and unsponsored American Depository Receipts ("ADRs"). Unsponsored ADRs may be less liquid than sponsored ADRs, and there may be less information available regarding the underlying foreign issuer for unsponsored ADRs. Investment in foreign securities is subject to special investment risks that differ in some respects from those related to investments in securities of U.S. domestic issuers. Such risks include trade balances and imbalances, and related economic policies, future adverse political, economic and social developments, the possible imposition of withholding taxes on interest and dividend income, possible seizure, nationalization, or expropriation of foreign investments or deposits, currency blockage, less stringent disclosure requirements, the possible establishment of exchange controls or taxation at the source, or the adoption of other foreign governmental restrictions. In addition, foreign branches of U.S. banks, foreign banks and foreign issuers may be subject to less stringent reserve requirements and to different accounting, auditing, reporting, and recordkeeping standards than those applicable to domestic branches of U.S. banks and U.S. domestic issuers, and securities markets in foreign countries may be structured differently from and may not be as liquid as the U.S. markets. Where purchases of foreign securities are made in foreign currencies, a Fund may incur currency conversion costs and may be affected favorably or unfavorbly by changes in the value of foreign currencies against the U.S. dollar.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS - Each Fund may purchase securities on a when issued or delayed-delivery basis. These transactions are arrangements in which a Fund purchases securities with payment and delivery scheduled for a future time. A Fund will engage in when-issued
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delivery transactions only for the purpose of acquiring portfolio securities consistent with and in furtherance of its investment objective and policies, not for investment leverage, although such transactions represent a form of leveraging. When-issued securities are securities purchased for delivery beyond the normal settlement date at a stated price and yield and thereby involve a risk that the yield obtained in the transaction will be less than that available in the market when delivery takes place. A Fund will generally not pay for such securities or start earning interest on them until they are received on the settlement date. When a Fund agrees to purchase such securities, however, the Custodian will set aside cash or liquid, high grade debt obligations equal to the amount of the commitment in a separate account. Securities purchased on a when-issued basis are recorded as an asset and are subject to changes in the value based upon changes in the general level of interest rates. In when-issued and delayed-delivery transactions, a Fund relies on the seller to complete the transaction; the seller's failure to do so may cause such Fund to miss a price or yield considered to be advantageous. Each Fund's commitments to purchase when-issued securities will not exceed 25% of the value of its total assets absent unusual market conditions.
OTHER - In order to generate additional income, each Fund (excluding the Money Market Fund) may, from time to time, lend its portfolio securities to broker-dealers, banks, or institutional borrowers of securities. A Fund must receive 100% collateral in the form of cash or U.S. Government securities. This collateral will be valued daily by the Adviser. Should the market value of the loaned securities increase, the borrower must furnish additional collateral to that Fund. During the time portfolio securities are on loan, the borrower pays that Fund any dividends or interest received on such securities. Loans are subject to termination by such Fund or the borrower at any time. While a Fund does not have the right to vote securities on loan, each Fund intends to terminate the loan and regain the right to vote if that is considered important with respect to the investment. In the event the borrower would default in its obligations, such Fund bears the risk of delay in recovery of the portfolio securities and the loss of rights in the collateral. A Fund will enter into loan agreements only with broker-dealers, banks, or other institutions that the Adviser has determined are creditworthy under guidelines established by the Company's Board of Directors.
Consistent with each Fund's investment objective and policies, the Equity Fund, Short/Intermediate Fund and the Fixed Income Fund each may also invest up to 10% of the value of its total assets in the securities of other investment companies, so long as the aggregate value of the shares acquired from any one such investment company will not exceed 5% of the total assets of such Fund. A Fund will incur additional expenses due to the duplication of expenses as a result of investing in mutual funds. In order to avoid the imposition of additional fees as a result of investing in shares of the Money Market Fund, the Adviser, the Administrator and their affiliates will reduce their fees charged to a Fund by an amount equal to the fees charged by such service providers based on a percentage of that Fund's assets attributable to such Fund's investment in the Money Market Fund. Additional restrictions on the Funds' investments in the securities of other mutual funds are contained in the Statement of Additional Information.
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RISK FACTORS - As described above, certain Funds may invest in debt securities within the fourth highest rating group assigned by one or more appropriate NRSROs and comparable unrated securities. Although investment grade, these types of debt securities are considered by Moody's and S&P to have some speculative characteristics, and are more vulnerable to changes in economic conditions, higher interest rates or adverse issuer-specific developments which are more likely to lead to a weaker capacity to make principal and interest payments than comparable higher rated debt securities.
Should subsequent events cause the rating of a debt security purchased by one of the Funds to fall below the fourth highest rating category, as the case may be, the Adviser will consider such an event in determining whether that Fund should continue to hold that security. The Adviser expects that it would not retain more than 5% of the assets of any Fund in such downgraded securities. In no event, however, would that Fund be required to liquidate any such portfolio security where the Fund would suffer a loss on the sale of such security.
Each Fund is subject to a number of investment restrictions that may be changed only by a vote of a majority of the outstanding Shares of that Fund (see "GENERAL INFORMATION-Miscellaneous").
Each of the Funds will not:
1. Purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, if, immediately after such purchase: (a) more than 5% of the value of such Fund's total assets would be invested in such issuer, or (b) such Fund would hold more than 10% of the outstanding voting securities of such issuer, except that up to 25% of the value of a Fund's total assets may be invested without regard to such limitations. There is no limit to the percentage of assets that may be invested in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities.
2. Purchase any securities which would cause more than 25% of the value of a Fund's total assets at the time of purchase to be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that: (a) there is no limitation with respect to obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and repurchase agreements secured by obligations of the U.S. Government or its agencies or instrumentalities; (b) wholly owned finance companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of their parents; and (c) utilities will be divided according to their services. For example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry.
3. Borrow money or issue senior securities, except that each Fund may borrow from banks or enter into reverse repurchase agreements for temporary purposes in amounts up to 10% of the value of its total assets at the time of such borrowing; or mortgage, pledge or hypothecate any assets, except in connection with any such borrowing and in amounts not in excess of the lesser of the dollar amounts borrowed or 10% of the value of such Fund's total assets at the time of its borrowing. A Fund will not purchase securities while its borrowings (including reverse repurchase agreements) exceed 5% of its total assets.
4. Make loans, except that each Fund may purchase or hold debt instruments and lend portfolio securities in accordance with its investment objective and policies, and may enter into repurchase agreements.
The following additional investment restriction may be changed without the vote of a majority of the outstanding Shares of a Fund. Each Fund may not purchase or otherwise acquire any securities if, as a result, more than 5% of that Fund's net assets would be invested in securities that are illiquid.
In addition to the above investment restrictions, each Fund is subject to certain other investment restrictions set forth under "INVESTMENT OBJECTIVES AND POLICIES-Investment Restrictions" in the Funds' Statement of Additional Information.
Irrespective of fundamental investment restriction number 1 above, and pursuant to Rule 2a-7 under the 1940 Act, the Money Market Fund will, with respect to 100% of its total assets, limit its investment in the securities of any one issuer in the manner provided by such Rule, which limitations are referred to above under the caption "INVESTMENT OBJECTIVES AND POLICIES-In General."
The net asset value of each Fund is determined and its Shares are priced as of 4:00 p.m. (except the Money Market Fund, which is also priced at 11:00 a.m. Eastern Time) (the "Valuation Time") on each Business Day. A "Business Day" of a Fund is a day on which the New York Stock Exchange is open for trading and any other day (other than a day on which no Shares of such Fund are tendered for redemption and no order to purchase Shares is received) during which there is sufficient trading in that Fund's portfolio instruments that its net asset value per Share might be materially affected. The New York Stock Exchange will not be open in observation of the following holidays: New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Net asset value per Share for purposes of pricing purchases and redemptions is calculated by dividing the value of all securities and other assets belonging to a Fund, less the liabilities charged to that Fund, by the number of that Fund's outstanding Shares. The net asset value per share of the Equity Fund, the Short/Intermediate Fund and the Fixed
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Income Fund will fluctuate as the value of the investment portfolio of a Fund changes.
The assets in the Money Market Fund are valued based upon the amortized cost method which the Directors of the Company believe fairly reflects the market-based net asset value per Share. Pursuant to the rules and regulations of the Commission regarding the use of the amortized cost method, the Money Market Fund will maintain a dollar-weighted average portfolio maturity of 90 days or less. Although the Company seeks to maintain the Money Market Fund's net asset value per Share at $1.00, there can be no assurance that net asset value will not vary.
The securities of each other Fund will be valued at market value. If market quotations are not available, securities will be valued by a method which the Board of Directors believes accurately reflects a fair value. For further information about valuation of investments, see "NET ASSET VALUE" in the Statement of Additional Information.
HOW TO PURCHASE AND REDEEM SHARE
DISTRIBUTOR - Shares in each Fund are sold on a continuous basis by the Company's Distributor, Sunstone Financial Group, Inc. The principal office of the Distributor is 207 East Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. If you wish to purchase Shares, telephone the Company at (800) OMAHA-03.
PURCHASES OF SHARES - Shares may be purchased directly by investors or through procedures established by the Distributor in connection with requirements of qualified accounts maintained by or on behalf of certain persons ("Customers") by the Adviser or its correspondent or affiliated banks (collectively, the "Banks"). In the case of the Money Market Fund, these procedures may include instructions under which a Customer's account is "swept" automatically no less frequently than weekly and amounts in excess of a minimum amount agreed upon by the Bank and the Customer are invested by the Distributor in Shares of the Money Market Fund.
Shares of the Funds sold to the Banks acting in a fiduciary, advisory, custodial, or other similar capacity on behalf of Customers will normally be held of record by the Banks. With respect to Shares of the Funds so sold, it is the responsibility of the particular Bank to transmit purchase or redemption orders to the Company and to deliver federal funds for purchase on a timely basis. Beneficial ownership of Shares will be recorded by the Banks and reflected in the account statements provided by the Banks to Customers. A Bank will exercise voting authority for those Shares for which it is granted authority by the Customer.
Investors may also purchase Shares of the Funds by completing and signing a Purchase Application and mailing it, together with a check (or other negotiable bank draft or money order) in at least the minimum initial purchase amount, payable to the appropriate Fund, to the First Omaha Funds, Inc., P.O. Box 419022, Kansas City, Missouri 64141-6022. Subsequent purchases of Shares of that Fund may be made at any time
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by mailing a check (or other negotiable bank draft or money order) payable to the appropriate Fund, to the above address.
If a Purchase Application has been previously received by the Company, investors may also purchase Shares by wiring funds to the Funds' Custodian. Prior to wiring any such funds and in order to ensure that wire orders are invested promptly, investors must call the Company at (800) OMAHA-03 to obtain instructions regarding the bank account number into which the funds should be wired and other pertinent information.
Shares of each of the Funds are purchased at the net asset value per Share (see "VALUATION OF SHARES") next determined after receipt by the Company of an order to purchase Shares. Purchases of Shares of a Fund will be effected only on a Business Day (as defined in "VALUATION OF SHARES") of that Fund. An order received prior to the Valuation Time on any Business Day will be executed at the net asset value determined as of the Valuation Time on the date of receipt. An order received after the Valuation Time on any Business Day will be executed at the net asset value determined as of the Valuation Time on the next Business Day of that Fund.
MINIMUM INVESTMENT - Except as otherwise discussed below under "Auto Invest Plan," the minimum investment is $500 for the initial purchase of Shares of each Fund and $50 for subsequent purchases. The subsequent purchase minimum may be waived if purchases are made in connection with an Individual Retirement Account ("IRA") and both the initial and subsequent minimum investments may be waived if purchases are made in connection with a payroll deduction plan.
There is no initial sales charge imposed by the Funds in connection with the purchase of Shares. Depending upon the terms of a particular Customer's account, the Banks or their affiliates may charge a Customer account fees for automatic investment and other cash management services provided in connection with investment in a Fund. Information concerning these services and any charges may be obtained from the Banks. This Prospectus should be read in conjunction with any such information received from the Banks.
Each Fund reserves the right to reject any order for the purchase of its Shares in whole or in part. Every Shareholder will receive a confirmation of each new transaction in his or her account, which will also show the total number of Shares owned by the Shareholder and the number of Shares being held in safekeeping by the Transfer Agent for the account of the Shareholder. Reports of purchases and redemptions of Shares by Banks on behalf of their Customers will be sent by the Banks to their Customers. Shareholders may rely on these statements in lieu of certificates. Certificates representing Shares will not be issued.
AUTO INVEST PLAN - The Company's Auto Invest Plan enables Shareholders to make regular monthly or quarterly purchases of Shares of a Fund through automatic deduction from their bank accounts, provided that the Shareholder's bank is a member of the Federal Reserve and the Automated Clearing House (ACH) system. With Shareholder authorization the Transfer Agent will deduct the amount specified (subject to the
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applicable minimums) from the Shareholder's bank account which proceeds will automatically be invested in Shares of the designated Fund at the public offering price on the date of such deduction. The required minimum initial investment when opening an account using the Auto Invest Plan is $100; the minimum amount for subsequent investments is $50. To participate in the Auto Invest Plan, Shareholders should complete the appropriate section of the Purchase Application which can be acquired by calling the Company at (800) OMAHA-03. For a Shareholder to change the Auto Invest instructions, the request must be made in writing to the Company at: P.O. Box 419022, Kansas City, Missouri 64141-6022.
EXCHANGE PRIVILEGE - Shares of a Fund may be exchanged without payment of any fees for Shares of each of the other First Omaha Funds at respective net asset values, provided the amount to be exchanged meets the applicable minimum investment requirements and the exchange is made in states where it is legally authorized. An exchange is considered a sale of Shares and will result in a capital gain or loss for federal income tax purposes.
A Shareholder wishing to exchange his or her Shares may do so by contacting the Company at (800) OMAHA-03 or by providing written instructions to the Company. Any Shareholder who wishes to make an exchange should review information in the Company's current Prospectus regarding the First Omaha Fund in which he or she wishes to invest before making the exchange. For a discussion of risks associated with unauthorized telephone exchanges, see "Redemption by Telephone" below.
The Company reserves the right to modify or terminate the expanded exchange privilege upon 60 days written notice to each Shareholder prior to the modification or termination taking effect.
REDEMPTION OF SHARES - Shares may ordinarily be redeemed by mail or by telephone. However, all or part of a Customer's Shares may be redeemed in accordance with instructions and limitations pertaining to his or her account at a Bank. For example, if a Customer has agreed with a Bank to maintain a minimum balance in his or her account with the Bank, and the balance in that account falls below that minimum, the Customer may be obliged to redeem, or the Bank may redeem on behalf of the Customer, all or part of the Customer's Shares of a Fund to the extent necessary to maintain the required minimum balance. The minimum balance required by any such Bank may be higher than the minimum required by the Company.
REDEMPTION BY MAIL - A written request for redemption must be received by the Transfer Agent in order to honor the request. The Transfer Agent's address is: First National Bank of Omaha, P.O. Box 419022, Kansas City, Missouri 64141-6022. The Transfer Agent will require a signature guarantee by an eligible guarantor institution. The signature guarantee requirement will be waived if the following conditions apply: (1) the redemption check is payable to the Shareholder(s) of record, and (2) the redemption check is mailed to the Shareholder(s) at the address of record or mailed or wired to a commercial bank account previously designated on the Purchase Application. There is no charge for having redemption proceeds mailed to a
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designated bank account. To change the address to which a redemption check is to be mailed, a written request therefor must be received by the Transfer Agent. In connection with such request, the Transfer Agent will require a signature guarantee by an eligible guarantor institution. For purposes of this policy, the term eligible "guarantor institution" shall include banks, brokers, dealers, credit unions, securities exchanges and associations, clearing agencies and savings associations as those terms are defined in the Securities Act of 1934. The Transfer Agent reserves the right to reject any signature guarantee if: (1) it has reason to believe that the signature is not genuine, (2) it has reason to believe that the transaction would otherwise be improper, or (3) the guarantor institution is a broker or dealer that is neither a member of a clearing corporation nor maintains net capital of at least $100,000.
REDEMPTION BY TELEPHONE - If a Shareholder has so designated on the Purchase Application, a Shareholder may request the redemption of Shares by telephone and have the payment of redemption requests sent through ACH to a federally insured depository account previously designated by the Shareholder on the Purchase Application or mailed directly to the Shareholder at the Shareholder's address as recorded by the Transfer Agent. IF YOU HAVE PAYMENT SENT THROUGH ACH, PLEASE ALLOW 24 TO 48 HOURS FOR AVAILABLE FUNDS. There is currently no charge for having payment of redemption requests mailed or sent through ACH to a designated bank account. Such ACH redemption requests may be made by the Shareholder by telephone to the Company. For telephone redemptions, call the Company at (800) OMAHA-03.
Neither the Funds nor their service providers will be liable for any loss, damages, expense or cost arising out of any telephone redemption effected in accordance with the Funds' telephone redemption procedures, acting upon instructions reasonably believed to be genuine. Each Fund will employ procedures designed to provide reasonable assurance that instructions by telephone are genuine; if these procedures are not followed, such Fund or its service providers may be liable for any losses due to unauthorized or fraudulent instructions. These procedures include recording all telephone conversations, sending confirmations to Shareholders within 72 hours of the telephone transaction, verification of account name and account number or tax identification number, and sending redemption proceeds only to the address of record or to a previously authorized bank account. If, due to temporary adverse conditions, investors are unable to effect telephone transactions, Shareholders may also mail the redemption request to the Transfer Agent at the address listed above under "HOW TO PURCHASE AND REDEEM SHARES-Redemption by Mail."
AUTO WITHDRAWAL PLAN - The Auto Withdrawal Plan enables Shareholders of each of the Funds to make regular monthly or quarterly redemptions of Shares. With Shareholder authorization, the Transfer Agent will automatically redeem Shares at the net asset value on the dates of the withdrawal and have a check in the amount specified mailed to the Shareholder. The required minimum withdrawal is $100. To participate in the Auto Withdrawal Plan, Shareholders should call (800) OMAHA-03 for more information. Purchases of additional Shares concurrent with withdrawals may be disadvantageous to certain Shareholders because
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of tax liabilities. For a Shareholder to change the Auto Withdrawal instructions, the request must be made in writing to the Company.
PAYMENTS TO SHAREHOLDERS - Redemption orders are effected at the net asset value per Share next determined after the Shares are properly tendered for redemption, as described above. Payment to Shareholders for Shares redeemed will be made within seven days after receipt by the Distributor of the request for redemption. However, to the greatest extent possible, a Fund will attempt to honor requests from Shareholders for next day payments upon redemption of Shares if the request for redemption is received by the Distributor before 4:00 p.m. (11:00 a.m. for the Money Market Fund), Eastern Time, on a Business Day or, if the request for redemption is received after 4:00 p.m. (11:00 a.m. for the Money Market Fund), Eastern Time, to honor requests for payment on the second Business Day, unless it would be disadvantageous to that Fund or the Shareholders of that Fund to sell or liquidate portfolio securities in an amount sufficient to satisfy requests for payments in that manner.
At various times, the Company may be requested to redeem Shares for which it has not yet received good payment. In such circumstances, the Company may delay the forwarding of proceeds for up to 15 days until payment has been collected for the purchase of such Shares. The Company intends to pay cash for all Shares redeemed, but under abnormal conditions which make payment in cash unwise, the Company may make payment wholly or partly in portfolio securities at their then market value equal to the redemption price, which portfolio securities may or may not be liquid. In such cases, an investor may incur brokerage costs in converting such securities to cash.
Due to the relatively high cost of handling small investments, each Fund reserves the right to redeem, at net asset value, the Shares of that Fund of any Shareholder if, because of redemptions of Shares by or on behalf of the Shareholder (but not as a result of a decrease in the market prices of such Shares or the establishment of an account with less than $500 using the Auto Invest Plan or pursuant to a payroll deduction plan), the account of such Shareholder has a value of less than $500. Accordingly, an investor purchasing Shares of a Fund in only the minimum investment amount may be subject to such involuntary redemption if he or she thereafter redeems some of his or her Shares. Before a Fund 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 an amount which will increase the value of the account to at least $500.
See "ADDITIONAL PURCHASE AND REDEMPTION INFORMATION" in the Statement of Additional Information for examples of when the Company may suspend the right of redemption in light of the Company's responsibilities under the 1940 Act.
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DIVIDENDS - The net investment income of each Fund is declared monthly as a dividend to Shareholders (except for the Money Market Fund, which declares income dividends daily). Such dividends are generally declared at the close of business on the day of declaration and paid monthly. Distributable net realized capital gains are distributed at least annually. A Shareholder of a Fund will automatically receive all distributions in additional full and fractional Shares of that Fund at the net asset value as of the date of payment unless the Shareholder elects to receive such dividends in cash. Such election, or any revocation thereof, must be made in writing to the appropriate Fund, addressed to the First Omaha Funds, Inc., P.O. Box 419022, Kansas City, Missouri 64141-6022, and will become effective with respect to dividends having record dates after its receipt by the Transfer Agent. Dividends are paid in cash not later than seven Business Days after a Shareholder's complete redemption of the Shares in a Fund.
FEDERAL TAXES - Each of the Funds of the Company is treated as a separate entity for federal income tax purposes and each intends to qualify as a "regulated investment company" under the Internal Revenue Code of 1986, as amended (the "Code"), for so long as such qualification is in the best interest of such Fund's Shareholders. Qualification as a regulated investment company under the Code requires, among other things, that the regulated investment company distribute to its Shareholders at least 90% of its investment company taxable income. Each Fund contemplates declaring as dividends 100% of that Fund's investment company taxable income (before deduction of dividends paid). Because all of the Money Market Fund's net investment income is expected to be derived from earned interest and short-term capital gains, it is anticipated that no part of any distribution will be eligible for the dividends-received deduction for corporations. The Money Market Fund does not expect to realize any long-term capital gains and, therefore, does not foresee paying any "capital gains dividends" as described in the Code.
In order to avoid the imposition of an excise tax, each Fund is required to distribute annually, prior to calendar year end, 98% of taxable ordinary income on a calendar year basis, 98% of capital gain net income realized in the 12 months preceding October 31, and the balance of undistributed taxable ordinary income and capital gain net income from the prior calendar year. If distributions during the calendar year are less than the required amounts, that Fund would be subject to a nondeductible 4% excise tax on the deficiency.
A Shareholder receiving a distribution of ordinary income and/or an excess of short-term capital gain over net long-term capital loss would treat it as a receipt of ordinary income even if paid in additional Shares and not in cash. Shareholders not subject to federal income tax on their income will not, however, be required to pay federal income tax on any amounts distributed to them. The dividends-received deduction for corporations will apply to the aggregate of such ordinary income distributions in the same proportion as the aggregate dividends, if any, qualifying for the dividends-received deduction received by a Fund bear to its gross income.
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Distribution by a Fund of the excess of net long-term capital gain over net short-term capital loss is taxable to Shareholders as long-term capital gain in the year in which it is received, regardless of how long the Shareholder has held shares. Such distributions are not eligible for the dividends-received deduction.
If the net asset value of a Share is reduced below the Shareholder's cost of that Share by the distribution of income or gain realized on the sale of securities, the distribution is a return of invested principal, although taxable as described above.
Prior to purchasing Shares, the impact of dividends or capital gains distributions which are expected to be declared or have been declared, but have not been paid, should be carefully considered. Any such dividends or capital gains distributions paid shortly after a purchase of Shares prior to the record date will have the effect of reducing the per share net asset value of the Shares by the amount of the dividends or distributions. All or a portion of such dividends or distributions, although in effect a return of capital, is subject to tax.
STATE TAXES - Even though a substantial portion of distributions of net income by the Money Market Fund to its Shareholders, and lesser amounts of distributions to other Fund Shareholders, will be attributable to interest on U.S. Treasury obligations, which may be exempt from state or local tax if received directly by a Shareholder, Shareholders of a Fund may be subject to state and local taxes with respect to their ownership of Shares or their receipt of distributions from such Fund. In addition, to the extent Shareholders receive distributions of income attributable to investments in repurchase agreements by a Fund, such distribution may also be subject to state or local taxes.
The foregoing is intended only as a brief summary of some of the important tax considerations generally affecting each Fund and its Shareholders. Potential investors in each Fund are urged to consult their tax advisers concerning the application of federal, state and local taxes as such laws and regulations affect their own tax situation.
Shareholders will be advised at least annually as to the income tax consequences of distributions made to them during the year.
DIRECTORS OF THE COMPANY - Overall responsibility for management of the Company rests with the Board of Directors, who are elected by the Shareholders of the Company's Funds. The Company will be managed by the Directors in accordance with the laws of Nebraska governing corporations. The Directors, in turn, elect the officers of the Company to supervise the day-to-day operations.
The Directors receive fees and are reimbursed for their expenses in connection with each meeting of the
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Board of Directors they attend. The officers of the Company receive no compensation directly from the Company for performing the duties of their offices. Sunstone receives fees from each of the Funds for acting as Administrator and for providing certain fund accounting services.
INVESTMENT ADVISER - First National Bank of Omaha, One First National Center, Omaha, Nebraska 68102, is the investment adviser of each of the Funds. The Adviser is a subsidiary of First National of Nebraska, a Nebraska corporation, with total assets of approximately $5.3 billion as of December 31, 1994. The Adviser provides a full range of financial and trust services to businesses, individuals, and government entities and has been providing quality trust and investment management service for over 60 years. The Adviser serves Nebraska, as well as other areas of the Midwest. In addition, as of December 31, 1994, the Adviser's Trust Division had approximately $5.2 billion of assets under administration, including approximately $1.9 billion under management.
Subject to the general supervision of the Company's Board of Directors and in accordance with the Funds' investment objectives and restrictions, the Adviser manages the investments of each Fund, makes decisions with respect to and places orders for all purchases and sales of each Fund's portfolio securities, and maintains each Fund's records relating to such purchases and sales. All investment decisions for each Fund are made by an investment committee, and no person is primarily responsible for making recommendations to that committee.
For the services provided and expenses assumed pursuant to its investment advisory agreement with the Company, the Adviser receives a fee from the Equity Fund, the Short/Intermediate Fund, the Fixed Income Fund and the Money Market Fund, computed daily and paid monthly, equal to the lesser of: (1) a fee at the annual rate of seventy-five one-hundredths of one percent (.75%) (which is higher than the fee charged by most mutual funds), fifty one-hundredths of one percent (.50%), sixty one-hundredths of one percent (.60%) and twenty-five one-hundredths of one percent (.25%), respectively, of that Fund's average daily net assets, or (2) such other fee as may be agreed upon in writing from time to time by the Company and the Adviser. The Adviser may periodically voluntarily reduce all or a portion of its advisory fee with respect to a Fund to increase the net income of that Fund available for distribution as dividends. The Adviser may not seek reimbursement of such voluntarily reduced fees at a later date. The reduction of such fee will cause the yield and total return of that Fund to be higher than it would be in the absence of such reduction.
ADMINISTRATOR AND DISTRIBUTOR - Sunstone Financial Group, Inc. (the "Administrator" or the "Distributor," as the context indicates), acts as administrator and distributor for each of the Funds. Shares of the Funds are sold by the Distributor on a continuous basis. As compensation for its administrative services (which include clerical, compliance, regulatory, fund accounting and other services) and the assumption of related expenses, the Administrator is entitled to a fee, computed daily and payable monthly, at an annual rate of .20% of each Fund's average net assets subject to a minimum fee of $300,000.
FIRST OMAHA FUNDS - PROSPECTUS
The Administrator may periodically voluntarily reduce all or a portion of its administrative fee with respect to one or more Funds. These waivers may be terminated at any time at the Administrator's discretion. The Administrator may not seek reimbursement of such voluntarily reduced fees at a later date. The reduction of such fee will cause the yield of that Fund to be higher than it would be in the absence of such reduction. The Distributor receives no compensation from the Funds under its Distribution Agreement with the Company, but may receive compensation under the Distribution and Service Plan described below.
EXPENSES - The Adviser and the Administrator each bear all expenses in connection with the performance of their services as investment adviser and administrator, respectively, other than the cost of securities (including brokerage commissions, and issue and transfer taxes, if any) purchased for a Fund. Each Fund will bear the following expenses relating to its operations: organizational expenses, taxes, interest, any brokerage fees and commissions, fees and expenses of the Directors of the Company, Commission fees, state securities qualification fees, costs of preparing and printing Prospectuses for regulatory purposes and for distribution to its current Shareholders, outside auditing and legal expenses, advisory and administration fees, fees and out-of-pocket expenses of the Administrator, Custodian and Transfer Agent, costs for independent pricing service, certain insurance premiums, costs of maintenance of the Company's existence, costs of Shareholders' and Directors' reports and meetings, distribution expenses incurred pursuant to the Distribution and Service Plan described below, and any extraordinary expenses incurred in a Fund's operation.
DISTRIBUTION PLAN - Pursuant to Rule 12b-1 under the 1940 Act, the Company has adopted a Distribution and Service Plan (the "Plan"), under which each Fund is authorized to pay a periodic amount representing distribution expenses calculated at an annual rate not to exceed twenty-five one-hundredths of one percent (.25%) of the average daily net assets of that Fund. Such amount may be used to pay banks (including the Adviser), broker-dealers and other institutions (a "Participating Organization") for distribution and/or shareholder service assistance pursuant to an agreement between the Distributor and the Participating Organization. Under the Plan, a Participating Organization may include the Distributor, its subsidiaries and its affiliates.
As of the date of this Prospectus, however, there are no Rule 12b-1 Agreements in effect under the Plan with respect to the Funds, and no fees are being paid by any Fund under the Plan.
ADMINISTRATIVE SERVICES PLAN - The Company has adopted an Administrative Services Plan (the "Services Plan") pursuant to which each Fund is authorized to pay compensation to banks and other financial institutions, which may include the Adviser, its correspondent and affiliated banks, and Sunstone (each a "Service Organization"), which agree to provide certain ministerial, record keeping and/or administrative support services for their customers or account holders (collectively, "customers") who are the beneficial or record owner of Shares of that Fund. In consideration for such services, a Service Organization receives a fee from a Fund, computed daily and paid monthly at an annual rate of up to twenty-five one-hundredths of one per-
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cent (.25%) of the average daily net asset value of Shares of that Fund owned beneficially or of record by such Service Organization's customers for whom the Service Organization provides such services.
The servicing agreements adopted under the Services Plan (the "Servicing Agreements") require the Service Organizations receiving such compensation to perform certain ministerial, record keeping and/or administrative support services with respect to the beneficial or record owners of Shares of the Funds, such as processing dividend and distribution payments from the Fund on behalf of customers, providing periodic statements to customers showing their positions in the Shares of the Fund, providing sub-accounting with respect to Shares beneficially owned by such customers and providing customers with a service that invests the assets of their accounts in Shares of the Fund pursuant to specific or pre-authorized instructions.
As authorized by the Services Plan, the Company has entered into a Servicing Agreement with the Adviser pursuant to which the Adviser has agreed to provide certain administrative support services in connection with Shares of the Funds owned of record or beneficially by its customers. Such administrative support services may include, but are not limited to: (1) processing dividend and distribution payments from a Fund on behalf of customers; (2) providing periodic statements to its customers showing their positions in the Shares; (3) arranging for bank wires; (4) responding to routine customer inquiries relating to services performed by the Adviser; (5) providing sub-accounting with respect to the Shares beneficially owned by the Adviser's customers or the information necessary for sub-accounting; (6) if required by law, forwarding shareholder communications from a Fund (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to its customers; (7) aggregating and processing purchase, exchange and redemption requests from customers and placing net purchase, exchange and redemption orders for customers; and (8) providing customers with a service that invests the assets of their account in the Shares pursuant to specific or pre-authorized instructions. In consideration of such services, the Company, on behalf of each of the Funds, may pay the Adviser a monthly fee, computed at the annual rate of twenty-five one-hundredths of one percent (.25%) of the average aggregate net asset value of Shares of that Fund held during the period by customers for whom the Adviser has provided services under the Servicing Agreement. However, the Servicing Agreement with the Adviser provides that no payments may be made under the Services Plan until such time as the Board of Directors of the Company authorizes the commencement of such payments. The Adviser may periodically voluntarily reduce all or a portion of its administrative services fee with respect to a Fund to increase the net income of that Fund available for distribution as dividends. The reduction of such fee will cause the yield and total return of that Fund to be higher than they would be in the absence of such reduction.
BANKING LAWS - The Adviser believes that it possesses the legal authority to perform the services for each Fund contemplated by the Plan adopted by the Company, its Investment Advisory Agreement and its Custodian Agreement with the Company and administrative support services contemplated by the Servicing Agreement with the Company, as described in this Prospectus, without violation
FIRST OMAHA FUNDS - PROSPECTUS
and regulations, and has so represented in its Investment Advisory Agreement, its Servicing Agreement and its Custodian Agreement with the Company. Future changes in federal or state statutes and regulations relating to permissible activities of banks or bank holding companies and their subsidiaries and affiliates as well as further judicial or administrative decisions or interpretations of present and future statutes and regulations could change the manner in which the Adviser could continue to perform such services for the Funds. It is not anticipated, however, that any change in the Company's method of operations would affect its net asset value per Share or result in financial losses to any Shareholder. See "MANAGEMENT OF THE COMPANY-Glass-Steagall Act" in the Statement of Additional Information for further discussion of applicable law and regulations.
DESCRIPTION OF THE COMPANY AND ITS SHARES - The Company was organized as a Nebraska corporation on October 12, 1994. The Company consists of four Funds, each having its own series of Shares. Each Share represents an equal proportionate interest in a Fund with other Shares of the same Fund, and is entitled to such dividends and distributions out of the income earned on the assets belonging to that Fund as are declared at the discretion of the Directors (see "Miscellaneous" below).
The Articles of Incorporation of the Company permit the Company, by resolution of its Board of Directors, to create new series of common shares relating to new investment portfolios or to subdivide existing series of Shares into subseries or classes. Classes could be utilized to create differing expense and fee structures for investors in the same Fund. Differences could exist, for example, in the sales load, Rule 12b-1 fees or service plan fees applicable to different classes of Shares offered by a particular Fund. Such an arrangement could enable the Company to tailor its marketing efforts to a broader segment of the investing public with a goal of attracting additional investments in the Funds.
While the Board of Directors of the Company has not created any such subseries or classes, it could do so in the future without Shareholder approval. However, any such creation of classes would require compliance with regulations the Commission has adopted under the 1940 Act.
Shareholders are entitled to one vote for each Share owned and a proportionate fractional vote for any fraction of a Share owned, and will vote in the aggregate and not by series or Fund except as otherwise expressly required by law. For example, Shareholders of each of the Funds will vote in the aggregate with other Shareholders of the Company with respect to the election of Directors and ratification of the selection of independent accountants. However, Shareholders of each of the Funds will vote as a series, and not in the aggregate with other Shareholders of the Company, for purposes of approval of such Fund's Investment Advisory Agreement and the Plan. In connection with any election of Directors, Shareholders are entitled to cumulate their votes by casting the number of votes equal to the number of directorships being filled
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plied by the number of Shares held, and to cast all of such votes for one candidate or to distribute them among several candidates as the Shareholder sees fit.
The Adviser will possess, in a fiduciary capacity on behalf of its underlying accounts, voting or investment power with respect to a substantial majority of the outstanding Shares of each of the Funds and therefore, will be presumed to control each of the Funds within the meaning of the 1940 Act.
Overall responsibility for the management of each of the Funds is vested in the Board of Directors of the Company. See "MANAGEMENT OF THE COMPANY-Directors and Officers." Individual Directors are elected by the Shareholders of the Company and may be removed by the Board of Directors or Shareholders of the Company in accordance with the provisions of the Articles of Incorporation and Bylaws of the Company and Nebraska law. See "ADDITIONAL INFORMATION-Miscellaneous" in the Statement of Additional Information for further information.
An annual or special meeting of Shareholders to conduct necessary business is not required by the Articles of Incorporation, the 1940 Act or other authority except, under certain circumstances, to elect Directors, amend the Articles of Incorporation, the Investment Advisory Agreement, the Plan or a Fund's fundamental policies and to satisfy certain other requirements. To the extent that such a meeting is not required, the Company may elect not to have an annual or special meeting. However, the Company has undertaken to hold a meeting of Shareholders to consider the removal of any Director if requested by the holders of at least 10% of the Company's outstanding Shares.
CUSTODIAN - First National Bank of Omaha (the "Custodian") serves as Custodian for each of the Funds. Pursuant to the Custodian Agreement with the Company, the Custodian receives compensation from each of the Funds for such services in an amount equal to a fee, computed daily and paid monthly, at the annual rate of three one-hundredths of one percent (.03%) of each Fund's average daily net assets.
TRANSFER AGENCY SERVICES - First National Bank of Omaha, One First National Center, Omaha, Nebraska 68102, will serve as the Funds' Transfer Agent pursuant to a Transfer Agency Agreement with the Company dated as of December 20, 1994. Pursuant to such Agreement, the Transfer Agent, among other things, provides, or agrees to cause others to provide, the following services in connection with each Fund's Shareholders of record: maintenance of shareholder records for each of the Fund's Shareholders of record; processing shareholder purchase and redemption orders; processing transfers and exchanges of shares of the Fund on the shareholder files and records; processing dividend payments and reinvestments; and assistance in the mailing of shareholder reports and proxy solicitation materials. For such services First National Bank of Omaha receives a fee from the Funds based on the number of Shareholders of record, subject to certain minimum amounts from each Fund.
FIRST OMAHA FUNDS - PROSPECTUS
DST Systems, Inc., 210 W. 10th Street, Kansas City, Missouri 64105, will serve as sub-transfer agent for the Funds pursuant to a Sub-Transfer Agency Agreement dated as of December 20, 1994 with First National Bank of Omaha. DST Systems, Inc. will perform the principal services as Transfer Agent for the Funds under such Agreement and will receive a fee from First National Bank of Omaha for such services.
MISCELLANEOUS - Shareholders will receive unaudited semi-annual reports and annual reports audited by independent public accountants.
As used in this Prospectus and in the Statement of Additional Information, "assets belonging to a Fund" means the consideration received by a Fund upon the issuance or sale of shares in that fund, together with all income, earnings, profits, and proceeds derived from the investment thereof, including any proceeds from the sale, exchange, or liquidation of such investments, and any funds or amounts derived from any reinvestment of such proceeds, and any general assets of the Company not readily identified as belonging to a particular Fund that are allocated to such Fund by the Company's Board of Directors. The Board of Directors may allocate such general assets in any manner it deems fair and equitable. Determinations by the Board of Directors of the Company as to the timing of the allocation of general liabilities and expenses and as to the timing and allocable portion of any general assets with respect to the Funds are conclusive.
As used in this Prospectus and in the Statement of Additional Information, a "vote of a majority of the outstanding Shares" of a Fund means the affirmative vote, at a meeting of Shareholders duly called, of the lesser of: (1) 67% or more of the votes of Shareholders of a Fund present at a meeting at which the holders of more than 50% of the votes attributable to Shareholders of record of such Fund are represented in person or by proxy, or (2) the holders of more than 50% of the outstanding Shares of a Fund.
First National Bank of Omaha
207 E. Buffalo St., Suite 400
Cline, Williams, Wright, Johnson & Oldfather 1900 FirsTier Bank Bldg.
Two Central Park Plaza, Suite 1501
First Omaha Small Cap Value Fund
This Statement of Additional Information is not a Prospectus, but should be read in conjunction with the Prospectus of First Omaha Small Cap Value Fund (the "Small Cap Value Fund") dated as of the date hereof. The Small Cap Value Fund is a separate investment portfolio of First Omaha Funds, Inc. (the "Company"). This Statement of Additional Information is incorporated in its entirety into the Prospectus. Copies of the Prospectus may be obtained by writing the Company, P.O. Box 419022, Kansas City, Missouri, 64141-6022, or by telephoning toll free (800) OMAHA-03.
First Omaha Funds, Inc. (the "Company") is an open-end management investment company which currently offers five diversified investment portfolios: First Omaha Small Cap Value Fund (the "Small Cap Value Fund" or the "Fund"), First Omaha U.S. Government Obligations Fund (the "Money Market Fund"), First Omaha Equity Fund (the "Equity Fund"), First Omaha Short/Intermediate Fixed Income Fund (the "Short/Intermediate Fund"), and First Omaha Fixed Income Fund (the "Fixed Income Fund").
Much of the information contained in this Statement of Additional Information expands upon subjects discussed in the Prospectus of the Fund. Capitalized terms not defined herein are defined in the Prospectus. No investment in Shares of the Fund should be made without first reading the Fund's Prospectus.
Additional Information on Portfolio Instruments
The following policies supplement the investment objective and policies of the Fund as set forth in the Prospectus for the Fund.
Bank Obligations. The Small Cap Value Fund may invest in bank obligations such as bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Bankers' acceptances invested in by the Fund will be those guaranteed by domestic and foreign banks having, at the time of investment, capital, surplus, and undivided profits in excess of $100,000,000 (as of the date of their most recently published financial statements).
Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or a savings and loan association for a definite period of time and earning a specified return. Certificates of deposit and demand and time deposits will be those of domestic and foreign banks and savings and loan associations, if (a) at the time of investment the depository institution has capital, surplus, and undivided profits in excess of $100,000,000 (as of the date of its most recently published financial statements), or (b) the principal amount of the instrument is insured in full by the Federal Deposit Insurance Corporation.
The Small Cap Value Fund may also invest in Eurodollar Certificates of Deposit, which are U.S. dollar denominated certificates of deposit issued by offices of foreign and domestic banks located outside the United States; Yankee Certificates of Deposit, which are certificates of deposit issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the United States; Eurodollar Time Deposits ("ETDs"), which are U.S. dollar denominated deposits in a foreign branch of a U. S. bank or a foreign bank; and Canadian Time Deposits, which are basically the same as ETDs except they are issued by Canadian offices of major Canadian banks.
Commercial Paper. Commercial paper consists of unsecured promissory notes issued by corporations. Except as noted below with respect to variable amount master demand notes, issues of commercial paper normally have maturities of less than nine months and fixed rates of return.
The Small Cap Value Fund may invest in commercial paper which need not be rated by any nationally recognized rating agency or if rated, may be rated in any rating category. In general, investment in lowerrated instruments is more risky than investment in instruments in higher-rated categories. The Small Cap Value Fund may also invest in Canadian commercial paper, which is commercial paper issued by a Canadian corporation or a Canadian counterpart of a U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial paper of a foreign issuer.
Variable Amount Master Demand Notes. Variable amount master demand notes, in which the Small Cap Value Fund may invest, are unsecured demand notes that permit the indebtedness thereunder to vary and provide for periodic adjustments in the interest rate according to the terms of the instrument. Because master demand notes are direct lending arrangements between the Fund and the issuer, they are not normally traded. Although there is no secondary market in the notes, the Fund may demand payment of principal and accrued interest at any time. The Adviser will consider the earning power, cash flow, and other liquidity ratios of the issuers of such notes and will continuously monitor their financial status and ability to meet payment on demand. In determining average weighted portfolio maturity, a variable amount master demand note will be deemed to have a maturity equal to the longer of the period of time remaining until the next interest rate adjustment or the period of time remaining until the principal amount can be recovered from the issuer through demand. The Fund will not invest more than 5% of its assets in such securities.
Foreign Investment. Investments in securities issued by foreign branches of U.S. banks, foreign banks, or other foreign issuers, including ADRs and securities purchased on foreign securities exchanges, may subject the Fund to investment risks that differ in some respects from those related to investment in obligations of U.S. domestic issuers or in U.S. securities markets. Such risks include future adverse political and economic developments, possible seizure, nationalization, or expropriation of foreign investments, less stringent disclosure requirements, the possible establishment of exchange controls or taxation at the source, or the adoption of other foreign governmental restrictions. The Small Cap Value Fund will acquire such securities only when the Adviser believes the risks associated with such investments are minimal.
U.S. Government Obligations. The Fund may invest in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including bills, notes and bonds issued by the U.S. Treasury.
Obligations of certain agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Government, such as those of the Government National Mortgage Association and the Export-Import Bank of the United States; others are supported by the right of the issuer to borrow from the Treasury; others are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; and still others are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law.
When-Issued Securities. As discussed in the Prospectus of the Fund, the Fund may purchase securities on a "when-issued" basis (i.e., for delivery beyond the normal settlement date at a stated price and yield). When the Fund agrees to purchase securities on a "when-issued" basis, the Custodian will set aside cash or liquid portfolio securities equal to the amount of the commitment in a separate account. Normally, the Custodian will set aside portfolio securities to satisfy the purchase commitment, and in such a case, the Fund may be required subsequently to place additional assets in the separate account in order to assure that the value of the account remains equal to the amount of the Fund's commitment. It may be expected that the Fund's net assets will fluctuate to a greater degree when it sets aside portfolio securities to cover such purchase commitments than when it sets aside cash. In addition, because the Fund will set aside cash or liquid portfolio securities to satisfy its purchase commitments in the manner described above, the Fund's liquidity and the ability of the Adviser to manage it might be affected in the event its commitments to purchase "when-issued" securities ever exceeded 25% of the value of its assets.
When the Fund engages in "when-issued" transactions, it relies on the seller to consummate the trade. Failure of the seller to do so may result in the Fund incurring a loss or missing the opportunity to obtain a price considered to be advantageous. The Fund will engage in "when-issued" delivery transactions only for the purpose of acquiring portfolio securities consistent with the Fund's investment objectives and policies and not for investment leverage.
Medium-Grade Debt Securities. As stated in the Prospectus, the Small Cap Value Fund may invest in securities within the four highest rating groups assigned by one or more appropriate NRSROs, including securities rated in the fourth highest rating group or, if unrated, judged by the Adviser to be of comparable quality ("Medium-Grade Securities").
As with other fixed-income securities, Medium-Grade Securities are subject to credit risk and market risk. Market risk relates to changes in a security's value as a result of changes in interest rates. Credit risk relates to the ability of the issuer to make payments of principal and interest. Medium-Grade Securities are considered by Moody's to have speculative characteristics.
Medium-Grade Securities are generally subject to greater credit risk than comparable higher-rated securities because issuers are more vulnerable to economic downturns, higher interest rates or adverse issuer-specific developments. In addition, the price of Medium-Grade Securities is generally subject to greater market risk and therefore reacts more sharply to changes in interest rates. The value and liquidity of Medium-Grade Securities may be diminished by adverse publicity and investor perceptions.
Because certain Medium-Grade Securities are traded only in markets where the number of potential purchasers and sellers, if any, is limited, the ability of the Small Cap Value Fund to sell such securities at their fair value either to meet redemption requests or to respond to changes in the financial markets may be limited.
Particular types of Medium-Grade Securities may present special concerns. Some Medium-Grade Securities in which the Small Cap Value Fund may invest may be subject to redemption or call provisions that may limit increases in market value that might otherwise result from lower interest rates while increasing the risk that the Fund may be required to reinvest redemption or call proceeds during a period of relatively low interest rates.
The credit ratings issued by NRSROs are subject to various limitations. For example, while such ratings evaluate credit risk, they ordinarily do not evaluate the market risk of Medium-Grade Securities. In certain circumstances, the ratings may not reflect in a timely fashion adverse developments affecting an issuer. For these reasons, the Adviser conducts its own independent credit analysis of Medium-Grade Securities.
Securities of Other Investment Companies. The Small Cap Value Fund may invest in securities issued by other investment companies, including in Shares of the Money Market Fund. The Fund currently intends to limit its investments so that, as determined immediately after a securities purchase is made: (a) not more than 5% of the value of its total assets will be invested in the securities of any one investment company; (b) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group; and (c) not more than 3% of the outstanding voting stock of any one investment company will be owned by the Fund. Except as described in the Prospectus with respect to an investment in the Money Market Fund, as a shareholder of another investment company, the Fund would bear, along with other shareholders, its pro rata portion of that company's expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that the Fund bears directly in connection with its own operations. Investment companies in which the Fund may invest, other than the Money Market Fund, may also impose a sales or distribution charge in connection with the purchase or redemption of the shares and other types of commissions or charges. Such charges will be payable by the Fund and, therefore, will be borne directly by shareholders.
Repurchase Agreements. Securities held by the Fund may be subject to repurchase agreements. Under the terms of a repurchase agreement, the Fund would acquire securities from member banks of the Federal Deposit Insurance Corporation and registered broker-dealers which the Adviser deems credit-worthy under guidelines approved by the Company's Board of Directors, subject to the seller's agreement to repurchase such securities at a mutually agreed-upon date and price. The repurchase price equal the price paid by the Fund plus interest negotiated on the basis of current short-term rates, which may be more or less than the rate on the underlying portfolio securities. Securities subject to repurchase agreements will be of the same type and quality as those in which the Fund may invest directly. The seller under a repurchase agreement will be required to maintain continually the value of collateral held pursuant to the agreement at not less than the repurchase price (including accrued interest). If the seller were to default on its repurchase obligation or become insolvent, the Fund holding such obligation would suffer a loss to the extent that the proceeds from a sale of the underlying portfolio securities were less than the repurchase price under the agreement, or to the extent that the disposition of such securities by the Fund were delayed pending court action. Additionally, there is no controlling legal precedent confirming that the Fund would be entitled, as against a claim by such seller or its receiver or trustee in bankruptcy, to retain the underlying securities, although the Board of Directors of the Company believes that, under the regular procedures normally in effect for custody of the Fund's securities subject to repurchase agreements and under federal laws, a court of competent jurisdiction would rule in favor of the Company if presented with the question. Securities subject to repurchase agreements will be held by the Fund's custodian or another qualified custodian or in the Federal Reserve/Treasury book-entry system. Repurchase agreements may be considered to be loans by the Fund under the 1940 Act.
Reverse Repurchase Agreements. As discussed in the Prospectus, the Fund may borrow funds for temporary purposes by entering into reverse repurchase agreements in accordance with the Fund's investment restrictions. Pursuant to such agreements, the Fund would sell portfolio securities to financial institutions such as banks and broker-dealers, and agree to repurchase the securities at a mutually agreed-upon date and price. The Fund intends to enter into reverse repurchase agreements only to avoid otherwise selling securities during unfavorable market conditions to meet redemptions. At the time the Fund enters into a reverse repurchase agreement, it will place in a segregated custodial account assets such as U.S. Government securities or other liquid, high grade debt securities consistent with the Fund's investment restrictions having a value equal to the repurchase price (including accrued interest), and will subsequently continually monitor the account to ensure that such equivalent value is maintained at all times. Reverse repurchase agreements involve the risk that the market value of the securities sold by the Fund may decline below the price at which the Fund is obligated to repurchase the securities. Reverse repurchase agreements may be considered to be borrowings by the Fund under the 1940 Act.
Illiquid Securities. The Fund may invest up to 5% of its net assets in illiquid securities (i.e., securities that cannot be disposed of within seven days in the normal course of business at approximately the amount at which the Fund has valued the securities). The Board of Directors has the ultimate authority to determine which securities are liquid or illiquid for purposes of this limitation. Certain securities ("restricted securities") exempt from registration or issued in transactions exempt from registration under the Securities Act of 1933, as amended ("Securities Act") (securities that may be resold pursuant to Rule 144A or Regulation S under the Securities Act), may be considered liquid. The Board has delegated to the Adviser the day-to-day determination of the liquidity of a security, although it has retained oversight and ultimate responsibility for such determinations. Although no definite quality criteria are used, the Board of Directors has directed the Adviser to look to such factors as (a) the nature of the market for a security (including the institutional private or international resale market), (b) the terms of these securities or other instruments allowing for the disposition to a third party or the issuer thereof (e.g., certain repurchase obligations and demand instruments), (c) the availability of market quotations (e.g., for securities quoted in PORTAL system), and (d) other permissible relevant factors. Certain securities, such as repurchase obligations maturing in more than seven days, are currently considered illiquid.
Restricted securities may be sold only in privately negotiated or other exempt transactions, qualified non-U.S. transactions, such as under Regulation S, or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933. Where registration is required, the Fund may be obligated to pay all or part of the registration expenses and a considerable time may elapse between the decision to sell and the sale date. If, during such period, adverse market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it decided to sell. Restricted securities will be priced at fair value as determined in good faith by the Board of Directors. If through the appreciation of illiquid securities or the depreciation of liquid securities, the Fund should be in a position where more than 5% of the value of its net assets is invested in illiquid assets, including restricted securities which are not readily marketable, the Fund will take such steps as it deems advisable, if any, to reduce the percentage of such securities to 5% or less of the value of its net assets.
The Fund's investment objective is a fundamental policy and may not be changed without a vote of the holders of a majority of the Fund's outstanding Shares. In addition, the following investment restrictions may be changed only by a vote of the majority of the outstanding Shares of the Fund (as defined under "ADDITIONAL INFORMATION - Vote of a Majority of the Outstanding Shares").
The Small Cap Value Fund may not:
1. Purchase securities on margin, except for use of short-term credit necessary for clearance of purchases of
2. Engage in any short sales;
3. Underwrite the securities issued by other persons, except to the extent that the Fund may be deemed to be an underwriter under certain securities laws in the disposition of
4. Purchase or sell commodities or commodities contracts, except to the extent disclosed in the current Prospectuses of the
5. Purchase or sell real estate (although investments in marketable securities of companies engaged in such activities are not prohibited by this restriction).
The following additional investment restrictions may be changed without the vote of a majority of the outstanding shares of the Fund. The Small Cap Value Fund may not:
1. Purchase participations or direct interests in oil, gas or other mineral exploration or development programs (although investments by the Fund in marketable securities of companies engaged in such activities are not prohibited in this
2. Purchase securities of other investment companies, except (a) in connection with a merger, consolidation, acquisition or reorganization, and (b) the Fund may invest in other investment companies if, at the time of purchase (i) the Fund will own no more than 3% of the shares of the investment company selling such shares, (ii) the value of the investment company shares acquired, when aggregated with the value of other shares of such investment company held by the Fund, does not exceed 5% of the total assets of the Fund, and (iii) the value of the investment company shares acquired, when aggregated with the value of any other shares of investment companies held by the Fund, does not exceed 10% of the total assets of the Fund; and
3. Purchase or retain the securities of an issuer if, to the knowledge of the Fund's management, the officers or Directors of the Company, and the officers or directors of the Investment Adviser, who each owns beneficially more than .5% of the outstanding securities of such issuer, together own beneficially more than 5% of such securities.
If any percentage restriction described above (and in the Prospectus) is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in asset value will not constitute a violation of such restriction. However, should a change in net asset value or other external events cause the Fund's investment in illiquid securities to exceed the Fund's limit on its investments in such securities, the Fund will act to cause the aggregate amount of illiquid securities to come within such limit as soon as reasonably practicable. In such an event, however, the Fund would not be required to liquidate any portfolio securities where the Fund would suffer a loss on the sale of such securities.
The Company, on behalf of the Small Cap Value Fund, has represented to the Ohio Division of Securities that the Fund will (1) not invest any of its assets in the securities of other investment companies, except by purchase in 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; (2) limit its investments to 15% in securities of any issuer which, together with any predecessors, have a record of less than three years continuous operation and (3) limit its investments to 5% in securities of issuers which are restricted as to disposition. The Company intends to comply with these representations with respect to the Fund for so long as the Shares of the Fund are registered for sale in the State of Ohio.
In addition, the Company, on behalf of the Small Cap Value Fund has represented to the Texas State Securities Board that the Fund will (1) not invest in oil, gas or mineral leases or purchase or sell real property (including limited partnership interests, but excluding readily marketable securities of companies which invest in real estate) and (2) not invest more than 5% of its net assets in warrants valued at the lower of cost or market, provided, that included within that amount, but not to exceed 2% of net assets, may be warrants which are not listed on the New York or American Stock Exchanges. For purposes of restriction (2) above, warrants acquired in units or attached to securities are deemed to be without value. The Company intends to comply with these representations with respect to the Fund for so long as the Shares of the Fund are registered for sale in the State of Texas.
The portfolio turnover rate for the Fund is calculated by dividing the lesser of the Fund's purchases or sales of portfolio securities for the year by the monthly average value of the portfolio securities. The Commission requires that the calculation exclude all securities whose remaining maturities at the time of acquisition were one year or less.
As indicated in the Prospectus, the net asset value of the Fund is determined and the Shares of the Fund are priced as of the Valuation Time on each Business Day of the Company. A "Business Day" is a day on which the New York Stock Exchange is open for trading and any other day (other than a day on which no Shares of the Fund are tendered for redemption and no order to purchase any Shares is received) during which there is sufficient trading in portfolio instruments that the Fund's net asset value per share might be materially affected. The New York Stock Exchange will not open in observance of the following holidays: New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Each security traded on a U.S. national securities exchange or quoted on the NASDAQ National Market System ordinarily will be valued on the basis of its last sale price on the date of valuation or, if there are no sales that day, at the closing bid quotation. Securities traded on exchanges located outside of the U.S. will be valued on the basis of the price as of the most recent close of business on the exchange preceding the time of valuation. Securities and other assets for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures established by and under the general supervision of the Directors of the Company. Short-term securities are valued at either amortized cost or original cost plus accrued interest, which approximates current value.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Fund are sold on a continuous basis by the Distributor, and the Distributor has agreed to use appropriate efforts to solicit purchase orders. In addition to purchasing Shares directly through the Distributor, Shares may be purchased through procedures established by the Distributor in connection with the requirements of accounts at the Adviser or the Adviser's correspondent or affiliated banks. Customers purchasing Shares of the Fund may include officers, directors, or employees of the Adviser or the Adviser's correspondent or affiliated banks.
The Company may suspend the right of redemption or postpone the date of payment for Shares of the Fund during any period when (a) trading on the New York Stock Exchange is restricted by applicable rules and regulations of the Commission, (b) the New York Stock Exchange is closed for other than customary weekend and holiday closings, (c) the Commission has by order permitted such suspension, or (d) an emergency exists as a result of which (i) disposal by the Company of securities owned by it is not reasonably practical, or (ii) it is not reasonably practical for the Company to determine the fair value of its net assets.
The Company may redeem Shares of the Money Market Fund involuntarily if redemption appears appropriate in light of the Company's responsibilities under the 1940 Act.
Overall responsibility for management of the Company rests with its Board of Directors, which is elected by the Shareholders of the Company. The Directors elect the officers of the Company to supervise actively its day-to-day operations.
The names of the Directors and officers of the Company, their addresses, and principal occupations during the past five years are as follows:
* Denotes "interested directors" as defined in the 1940 Act.
The following table sets forth certain information concerning compensation to be paid by the Company to its Directors and officers.
* Estimated amounts to be paid during the Company's first fiscal year.
As of the date of this Statement of Additional Information, the Company's officers and Directors, as a group, own less than 1% of each Fund's outstanding Shares.
The officers of the Company receive no compensation directly from the Company for performing the duties of their offices. Sunstone Financial Group, Inc. receives fees from each of the Funds for acting as Administrator and may receive fees from each of the Funds pursuant to the Distribution and Service Plan and the Administrative Services Plan described below. Messrs. Pavlick and Snyder are employees of, and are compensated by, the Administrator.
Investment advisory services are provided to the of the Fund by First National Bank of Omaha, Omaha, Nebraska, the Adviser, pursuant to the Investment Advisory Agreement dated as of December 20, 1994 and amended as of December 5, 1995 (the "Investment Advisory Agreement"). The Adviser is a wholly owned subsidiary of First National of Nebraska, Inc., a Nebraska corporation.
Under the Investment Advisory Agreement, the Adviser has agreed to provide investment advisory services as described in the Prospectus of the Fund. For the services provided and expenses assumed pursuant to the Investment Advisory Agreement, the Small Cap Value Fund pays the Adviser a fee equal to the lesser of (a) a fee computed daily and paid monthly, at an annual rate of eighty-five one-hundredths of one percent (.85%) of the average daily net assets of the Fund, or (b) such other fee as may be agreed upon from time to time in writing by the Company and the Adviser. The Adviser may periodically voluntarily reduce all or a portion of its advisory fee with respect to the Fund, which reduction would increase the net income of the Fund available for distribution as dividends.
Unless sooner terminated, the Investment Advisory Agreement will continue in effect until June 30, 1996, and from year to year thereafter, if, as to the Fund, such continuance is approved at least annually by the Company's Board of Directors or by vote of a majority of the outstanding Shares of the Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the Prospectus), and a majority of the Directors who are not parties to the Investment Advisory Agreement or interested persons (as defined in the 1940 Act) of any party to the Investment Advisory Agreement by votes cast in person at a meeting called for such purpose. The Investment Advisory Agreement is terminable as to the Fund at any time on 60 days written notice without penalty by the Directors, by vote of a majority of the outstanding Shares of the Fund, or by the Adviser. The Investment Advisory Agreement also terminates automatically in the event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the performance of the Investment Advisory Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith, or gross negligence on the part of the Adviser in the performance of its duties, or from reckless disregard by the Adviser of its duties and obligations thereunder.
The Adviser also serves as the Fund's custodian as more fully discussed under "Custodian" below.
Pursuant to the Investment Advisory Agreement, the Adviser determines, subject to the general supervision of the Board of Directors of the Company and in accordance with the Fund's investment objective and restrictions, which securities are to be purchased and sold by the Fund, and which brokers are to be eligible to execute the Fund's portfolio transactions. Purchases from underwriters of portfolio securities generally include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as market makers may include the spread between the bid and asked price. Transactions on stock exchanges involve the payment of negotiated brokerage commissions. Transactions in the over-the-counter market are generally principal transactions with dealers. With respect to the over-the-counter market, the Company, where possible, will deal directly with dealers who make a market in the securities involved except in those circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various brokers and dealers is determined by the Adviser in its best judgment and in a manner deemed fair and reasonable to Shareholders. The primary consideration is prompt execution of orders in an effective manner at the most favorable price. Subject to this consideration, brokers and dealers who provide supplemental investment research to the Adviser may receive orders for transactions on behalf of the Fund. Information so received is in addition to and not in lieu of services required to be performed by the Adviser and does not reduce the advisory fees payable to the Adviser by the Fund. Such information may be useful to the Adviser in serving the Fund and other clients and, conversely, supplemental information obtained by the placement of business of other clients may be useful to the Adviser in carrying out its obligations to the Fund. The Adviser may authorize the Fund to pay a commission in excess of the commission another broker-dealer would have charged if the Adviser determines in good faith that such commission is reasonable in relation to the value of the brokerage and research services provided by such broker-dealer, viewed either in terms of that particular transaction or the Adviser's overall responsibilities to the accounts it manages.
While the Adviser generally seeks competitive commissions, the Company may not necessarily pay the lowest commission available on each brokerage transaction, for reasons discussed above.
Except as otherwise disclosed to the Shareholders of the Fund and as permitted by applicable laws, rules and regulations, the Company will not, on behalf of the Fund, execute portfolio transactions through, acquire portfolio securities issued by, make savings deposits in, or enter into repurchase or reverse repurchase agreements with the Adviser, the Distributor, or their affiliates, and will not give preference to the Adviser's correspondents with respect to such transactions, securities, savings deposits, repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those for the other Funds of the Company, any other investment company or account managed by the Adviser. Any such other Fund, investment company or account may also invest in the as the Company. When a purchase or sale of the same security is made at substantially the same time on behalf of the Fund and another investment company or account, the transaction will be averaged as to price, and available investments will be allocated as to amount in a manner which the Adviser believes to be equitable to the Fund and such other investment company or account. In some instances, this investment procedure may adversely affect the price paid or received by the Fund or the size of the position obtained by the Fund. To the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased for the Fund with those to be sold or purchased for the other investment companies or accounts in order to obtain best execution. As provided by the Investment Advisory Agreement, in making investment recommendations for each of the Funds, the Adviser will not inquire or take into consideration whether an issuer of securities proposed for purchase or sale by the Company is a customer of the Adviser, its parent or its subsidiaries or affiliates and, in dealing with its customers, the Adviser, its parent, subsidiaries, and affiliates will not inquire or take into consideration whether securities of such customers are held by the Funds.
In 1971, the United States Supreme Court held in Investment Company Institute v. Camp that the Federal statutes commonly referred to as the Glass-Steagall Act prohibit a national bank from operating a mutual fund for the collective investment of managing agency accounts. Subsequently, the Board of Governors of the Federal Reserve System (the "Board") issued a regulation and interpretation to the effect that the Glass-Steagall Act and such decision: (a) forbid a bank holding company registered under the Federal Bank Holding Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from sponsoring, organizing, or controlling a registered, open-end investment company continuously engaged in the issuance of its shares, but (b) do not prohibit such a holding company or affiliate from acting as investment adviser, transfer agent, and custodian to such an investment company. In 1981, the United States Supreme Court held in Board of Governors of the Federal Reserve System v. Investment Company Institute that the Board did not exceed its authority under the Holding Company Act when it adopted its regulation and interpretation authorizing bank holding companies and their non-bank affiliates to act as investment advisers to registered closed-end investment companies. In the Board of Governors case, the Supreme Court also stated that if a national bank complied with the restrictions imposed by the Board in its regulation and interpretation authorizing bank holding companies and their non-bank affiliates to act as investment advisers to investment companies, a national bank performing investment advisory services for an investment company would not violate the Glass-Steagall Act.
The Adviser believes that it possesses the legal authority to perform the services for the Fund contemplated by the Prospectus, this Statement of Additional Information, the Investment Advisory Agreement, the Custodian Agreement and the Servicing Agreement without violation of applicable statutes and regulations. The Adviser has been advised by its counsel that counsel believes that such laws should not prevent the Adviser from providing the services required of it under the Investment Advisory Agreement, the Custodian Agreements, and the Servicing Agreement. Future changes in either Federal or state statutes and regulations relating to the permissible activities of banks or bank holding companies and the subsidiaries or affiliates of those entities, as well as further judicial or administrative decisions or interpretations of present and future statutes and regulations, could prevent or restrict the Adviser from continuing to perform such services for the Company. Depending upon the nature of any changes in the services which could be provided by the Adviser, the Board of Directors of the Company would review the Company's relationship with the Adviser and consider taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit or restrict the proposed activities of the Adviser and its affiliated and correspondent banks in connection with Customer purchases of Shares of the Fund, those banks might be required to alter materially or discontinue the services offered by them to Customers. It is not anticipated, however, that any change in the Company's method of operations would affect its net asset value per share or result in financial losses to any Customer.
Sunstone Financial Group, Inc. serves as administrator and fund accountant (the "Administrator") to the Fund pursuant to the Administration and Fund Accounting Agreement dated April 10, 1995 and amended December 5, 1995 (the "Administration Agreement"). The Administrator assists in supervising all operations of the Fund (other than those performed by the Adviser under the Investment Advisory Agreement, the Custodian Agreement and the Transfer Agency Agreement). The Administrator is a broker-dealer registered with the Commission, and is a member of the National Association of Securities Dealers, Inc. The Administrator provides administration, distribution and fund accounting services to other investment companies.
Under the Administration Agreement, the Administrator has agreed to provide office space, facilities, equipment and personnel, compile data for and prepare with respect to the Fund timely Notices to the Commission required pursuant to Rule 24f-2 under the Act and semi-annual reports on Form N-SAR; prepare and file all federal income and excise tax returns and state income tax returns (and such other required tax filings as may be agreed to by the parties) other than those required to be made by the Fund's custodian or transfer agent; prepare compliance filings relating to the registration of the securities of the Fund pursuant to state securities laws with the advice of Fund's counsel; perform securities valuations; determine the income and expense accruals of the Fund; calculate daily net asset values and income factors of the Funds; maintain all general ledger accounts and related subledgers; prepare financial statements for the Annual and Semi-Annual Reports required pursuant to Section 30(d) under the Act; review the Registration Statement for the
Form N-1A or any replacement therefor) and any amendments thereto, and proxy materials; prepare and monitor the Fund's expense accruals and cause all appropriate expenses to be paid from Fund assets on proper authorization from the Fund; assist in the acquisition of First Omaha Funds' fidelity bond required by the Act, monitor the amount of the bond and make the necessary Commission filings related thereto; check the Fund's compliance with the policies and limitations relating to portfolio investments as set forth in the Prospectus, Statement of Additional Information and Articles of Incorporation and monitor each Fund's status as a regulated investment company under Subchapter M of the Internal Revenue Code, as amended; maintain, and/or coordinate with the other service providers the maintenance of, the accounts, books and other documents required pursuant to Rule 31a-1(a) and (b) under the Act; and generally assist in the Fund's administrative operations.
The Administrator receives a fee from the Fund for its services as administrator and fund accountant and expenses assumed pursuant to the Administration Agreement, equal to the lesser of a fee calculated daily and paid periodically, at the annual rate of twenty one-hundredths of one percent (.20%) of the Fund's average daily net assets, subject to a minimum of $50,000, or such other fee as may be agreed upon in writing by the Company and the Administrator. The Administrator may periodically voluntarily reduce all or a portion of its fee with respect to the Fund in order to increase the net income of one or more of the Fund available for distribution as dividends.
Unless sooner terminated as provided therein, the Administration Agreement will continue in effect until April 10, 1999. The Administration Agreement thereafter shall be renewed automatically for successive one-year terms, unless earlier terminated. The Administration Agreement is terminable with respect to a particular Fund only upon mutual agreement of the parties to the Administration Agreement and, after the initial term, on not less than 90 days' notice by the Company's Board of Directors or by the Administrator.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or any loss suffered by the Fund in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith, or gross negligence in the performance of its duties, or from the reckless disregard by the Administrator of its obligations and duties thereunder.
If total expenses borne by the Fund in any fiscal year exceed expense limitations imposed by applicable state securities regulations, the Adviser will reimburse the Fund by the amount of such excess in proportion to its respective fees. As of the date of this Statement of Additional Information, the most restrictive expense limitation applicable to the Fund limits the Fund's aggregate annual expenses, including management and advisory fees but excluding interest, taxes, brokerage commissions, and certain other expenses, to 2 1/2% of the first $30 million of the Fund's average net assets, 2% of the next $70 million of the Fund's average net assets, and 1-1/2% of the Fund's remaining average net assets. Any expense reimbursements will be estimated daily and reconciled and paid on a monthly basis. Fees imposed upon customer accounts by the Adviser or banks for cash management services are not included within Fund expenses for purposes of any such expense limitation.
Sunstone Financial Group, Inc. serves as agent for the Fund in the distribution of its Shares pursuant to a Distribution Agreement dated April 10, 1995 and amended December 5, 1995 (the "Distribution Agreement") . Unless otherwise terminated, the Distribution Agreement remains in effect from year to year for successive annual periods ending on April 10 if approved at least annually (a) by the Company's Board of Directors or by the vote of a majority of the outstanding shares of the Company, and (b) by the vote of a majority of the Directors of the Company who are not parties to the Distribution Agreement or interested persons (as defined in the 1940 Act) of any party to the Distribution Agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement may be terminated in the event of any assignment, as defined in the 1940 Act.
The Distributor solicits orders for the sale of Shares, advertises and pays the costs of advertising, office space and the personnel involved in such activities. The Distributor receives no compensation under the Distribution Agreement with the Company, but may receive compensation under the Distribution and Service Plan described below.
As described in the Prospectus, the Company has adopted a Distribution and Service Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act under which the Fund is authorized to make payments to banks, including the Adviser, other institutions and broker-dealers, (with all of the foregoing organizations being referred to as "Participating Organizations") for providing distribution or shareholder service assistance. Payments to such Participating Organizations may be made pursuant to agreements entered into upon the recommendation of the Distributor. The Plan authorizes the Fund to make payments in an amount not in excess, on an annual basis, of 0.25% of the average daily net assets of the Fund. As required by Rule 12b-1, the Plan was approved by the sole shareholder of the Fund and by the Board of Directors, including a majority of the Directors who are not interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Plan (the "Independent Directors"). The Plan may be terminated as to the Fund by vote of a majority of the Independent Directors, or by vote of majority of the outstanding Shares of the Fund. Any change in the Plan that would materially increase the distribution cost to the Fund requires Shareholder approval. The Directors review quarterly a written report of such costs and the purposes for which such costs have been incurred. The Plan may be amended by vote of the Directors including a majority of the Independent Directors, cast in person at a meeting called for that purpose. For so long as the Plan is in effect, selection and nomination of those Directors who are not interested persons of the Company shall be committed to the discretion of such disinterested persons. All agreements with any person relating to the implementation of the Plan may be terminated at any time on 60 days' written notice without payment of any penalty, by vote of a majority of the Independent Directors or by a vote of the majority of the outstanding Shares of any of the Funds. The Plan will continue in effect for successive one-year periods, provided that each such continuance is specifically approved (a) by the vote of a majority of the
Independent Directors, and (b) by a vote of a majority of the entire Board of Directors cast in person at a meeting called for that purpose. The Board of Directors has a duty to request and evaluate such information as may be reasonably necessary for them to make an informed determination of whether the Plan should be implemented or continued. In addition, the Directors in approving the Plan must determine that there is a reasonable likelihood that the Plan will benefit the Fund and its Shareholders.
The Board of Directors of the Company believes that the Plan is in the best interests of the Fund since it encourages Fund growth. As the Fund grows in size, certain expenses, and therefore total expenses, per Share, may be reduced and overall performance per Share may be improved.
As of the date of this Statement of Additional Information, the Company, on behalf of the Fund, does not have a Rule 12b-l Agreement and does not pay any fees under the Plan.
As described in the Prospectus, the Company has also adopted an Administrative Services Plan (the "Services Plan") under which the Fund is authorized to pay certain financial institutions, including the Adviser, its correspondent and affiliated banks, and the Distributor (a "Service Organization"), to provide certain ministerial, record keeping, and administrative support services to their customers who own of record or beneficially Shares in the Fund. Payments to such service organizations are made pursuant to Servicing Agreements between the Company and the Service Organization. The Services Plan authorizes the Fund to make payments to Service Organizations in an amount, on an annual basis, of up to 0.25% of the average daily net assets of the Fund. The Services Plan has been approved by the Board of Directors of the Company, including a majority of the Directors who are not interested persons of the Company (as defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of the Services Plan or in any Servicing Agreements thereunder (the "Disinterested Directors"). The Services Plan may be terminated as to the Fund by a vote of a majority of the Disinterested Directors. The Directors review quarterly a written report of the amounts expended pursuant to the Services Plan and the purposes for which such expenditures were made. The Services Plan may be amended by a vote of the Directors, provided that any material amendments also require the vote of a majority of the Disinterested Directors. For so long as the Services Plan is in effect, selection and nomination of those Disinterested Directors shall be committed to the discretion of the Company's Disinterested Directors. All Servicing Agreements may be terminated at any time without the payment of any penalty by a vote of a majority of the Disinterested Directors. The Services Plan will continue in effect for successive one-year periods, provided that each such continuance is specifically approved by a majority of the Board of Directors, including a majority of the Disinterested Directors.
As authorized by the Services Plan, the Company has entered into a Servicing Agreement with the Adviser pursuant to which the Adviser has agreed to provide certain administrative support services in connection with Shares of the Fund owned of record or beneficially by its customers. Such administrative support services may include, but are not limited to, (a) processing dividend and distribution payments from the Fund on behalf of customers; (b) providing periodic statements to its customers showing their positions in the Shares; (c) arranging for bank wires; (d) responding to routine customer inquiries relating to services performed by the Adviser; (e) providing sub-accounting with respect to the Shares beneficially owned by the Adviser's customers or the information necessary for sub-accounting; (f) if required by law, forwarding shareholder communications from the Fund (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to its customers; (g) aggregating and processing purchase, exchange, and redemption requests from customers and placing net purchase, exchange, and redemption orders for customers; and (h) providing customers with a service that invests the assets of their account in the Shares pursuant to specific or preauthorized instructions. In consideration of such services, the Company, on behalf of the Fund, may pay the Adviser a monthly fee, computed at the annual rate of .25% of the average aggregate net asset value of Shares of the Fund held during the period by customers for whom the Adviser has provided services under the Servicing Agreement. However, the Servicing Agreement with the Adviser provides that no payments may be made under the Services Plan until such time as the Board of Directors of the Company authorizes the commencement of such payments.
In addition, the Company, on behalf of the Fund, may enter into, from time to time, other Servicing Agreements with other service organizations pursuant to which such Service Organizations will provide similar services as those discussed above.
First National Bank of Omaha, One First National Center, Omaha, Nebraska 68102, in addition to serving as the investment adviser and transfer agent to the Fund, also serves as custodian (the "Custodian") to the Fund pursuant to the Custodian Agreement dated December 20, 1994 and amended as of December 5, 1995 (the "Custodian Agreement"). The Custodian's responsibilities include safeguarding and controlling the Fund's cash and securities, handling the receipt and delivery of securities, and collecting interest on the Fund's investments. In consideration of such services, the Fund pays the Custodian a fee, computed daily and paid monthly, at the annual rate of .03% of the Fund's average daily net assets.
Unless sooner terminated, the Custodian Agreement will continue in effect until terminated by either party upon 60 days advance written notice to the other party. Notwithstanding the foregoing, the Custodian Agreement, with respect to the Fund, will be approved at least annually by the Company's Board of Directors or by vote of a majority of the outstanding Shares of the Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the Prospectus), and a majority of the Directors who are not parties to the Custodian Agreement or interested persons (as defined in the 1940 Act) of any party to the Custodian Agreement by votes cast in person at a meeting called for such purpose.
In the opinion of the staff of the Commission, since the custodian is serving as both the investment adviser and custodian of the Fund, the Fund and the Custodian are subject to the requirements of Rule 17f-2 under the 1940 Act, and therefore the Fund and the Custodian will comply with the requirements of such rule.
First National Bank of Omaha serves as Transfer Agent and dividend disbursing agent (the "Transfer Agent") for the Company pursuant to the Transfer Agency Agreement dated December 20, 1994 and amended as of December 5, 1995. Pursuant to such Agreement, the Transfer Agent, among other things, performs the following services in connection with each Fund's shareholders of record: maintenance of shareholder records for each of the Company's shareholders of record; processing shareholder purchase and redemption orders; processing transfers and exchanges of shares of the Company on the shareholder files and records; processing dividend payments and reinvestments; and assistance in the mailing of shareholder reports and proxy solicitation materials. For such services the Transfer Agent receives a fee based on the number of shareholders of record. Pursuant to authority in the Transfer Agency Agreement the Transfer Agent has appointed as sub-transfer agent DST Systems, Inc., 210 West 10th Street, Kansas City, Missouri 64105.
KPMG Peat Marwick LLP, Two Central Park Plaza, Suite 1501, Omaha, Nebraska 68102 serve as independent public accountants to the Fund.
Cline, Williams, Wright, Johnson & Oldfather, 1900 FirsTier Bank Building, Lincoln, Nebraska 68508, is counsel to the Company and will pass upon the legality of the Shares offered hereby.
The Company is authorized to issue a total of 1,000,000,000 Shares of common stock in series with a par value of $.00001 per share. Five hundred million of these Shares have been authorized by the Board of Directors to be issued in series designated for the existing five Funds. The Board of Directors may authorize additional Shares in series, or may divide the Shares of any existing or new series into two or more subseries or classes, all cwithout shareholder approval.
All Shares, when issued, will be fully paid and non-assessable and will be redeemable and freely transferable. All Shares have equal voting rights. They can be issued as full or fractional Shares. A fractional Share has pro rata the same kind of rights and privileges as a full Share. The Shares possess no preemptive or conversion rights.
Each Share of a Fund has one vote (with proportionate voting for fractional shares) irrespective of the relative net asset value of the Shares. On some issues, such as the election of directors, all Shares of the Fund vote together as one series. Cumulative voting is authorized. This means that in a vote for the election of directors, Shareholders may multiply the number of Shares they own by the number of directorships being filled and then allocate such votes to one or more directors. On issues affecting only a particular Fund, the Shares of the affected Fund vote as a separate series. An example of such an issue would be a fundamental investment restriction pertaining to only one Fund.
It is possible that the Fund will not hold annual or periodically scheduled regular meetings of Shareholders. Annual meetings of Shareholders will not be held unless called by the Shareholders pursuant to the Nebraska Business Corporation Act or unless required by the Investment Company Act of 1940 and the rules and regulations promulgated thereunder. Special meetings of the Shareholders may be held, however, at any time and for any purpose, if called by (a) the Chairman of the Board, the President and two or more directors, (b) by one or more Shareholders holding ten percent or more of the Shares entitled to vote on matters presented to the meeting, or (c) if the annual meeting is not held within any thirteen month period, the local district court, upon application of any Shareholder, may summarily order that such meeting be held. In addition, the 1940 Act requires a Shareholder vote for all amendments to fundamental investment policies, investment advisory contracts and amendments thereto.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted to the holders of the outstanding voting securities of an investment company such as the Company shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each Fund affected by the matter. For purposes of determining whether the approval of a majority of the outstanding shares of a Fund will be required in connection with a matter, a Fund will be deemed to be affected by a matter unless it is clear that the interests of each Fund in the matter are identical, or that the matter does not affect any interest of the Fund. Under Rule 18f-2, the approval of an investment advisory agreement or any change in investment policy would be effectively acted upon with respect to a Fund only if approved by a majority of the outstanding shares of such Fund. However, Rule 18f-2 also provides that the ratification of independent public accountants, the approval of principal underwriting contracts, and the election of Directors may be effectively acted upon by Shareholders of the Company voting without regard to series.
As of the date of this Statement of Additional Information, Miriam M. Allison, President of the Administrator, owned 100% of the outstanding shares of the Small Cap Value Fund. It is contemplated that the public offering will reduce Ms. Allison's holdings to less than 5% of the total Shares outstanding. Thereafter, the Adviser will possess, in a fiduciary capacity on behalf of its underlying accounts, voting or investment power with respect to a substantial majority of the outstanding Shares of the Fund and therefore will be presumed to control the Fund within the meaning of the 1940 Act.
Vote of a Majority of the Outstanding Shares
As used in the Prospectus and this Statement of Additional Information, a "vote of a majority of the outstanding Shares" of the Fund means the affirmative vote, at a meeting of Shareholders duly called, of the lesser of (a) 67% or more of the votes of Shareholders of the Fund present at a meeting at which the holders of more than 50% of the votes attributable to Shareholders of record of the Fund are represented in person or by proxy, or (b) the holders of more than 50% of the outstanding Shares of the Fund.
Although the Fund expects to qualify as a "regulated investment company" and to be relieved of all or substantially all federal income taxes, depending upon the extent of its activities in states and localities in which its offices are maintained, in which its agents or independent contractors are located, or in which it is otherwise deemed to be conducting business, the Fund may be subject to the tax laws of such states or localities. In addition, if for any taxable year the Fund does not qualify for the special tax treatment afforded regulated investment companies, all of its taxable income will be subject to federal tax at regular corporate rates (without any deduction for distributions to its Shareholders). In such event, dividend distributions would be taxable to Shareholders to the extent of earnings and profits, and would be eligible for the dividends received deduction for corporations.
Foreign taxes may be imposed on the Fund by foreign countries with respect to its income from foreign securities. Since less than 50% in value of the Fund's total assets at the end of its fiscal year are expected to be invested in stocks or securities of foreign corporations, the Fund will not be entitled under the Code to pass through to its Shareholders their pro rata share of the foreign taxes paid by the Fund. These taxes will be taken as a deduction by the Fund.
The Fund will be required in certain cases to withhold and remit to the United States Treasury 31% of taxable dividends paid to any Shareholder who has provided either an incorrect tax identification number or no number at all, or who is subject to withholding by the Internal Revenue Service for failure properly to include on their return payments of interest or dividends.
Information set forth in the Prospectus and this Statement of Additional Information which relates to federal taxation is only a summary of some of the important federal tax considerations generally affecting purchasers of Shares of the Fund. No attempt has been made to present a detailed explanation of the federal income tax treatment of the Fund or its Shareholders and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential purchasers of Shares of the Fund are urged to consult their tax advisers with specific reference to their own tax situation. In addition, the tax discussion in the Prospectus and this Statement of Additional Information is based on tax laws and regulations which are in effect on the date of the Prospectus and this Statement of Additional Information; such laws and regulations may be changed by legislative or administrative action.
Yield of the Small Cap Value Fund
As summarized in the Prospectus under the heading "PERFORMANCE INFORMATION," yield of the Small Cap Value Fund will be computed by annualizing net investment income per share for a recent 30-day period and dividing that amount by such Share's net asset value per share (reduced by any undeclared earned income expected to be paid shortly as a dividend) on the last trading day of that period. Net investment income will reflect amortization of any market value, premium or discount of fixed income securities (except for obligations backed by mortgages or other assets) and may include recognition of a pro rata portion of the stated dividend rate of dividend paying portfolio securities. The yield of the Fund will vary from time to time depending upon market conditions, the composition of the Fund's portfolio and operating expenses of the Company allocated to the Fund. These factors and possible differences in the methods used in calculating yield, should be considered when comparing the Fund's yield to yields published for other investment companies and other investment vehicles. Yield should also be considered relative to changes in the value of the Fund's shares and to the relative risks associated with the investment objective and policies of the Fund.
As summarized in the Prospectus under the heading "PERFORMANCE INFORMATION," average annual total return is a measure of the change in value of an investment in the Fund over the period covered, which assumes any dividends or capital gains distributions are reinvested in the Fund immediately rather than paid to the investor in cash. Average annual total return will be calculated by: (a) adding to the total number of Shares purchased by a hypothetical $10,000 investment in the Fund all additional Shares which would have been purchased if all dividends and distributions paid or distributed during the period had been immediately reinvested; (b) calculating the value of the hypothetical initial investment of $10,000 as of the end of the period by multiplying the total number of Shares owned at the end of the period by the net asset value per share on the last trading day of the period; (c) assuming redemption at the end of the period; and (d) dividing this account value for the hypothetical investor by the initial $10,000 investment. Aggregate total return is a measure of change in value of an investment in the Fund over the relevant period and is similarly to average annual total return except that the result is not annualized.
The Small Cap Value Fund may from time to time advertise current distribution rates which are calculated in accordance with the method discussed in the Funds' Prospectus.
Investors may judge the performance of the Fund by comparing them to the performance of other mutual funds with comparable investment objectives and through various mutual fund or market indices such as those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation and to data prepared by Lipper Analytical Services, Inc., a widely recognized independent service which monitors the performance of mutual funds. Comparisons may also be made to indices or data published in Money Magazine, Forbes, Barron's, The Wall Street Journal, Morningstar, Inc., Ibbotson Associates, CDA/Wiesenberger, The New York Times, Business Week, U.S.A. Today and local periodicals. In addition to performance information, general information about the Fund that appears in a publication such as those mentioned above may be included in advertisements, in sales literature and in reports to Shareholders.
From time to time, the Fund may include general comparative information, such as statistical data regarding inflation, securities indices or the features or performance of alternative investments, in advertisements, sales literature and reports to Shareholders. The Fund may also include calculations, such as hypothetical compounding examples, which describe hypothetical investment results in such communications. Such performance examples will be based on an express set of assumptions and are not indicative of performance of the Fund.
Current yields or total return will fluctuate from time to time and are not necessarily representative of future results. Accordingly, the Fund's yield or total return may not provide for comparison with bank deposits or other investments that pay a fixed return for a stated period of time. Yield and total return are functions of the Fund's quality, composition and maturity, as well as expenses allocated to the Fund. Fees imposed upon Customer accounts by the Adviser or its affiliated or correspondent banks for cash management services will reduce the Fund's effective yield and total return to Customers.
The Prospectus and this Statement of Additional Information omit certain of the information contained in the Registration Statement filed with the Commission. Copies of such information may be obtained from the commission upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an offering of the securities herein described in any state in which such offering may not lawfully be made. No salesman, dealer, or other person is authorized to give any information or make any representation other than those contained in the Prospectus and this Statement of Additional Information.
Commercial Paper Ratings. Commercial paper ratings of Standard & Poor's Corporation ("S&P") are current assessments of the likelihood of timely payment of debt considered short-term in the relevant market. Commercial paper rated A-1 by S&P indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted A-l+. Commercial paper rated A-2 by S&P indicates that capacity for timely payment on issues is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. Commercial paper rated A-3 by S&P indicates adequate capacity for timely payment. Such paper is, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. Commercial paper rated B by S&P is regarded as having only speculative capacity for timely payment. Commercial paper rated C by S&P is regarded as short-term obligations with a doubtful capacity for payment. Commercial paper rated D by S&P 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.
Moody's Investors Service, Inc.'s ("Moody's") commercial paper rating are opinions of the ability of issuers to repay punctually senior debt obligations which have an original maturity not exceeding one year. The rating Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers rated Prime-1 (or supporting institutions) are considered to have a superior capacity for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variations. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. The effects of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories.
Commercial paper rated F-l+ by Fitch Investors Service ("Fitch") is regarded as having the strongest degree of assurance for timely payments. Commercial paper rated F-1 by Fitch is regarded as having an assurance of timely payment only slightly less than the strongest rating, i.e., F-l+. Commercial paper rated F-2 by Fitch is regarded as having a satisfactory degree of assurance of timely payment, but the margin of safety is not as great as for issues assigned F-l+ or F-1 ratings. Commercial paper rated F-3 by Fitch is regarded as having characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse changes could cause these securities to be rated below investment grade. Commercial paper rated F-S by Fitch is regarded as having characteristics suggesting a minimal degree of assurance for timely payment and is vulnerable to near term adverse changes in financial and economic conditions. Commercial paper rated D by Fitch is in actual or imminent payment default.
The description of the three highest short-term debt ratings by Duff & Phelps, Inc. ("Duff") (Duff incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist investors in recognizing quality differences within the highest rating category) are as follows. Duff 1+ is regarded as having the highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding, and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1 is regarded as having a very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Duff 1- is regarded as having a high certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are minor. Duff 2 is regarded as having a good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. Duff 3 is regarded as having a satisfactory liquidity and other protection factors qualify issue as to investment grade. Risk factors are larger and subject to more variation. Nevertheless, timely payment is expected. Duff 4 is considered as having speculative investment characteristics. Liquidity is not sufficient to insure against disruption in debt service. Operating factors and market access may be subject to a high degree of variation. Duff 5 indicates that the issuer has failed to meet scheduled principal and/or interest payments.
Commercial paper rated A1 by IBCA Limited and its affiliate, IBCA Inc. (collectively "IBCA") is regarded by IBCA as obligations supported by the highest capacity for timely repayment. Where issues possess a particularly strong credit feature, a rating of Al+ is assigned. Obligations rated A2 are supported by a good capacity for timely repayment. Obligations rated A3 are supported by a satisfactory capacity for timely repayment. Obligations rated B are those for which there is an uncertainty as to the capacity to ensure timely repayment. Obligations rated C are those for which there is a high risk of default or which are currently in default.
The following summarizes the description of the three highest short-term ratings of Thomson BankWatch, Inc. ("Thomson"). TBW-1 is the highest category and indicates a very high likelihood that principal and interest will be paid on a timely basis. TBW-2 is the second highest category indicating that while the degree of safety regarding timely repayment of principal and interest is strong, the relative degree of safety is not as high as for issues rated "TBW-1." TBW-3 is the lowest investment grade category and indicates that while more susceptible to adverse developments (both internal and external) than obligations with higher ratings, capacity to service principal and interest in a timely fashion is considered adequate. TBW-4 is the lowest rating category and is regarded as non-investment grade and therefore speculative.
The plus (+) sign is used after a rating symbol to designate the relative position of an issuer within the rating category.
Corporate Debt Ratings. A S&P corporate debt rating is a current assessment of the credit-worthiness of an obligor with respect to a specific obligation. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. Debt rated AA has a very strong capacity to pay interest and to repay principal and differs from the highest rated issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to 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.
The following summarizes the four highest ratings used by Moody's for corporate debt. Bonds that 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 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. Bonds that 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. Bonds that 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 some time in the future. Bonds that 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.
Moody's applies numerical modifiers (1, 2, and 3) with respect to bonds rated Aa through Baa. The modifier 1 indicates that the bond being rated 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 bond ranks in the lower end of its generic rating category.
The following summarizes the four highest long-term debt ratings by Duff. Debt rated AAA has the highest credit quality. The risk factors are negligible being only slightly more than for risk-free U.S. Treasury debt. Debt rated AA has a high credit quality and protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. Debt rated A has protection factors that are average but adequate. However, risk factors are more variable and greater in periods of economic stress. Debt rated BBB has below average protection factors but is still considered sufficient for prudent investment. However, there is considerable variability in risk during economic cycles.
To provide more detailed indications of credit quality, the ratings from AA to BBB may be modified by the addition of a plus or minus sign to show relative standing within this major rating category.
The following summarizes the four highest long-term debt ratings by Fitch (except for AAA ratings, plus or minus signs are used with a rating symbol to indicate the relative position of the credit within the rating category). Bonds rated AAA are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. Bonds rated AA are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as 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 issues is generally rated "F-1+". Bonds rated as A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore, impair timely payment. The likelihood that the ratings for these bonds will fall below investment grade is higher than for bonds with higher ratings.
The following summarizes IBCA's four highest long-term debt ratings. Obligations rated AAA are those for which there is the lowest expectation of investment risk. Capacity for timely repayment of principal and interest is substantial, such that adverse changes in business, economic or financial conditions are unlikely to increase investment risk significantly. Obligations rated AA are those for which there is a very low expectation of investment risk. Capacity for timely repayment of principal and interest is substantial. Adverse changes in business, economic, or financial conditions may increase investment risk albeit not very significantly. Obligations rated A are those for which there is a low expectation of investment risk. Capacity for timely repayment of principal and interest is strong, although adverse changes in business, economic or financial conditions may lead to increased investment risk. Obligations rated BBB are those for which there is currently a low expectation of investment risk. Capacity for timely repayment of principal and interest is adequate, although adverse changes in business, economic, or financial conditions are more likely to lead to increased investment risk than for obligations in other categories.
The following summarizes Thomson's description of its four highest long-term debt ratings (Thomson may include a plus (+) or minus (-) designation to indicate where within the respective category the issue is placed). AAA is the highest category and indicates that the ability to repay principal and interest on a timely basis is very high. AA is the second highest category and indicates a superior ability to repay principal and interest on a timely basis with limited incremental risk versus issues rated in the highest category. A is the third highest category and indicates the ability to repay principal and interest is strong. Issues rated "A" could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings. BBB is the lowest investment grade category and indicates an acceptable capacity to repay principal and interest. Issues rated BBB are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
The following summarizes the three highest ratings used by Moody's for state and municipal short-term obligations. Obligations bearing MIG-1 or VMIG-1 designations are of the best quality, enjoying strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. Obligations rated MIG-2 or VMIG-2 denote high quality with ample margins of protection although not so large as in the preceding rating group. Obligations bearing MIG-3 or VMIG-3 denote favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established.
S&P SP-1, SP-2, and SP-3 municipal note ratings (the three highest ratings assigned) are described 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.
"SP-3": Speculative capacity to pay principal and interest.
The following summarizes the four highest ratings used by Moody's for state and municipal bonds:
"Aaa": Bonds 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 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 which 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 which 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.
The following summarizes the four highest ratings used by S&P for state and municipal bonds:
"AAA": Debt which has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong.
"AA": Debt which has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree.
"A": Debt which 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 than debt in higher rated categories.
"BBB": Debt which has 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.
Definitions of Certain Money Market Instruments
Commercial paper consists of unsecured promissory notes issued by corporations. Issues of commercial paper normally have maturities of less than nine months and fixed rates of return.
Certificates of Deposit are negotiable certificates issued against funds deposited in a commercial bank or a savings and loan association for a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations are obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Government. These obligations may include Treasury bills, notes and bonds, and issues of agencies and instrumentalities of the U.S. Government, provided such obligations are guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations of the U.S. Government include Treasury bills, certificates of indebtedness, notes and bonds, and issues of agencies and instrumentalities of the U.S. Government, such as the Government National Mortgage Association, the Tennessee Valley Authority, the Farmers Home Administration, the Federal Home Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal Land Banks, the Federal Housing Administration, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Student Loan Marketing Association. Some of these obligations, such as those of the Government National Mortgage Association, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Student Loan Marketing Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Federal Farm Credit Banks, are supported only by the credit of the instrumentality. No assurance can be given that the U. S. Government would provide financial support to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law.
First Omaha U.S. Government Obligations Fund
First Omaha Short/Intermediate Fixed Income Fund
First Omaha Fixed Income Fund
Each an Investment Portfolio of
This Statement of Additional Information is not a Prospectus, but should be read in conjunction with the Prospectus (the "Prospectus") of First Omaha U.S. Government Obligations Fund (the "Money Market Fund"), First Omaha Equity Fund (the "Equity Fund"), First Omaha Short/Intermediate Fixed Income Fund (the "Short/Intermediate Fund"), and First Omaha Fixed Income Fund (the "Fixed Income Fund") (the Money Market Fund, the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund hereinafter collectively referred to as the "Funds" and singly, a "Fund") dated as of the date hereof. The Funds are each separate investment portfolios of First Omaha Funds, Inc. (the "Company"). This Statement of Additional Information is incorporated in its entirety into the Prospectus. Copies of the Prospectus may be obtained by writing the Company, P.O. Box 419022, Kansas City, Missouri, 64141-6022, or by telephoning toll free (800) OMAHA-03.
First Omaha Funds, Inc. (the "Company") is an open-end management investment company which currently offers four diversified investment portfolios: First Omaha U.S. Government Obligations Fund (the "Money Market Fund"), First Omaha Equity Fund (the "Equity Fund"), First Omaha Short/Intermediate Fixed Income Fund (the "Short/Intermediate Fund"), and First Omaha Fixed Income Fund (the "Fixed Income Fund") (the Money Market Fund, the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund hereinafter collectively referred to as the "Funds" and singularly referred to as "Fund").
Much of the information contained in this Statement of Additional Information expands upon subjects discussed in the Prospectus of the Funds. Capitalized terms not defined herein are defined in the Prospectus. No investment in Shares of a Fund should be made without first reading such Fund's Prospectus.
Additional Information on Portfolio Instruments
The following policies supplement the investment objective and policies of each Fund as set forth in the Prospectus for such Fund.
Bank Obligations. Each of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund may invest in bank obligations such as bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Bankers' acceptances invested in by the Funds will be those guaranteed by domestic and foreign banks having, at the time of investment, capital, surplus, and undivided profits in excess of $100,000,000 (as of the date of their most recently published financial statements).
Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or a savings and loan association for a definite period of time and earning a specified return. Certificates of deposit and demand and time deposits will be those of domestic and foreign banks and savings and loan associations, if (a) at the time of investment the depository institution has capital, surplus, and undivided profits in excess of $100,000,000 (as of the date of its most recently published financial principal amount of the instrument is insured in full by the Federal Deposit Insurance Corporation.
The Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund may also invest in Eurodollar Certificates of Deposit, which are U.S. dollar denominated certificates of deposit issued by offices of foreign and domestic banks located outside the United States; Yankee Certificates of Deposit, which are certificates of deposit issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the United States; Eurodollar Time Deposits ("ETDs"), which are U.S. dollar denominated deposits in a foreign branch of a U.S. bank or a foreign bank; and Canadian Time Deposits, which are basically the same as ETDs except they are issued by Canadian offices of major Canadian banks.
Commercial Paper. Commercial paper consists of unsecured promissory notes issued by corporations. Except as noted below with respect to variable amount master demand notes, issues of commercial paper normally have maturities of less than nine months and fixed rates of return.
The Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund may invest in commercial paper which need not be rated by any nationally recognized rating agency or if rated, may be rated in any rating category. In general, investment in lowerrated instruments is more risky than investment in instruments in higher-rated categories. The Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund may also invest in Canadian commercial paper, which is commercial paper issued by a Canadian corporation or a Canadian counterpart of a U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial paper of a foreign issuer.
Variable Amount Master Demand Notes. Variable amount master demand notes, in which the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund may invest, are unsecured demand notes that permit the indebtedness thereunder to vary and provide for periodic adjustments in the interest rate according to the terms of the instrument. Because master demand notes are direct lending arrangements between a Fund and the issuer, they are not normally traded. Although there is no secondary market in the notes, a Fund may demand payment of principal and accrued interest at any time. The Adviser will consider the earning power, cash flow, and other liquidity ratios of the issuers of such notes and will continuously monitor their financial status and ability to meet payment on demand. In determining average weighted portfolio maturity, a variable amount master demand note will be deemed to have a maturity equal to the longer of the period of time remaining until the next interest rate adjustment or the period of time remaining until the principal amount can be recovered from the issuer through demand. Neither Fund will invest more than 5% of its assets in such securities.
Foreign Investment. Investments in securities issued by foreign branches of U.S. banks, foreign banks, or other foreign issuers, including ADRs and securities purchased on foreign securities exchanges, may subject the Funds to investment risks that differ in some respects from those related to investment in obligations of U.S. domestic issuers or in U.S. securities markets. Such risks include future adverse political and economic developments, possible seizure, nationalization, or expropriation of foreign investments, less stringent disclosure requirements, the possible establishment of exchange controls or taxation at the source, or the adoption of other foreign governmental restrictions. The Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund will acquire such securities only when the Adviser believes the risks associated with such investments are minimal.
U.S. Government Obligations. Each of the Funds may invest in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, including bills, notes and bonds issued by the U.S. Treasury. The Money Market Fund may also invest in "stripped" U.S. Treasury obligations such as Treasury Receipts issued by the U.S. Treasury representing either future interest or principal payments. Stripped securities are issued at a discount to their "face value" and may exhibit greater price volatility than ordinary debt securities because of the manner in which their principal and interest are returned to investors.
Obligations of certain agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Government, such as those of the Government National Mortgage Association and the Export-Import Bank of the United States; others are supported by the right of the issuer to borrow from the Treasury; others are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; and still others are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored agencies or instrumentalities if it is not obligated to do so by law.
When-Issued Securities. As discussed in the Prospectus of the Funds, each such Fund may purchase securities on a "when-issued" basis (i.e., for delivery beyond the normal settlement date at a stated price and yield). When a Fund agrees to purchase securities on a "when-issued" basis, the Custodian will set aside cash or liquid portfolio securities equal to the amount of the commitment in a separate account. Normally, the Custodian will set aside portfolio securities to satisfy the purchase commitment, and in such a case, such Fund may be required subsequently to place additional assets in the separate account in order to assure that the value of the account remains equal to the amount of a Fund's commitment. It may be expected that a Fund's net assets will fluctuate to a greater degree when it sets aside portfolio securities to cover such purchase commitments than when it sets aside cash. In addition, because a Fund will set aside cash or liquid portfolio securities to satisfy its purchase commitments in the manner described above, a Fund's liquidity and the ability of the Adviser to manage it might be affected in the event its commitments to purchase "when-issued" securities ever exceeded 25% of the value of its assets.
When a Fund engages in "when-issued" transactions, it relies on the seller to consummate the trade. Failure of the seller to do so may result in a Fund incurring a loss or missing the opportunity to obtain a price considered to be advantageous. Each of the Funds will engage in "when-issued" delivery transactions only for the purpose of acquiring portfolio securities consistent with the Fund's investment objectives and policies and not for investment leverage.
Mortgage-Related Securities. The Short/Intermediate Fund and the Fixed Income Fund may, consistent with their respective investment objective and policies, invest in mortgage-related securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities.
Mortgage-related securities, for purposes of such Funds' Prospectus and this Statement of Additional Information, represent pools of mortgage loans assembled for sale to investors by various governmental agencies such as the Government National Mortgage Association and government-related organizations such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, as well as by non-governmental issuers such as commercial banks, savings and loan institutions, mortgage bankers and private mortgage insurance companies. Although certain mortgage-related 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 a Fund purchases a mortgage-related 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-related 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, thereby shortening the average life of the security and shortening the period of time over which income at the higher rate is received. Conversely, when interest rates are rising, the rate of prepayment tends to decrease, thereby lengthening the average life of the security and lengthening the period of time over which income at the lower rate is received. For these and other reasons, a mortgage-related security's average maturity may be shortened or lengthened as a result of interest rate fluctuations and, therefore, it is not possible to predict accurately the security's return to the Short/Intermediate Fund and the Fixed Income Fund. In addition, regular payments received in respect of mortgage-related securities include both interest and principal. No assurance can be given as to the return the Funds will receive when these amounts are reinvested.
The Short/Intermediate Fund and the Fixed Income Fund may also invest in mortgage-related securities which are collateralized mortgage obligations structured on pools of mortgage pass-through certificates or mortgage loans. Mortgage-related securities will be purchased only if rated in the four highest bond rating categories assigned by one or more appropriate NRSROs, or, if unrated, which the Adviser deems to present attractive opportunities and are of comparable quality.
There are a number of important differences among the agencies and instrumentalities of the U.S. Government that issue mortgage-related securities and among the securities that they issue. Mortgage-related securities issued by the Government National Mortgage Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed as to the timely payment of principal and interest by GNMA and such guarantee is backed by the full faith and credit of the U.S. Government. GNMA is a wholly-owned U.S. Government corporation within the Department of Housing and Urban Development. GNMA certificates also are supported by the authority of GNMA to borrow funds from the U.S. Treasury to make payments under its guarantee. Mortgage-related securities issued by the Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes") which are solely the obligations of the FNMA and are not backed by or entitled to the full faith and credit of the U.S. Government. The FNMA is a government-sponsored organization owned entirely by private stockholders. Fannie Maes are guaranteed as to timely payment of the principal and interest by FNMA. Mortgage-related securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs" or "PCS"). The FHLMC is a corporate instrumentality of the U.S. Government, created pursuant to an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie Macs are not guaranteed by the U.S. Government or by any Federal Home Loan Banks and do not constitute a debt or obligation of the U.S. Government or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by the FHLMC. The FHLMC guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When the FHLMC does not guarantee timely payment of principal, FHLMC 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.
Other Asset-Backed Securities. The Fixed Income Fund and the Short/Intermediate Fund may also invest in interests in pools of receivables, such as motor vehicle installment purchase obligations (known as Certificates of Automobile Receivables or CARs) and credit card receivables (known as Certificates of Amortizing Revolving Debts or CARDs). Such securities are generally issued as pass-through certificates, which represent undivided fractional ownership interests in the underlying pools of assets. Such securities may also be debt instruments which are also known as collateralized obligations and are generally issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt.
Such securities are not issued or guaranteed by the U.S. Government or its agencies or instrumentalities; however, the payment of principal and interest on such obligations may be guaranteed up to certain amounts and for a certain time period by a letter of credit issued by a financial institution (such as a bank or insurance company) unaffiliated with the issuers of such securities. Non-mortgage-backed securities will be purchased by the Short/Intermediate Fund or the Fixed Income Fund only when rated in one of the four highest rating categories for such securities by one or more appropriate of purchase. In addition, such securities generally will have remaining estimated lives at the time of purchase of seven years or less.
The development of these asset-backed securities is at an early state compared to mortgage-backed securities. While the market for asset-backed securities is becoming increasingly liquid, the market for mortgage-backed securities issued by certain private organizations and non-mortgage-backed securities is not as well developed. The Adviser will limit purchases of asset-backed securities to securities that are deemed to be readily marketable by the Adviser at the time of purchase.
Asset-backed securities held by the Short/Intermediate Fund or Fixed Income Fund arise through the grouping by governmental, government-related and private organizations of loans, receivables and other assets originated by various lenders. Interests in pools of these assets differ from other forms of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal paid at maturity or specified call dates. Instead, asset-backed securities provide periodic payments which generally consist of both interest and principal payments.
The estimated life of an asset-backed security may vary with the prepayment experience with respect to the underlying debt instruments. The rate of such prepayments, and hence the life of an asset-backed security, will be a function of current market interest rates and other economic and demographic factors. Since prepayment experience can vary, asset-backed securities may be a less effective vehicle for locking in high long-term yields. Neither Fund will invest more than 5% of its assets in such other asset-backed securities.
Medium-Grade Debt Securities. As stated in the Prospectus, the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund may each invest in securities within the four highest rating groups assigned by one or more appropriate NRSROs, including securities rated in the fourth highest rating group or, if unrated, judged by the Adviser to be of comparable quality ("Medium-Grade Securities").
As with other fixed-income securities, Medium-Grade Securities are subject to credit risk and market risk. Market risk relates to changes in a security's value as a result of changes in interest rates. Credit risk relates to the ability of the issuer to make payments of principal and interest. Medium-Grade Securities are considered by Moody's to have speculative characteristics.
Medium-Grade Securities are generally subject to greater credit risk than comparable higher-rated securities because issuers are more vulnerable to economic downturns, higher interest rates or adverse issuer-specific developments. In addition, the price of Medium-Grade Securities is generally subject to greater market risk and therefore reacts more sharply to changes in interest rates. The value and liquidity of Medium-Grade Securities may be diminished by adverse publicity and investor perceptions.
Because certain Medium-Grade Securities are traded only in markets where the number of potential purchasers and sellers, if any, is limited, the ability of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund to sell such securities at their fair value either to meet redemption requests or to respond to changes in the financial markets may be limited.
Particular types of Medium-Grade Securities may present special concerns. Some Medium-Grade Securities in which the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund may invest may be subject to redemption or call provisions that may limit increases in market value that might otherwise result from lower interest rates while increasing the risk that such Funds may be required to reinvest redemption or call proceeds during a period of relatively low interest rates.
The credit ratings issued by NRSROs are subject to various limitations. For example, while such ratings evaluate credit risk, they ordinarily do not evaluate the market risk of Medium-Grade Securities. In certain circumstances, the ratings may not reflect in a timely fashion adverse developments affecting an issuer. For these reasons, the Adviser conducts its own independent credit analysis of Medium-Grade Securities.
Securities of Other Investment Companies. Each of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund may invest in securities issued by other investment companies, including in Shares of the Money Market Fund. Each of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund currently intends to limit its investments so that, as determined immediately after a securities purchase is made: (a) not more than 5% of the value of its total assets will be invested in the securities of any one investment company; (b) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group; and (c) not more than 3% of the outstanding voting stock of any one investment company will be owned by any of these Funds. Except as described in the Prospectus with respect to an investment in the Money Market Fund, as a shareholder of another investment company, such a Fund would bear, along with other shareholders, its pro rata portion of that company's expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that that Fund bears directly in connection with its own operations. Investment companies in which a Fund may invest, other than the Money Market Fund, may also impose a sales or distribution charge in connection with the purchase or redemption of their shares and other types of commissions or charges. Such charges will be payable by that Fund and, therefore, will be borne directly by shareholders.
Income Participation Loans. The Short/Intermediate Fund and the Fixed Income Fund may make or acquire participation in privately negotiated loans to borrowers. Frequently, such loans have variable interest rates and may be backed by a bank letter of credit; in other cases they may be unsecured. Such transactions may provide an opportunity to achieve higher yields than those that may be available from other securities offered and sold to the general public.
Privately arranged loans, however, will generally not be rated by a credit rating agency and will normally be liquid, if at all, only through a provision requiring repayment following demand by the lender. Such loans made by the Short/Intermediate Fund and the Fixed Income Fund may have a demand provision permitting such Fund to require repayment within seven days. Participation in such loans, however, may not have such a demand provision and may not be otherwise marketable. To the extent these securities are not readily marketable, they will be subject to the Fund's 5% limitation on investments in illiquid securities. Recovery of an investment in any such loan that is illiquid and payable on demand will depend on the ability of the borrower to meet an obligation for full repayment of principal and payment of accrued interest within the demand period, normally seven days or less (unless such Fund determines that a particular loan issue, unlike most such loans, has a readily available market). As it deems appropriate, the Company's Board of Directors will establish procedures to monitor the credit standing of each such borrower, including its ability to honor contractual payment obligations.
The Short/Intermediate Fund and the Fixed Income Fund will purchase income participation loans only if such instruments are, in the opinion of the Adviser, of comparable quality to securities rated within the four highest rating groups assigned by one or more appropriate NRSROs. Neither Fund will invest more than 5% of its assets in such securities.
Repurchase Agreements. Securities held by each of the Funds may be subject to repurchase agreements. Under the terms of a repurchase agreement, a Fund would acquire securities from member banks of the Federal Deposit Insurance Corporation and registered broker-dealers which the Adviser deems credit-worthy under guidelines approved by the Company's Board of Directors, subject to the seller's agreement to repurchase such securities at a mutually agreed-upon date and price. The repurchase price would generally equal the price paid by a Fund plus interest negotiated on the basis of current short-term rates, which may be more or less than the rate on the underlying portfolio securities. Securities subject to repurchase agreements will be of the same type and quality as those in which such Fund may invest directly. The seller under a repurchase agreement will be required to maintain continually the value of collateral held pursuant to the agreement at not less than the repurchase price (including accrued interest). If the seller were to default on its repurchase obligation or become insolvent, a Fund holding such obligation would suffer a loss to the extent that the proceeds from a sale of the underlying portfolio securities were less than the repurchase price under the agreement, or to the extent that the disposition of such securities by such Fund were delayed pending court action. Additionally, there is no controlling legal precedent confirming that a Fund would be entitled, as against a claim by such seller or its receiver or trustee in bankruptcy, to retain the underlying securities, although the Board of Directors of the Company believes that, under the regular procedures normally in effect for custody of a Fund's securities subject to repurchase agreements and under federal laws, a court of competent jurisdiction would rule in favor of the Company if presented with the question. Securities subject to repurchase agreements will be held by that Fund's custodian or another qualified custodian or in the Federal Reserve/Treasury book-entry system. Repurchase agreements may be considered to be loans by a Fund under the 1940 Act.
Reverse Repurchase Agreements. As discussed in the Prospectus, each of the Funds may borrow funds for temporary purposes by entering into reverse repurchase agreements in accordance with that Fund's investment restrictions. Pursuant to such agreements, a Fund would sell portfolio securities to financial institutions such as banks and broker-dealers, and agree to repurchase the securities at a mutually agreed-upon date and price. Each Fund intends to enter into reverse repurchase agreements only to avoid otherwise selling securities during unfavorable market conditions to meet redemptions. At the time a Fund enters into a reverse repurchase agreement, it will place in a segregated custodial account assets such as U.S. Government securities or other liquid, high grade debt securities consistent with such Fund's investment restrictions having a value equal to the repurchase price (including accrued interest), and will subsequently continually monitor the account to ensure that such equivalent value is maintained at all times. Reverse repurchase agreements involve the risk that the market value of the securities sold by a Fund may decline below the price at which a Fund is obligated to repurchase the securities. Reverse repurchase agreements may be considered to be borrowings by a Fund under the 1940 Act.
Illiquid Securities. Each Fund may invest up to 5% of its net assets in illiquid securities (i.e., securities that cannot be disposed of within seven days in the normal course of business at approximately the amount at which the Fund has valued the securities). The Board of Directors has the ultimate authority to determine which securities are liquid or illiquid for purposes of this limitation. Certain securities ("restricted securities") exempt from registration or issued in transactions exempt from registration under the Securities Act of 1933, as amended ("Securities Act") (securities that may be resold pursuant to Rule 144A or Regulation S under the Securities Act), may be considered liquid. The Board has delegated to the Adviser the day-to-day determination of the liquidity of a security, although it has retained oversight and ultimate responsibility for such determinations. Although no definite quality criteria are used, the Board of Directors has directed the Adviser to look to such factors as (a) the nature of the market for a security (including the institutional private or international resale market), (b) the terms of these securities or other instruments allowing for the disposition to a third party or the issuer thereof (e.g., certain repurchase obligations and demand instruments), (c) the availability of market quotations (e.g., for securities quoted in PORTAL system), and (d) other permissible relevant factors. Certain securities, such as repurchase obligations maturing in more than seven days, are currently considered illiquid.
Restricted securities may be sold only in privately negotiated or other exempt transactions, qualified non-U.S. transactions, such as under Regulation S, or in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933. Where registration is required, a Fund may be obligated to pay all or part of the registration expenses and a considerable time may elapse between the decision to sell and the sale date. If, during such period, adverse market conditions were to develop, that Fund might obtain a less favorable price than prevailed when it decided to sell. Restricted securities will be priced at fair value as determined in good faith by the Board of Directors. If through the appreciation of illiquid securities or the depreciation of liquid securities, a Fund should be in a position where more than 5% of the value of its net assets is invested in illiquid assets, including restricted securities which are not readily marketable, that Fund will take such steps as it deems advisable, if any, to reduce the percentage of such securities to 5% or less of the value of its net assets.
Each Fund's investment objective is a fundamental policy and may not be changed without a vote of the holders of a majority of such Fund's outstanding Shares. In addition, the following investment restrictions may be changed with respect to a particular Fund only by a vote of the majority of the outstanding Shares of that Fund (as defined under "ADDITIONAL INFORMATION - Vote of a Majority of the Outstanding Shares").
In addition to the investment restrictions set forth in the Prospectus, the Money Market Fund may not:
1. Purchase securities on margin, sell securities short, participate on a joint or joint and several basis in any securities trading account, or underwrite the securities of other issuers, except to the extent that such Fund may be deemed to be an underwriter under certain securities laws, in the disposition of "restricted securities" acquired in accordance with that Fund's
2. Purchase or sell commodities, commodity contracts (including futures contracts), oil, gas or mineral exploration or development programs, or real estate (although investments by such Fund in marketable securities of companies engaged in such activities are not hereby precluded);
3. Write or purchase put or call options;
4. Invest in any issuer for purposes of exercising control or
5. Purchase or retain securities of any issuer if the officers or Directors of the Company or the officers or directors of its investment adviser owning beneficially more than one-half of 1% of the securities of such issuer together own beneficially more than 5% of such securities.
In addition, none of the Equity Fund, the Short/Intermediate Fund or the Fixed Income Fund may:
1. Purchase securities on margin, except for use of short-term credit necessary for clearance of purchases of portfolio securities;
2. Engage in any short sales;
3. Underwrite the securities issued by other persons, except to the extent that a Fund may be deemed to be an underwriter under certain securities laws in the disposition of "restricted securities";
4. Purchase or sell commodities or commodities contracts, except to the extent disclosed in the current Prospectuses of the Funds; and
5. Purchase or sell real estate (although investments in marketable securities of companies engaged in such activities are not prohibited by this restriction).
The following additional investment restrictions may be changed without the vote of a majority of the outstanding Shares of a Fund. The Money Market Fund may not:
1. Invest in securities of other investment companies, except as such securities may be acquired as part of a merger, consolidation, reorganization, or acquisition of assets; and
2. Buy common stocks or voting securities.
In addition, none of the Equity Fund, the Short/Intermediate Fund or the Fixed Income Fund may:
1. Purchase participations or direct interests in oil, gas or other mineral exploration or development programs (although investments by such Funds in marketable securities of companies engaged in such activities are not
2. Purchase securities of other investment companies, except (a) in connection with a merger, consolidation, acquisition or reorganization, and (b) a Fund may invest in other investment companies if, at the time of purchase (i) the acquiring Fund will own no more than 3% of the shares of the investment company selling such shares, (ii) the value of the investment company shares acquired, when aggregated with the value of other shares of such investment company held by the acquiring Fund, does not exceed 5% of the total assets of the acquiring Fund, and (iii) the value of the investment company shares acquired, when aggregated with the value of any other shares of investment companies held by the acquiring Fund, does not exceed 10% of the total assets of the acquiring Fund; and
3. Purchase or retain the securities of an issuer if, to the knowledge of such Fund's management, the officers or Directors of the Company, and the officers or directors of the Investment Adviser, who each owns beneficially more than .5% of the outstanding securities of such issuer, together own beneficially more than 5% of such securities.
If any percentage restriction described above (and in the Prospectus) is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in asset value will not constitute a violation of such restriction. However, should a change in net asset value or other external events cause a Fund's investment in illiquid securities to exceed such Fund's limit on its investments in such securities, that Fund will act to cause the aggregate amount of illiquid securities to come within such limit as soon as reasonably practicable. In such an event, however, a Fund would not be required to liquidate any portfolio securities where such Fund would suffer a loss on the sale of such securities.
The Company, on behalf of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund, has represented to the Ohio Division of Securities that each of those Funds will (1) not invest any of its assets in the securities of other investment companies, except by purchase in 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; (2) limit its investments to 15% in securities of any issuer which, together with any predecessors, have a record of less than three years continuous operation and (3) limit its investments to 5% in securities of issuers which are restricted as to disposition. The Company intends to comply with these representations with respect to each of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund for so long as the Shares of such Fund are registered for sale in the State of Ohio.
In addition, the Company, on behalf of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund, has represented to the Texas State Securities Board that each of those Funds will (1) not invest in oil, gas or mineral leases or purchase or sell real property (including limited partnership interests, but excluding readily marketable securities of companies which invest in real estate) and (2) not invest more than 5% of their net assets in warrants valued at the lower of cost or market, provided, that included within that amount, but not to exceed 2% of net assets, may be warrants which are not listed on the New York or American Stock Exchanges. For purposes of restriction (2) above, warrants acquired in units or attached to securities are deemed to be without value. The Company intends to comply with these representations with respect to each of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund for so long as the Shares of such Fund are registered for sale in the State of Texas.
The portfolio turnover rate for each of the Funds is calculated by dividing the lesser of a Fund's purchases or sales of portfolio securities for the year by the monthly average value of the portfolio securities. The Commission requires that the calculation exclude all securities whose remaining maturities at the time of acquisition were one year or less.
Because the Money Market Fund intends to invest entirely in securities with remaining maturities of less than one year and because the Commission requires such securities to be excluded from the calculation of portfolio turnover rate, the portfolio turnover with respect to the Money Market Fund is expected to be zero percent for regulatory purposes. The portfolio turnover rate may vary greatly from year to year as well as within a particular year, and may also be affected by cash requirements for redemptions of Shares. Portfolio turnover will not be a limiting factor in making investment decisions.
As indicated in the Prospectus, the net asset value of each Fund is determined and the Shares of each Fund are priced as of the Valuation Time on each Business Day of the Company. A "Business Day" is a day on which the New York Stock Exchange is open for trading and any other day (other than a day on which no Shares of a Fund are tendered for redemption and no order to purchase any Shares is received) during which there is sufficient trading in portfolio instruments that such Fund's net asset value per share might be materially affected. The New York Stock Exchange will not open in observance of the following holidays: New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Valuation of the Money Market Fund.
The Money Market Fund has elected to use the amortized cost method of valuation pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument at its cost initially and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. This method may result in periods during which value, as determined by amortized cost, is higher or lower than the price the Money Market Fund would receive if it sold the instrument. The value of securities in the Money Market Fund can be expected to vary inversely with changes in prevailing interest rates.
Pursuant to Rule 2a-7, the Money Market Fund will maintain a dollar-weighted average portfolio maturity appropriate to the Money Market Fund's objective of maintaining a stable net asset value per share, provided that the Money Market Fund will not purchase any security with a remaining maturity of more than 397 days (13 months) (securities subject to repurchase agreements may bear longer maturities) nor maintain a dollar-weighted average portfolio maturity which exceeds 90 days. The Company's Board of Directors has also undertaken to establish procedures reasonably designed, taking into account current market conditions and the investment objective of the Money Market Fund, to stabilize the net asset value per share of the Money Market Fund for purposes of sales and redemptions at $1.00. These procedures include review by the Directors, at such intervals as they deem appropriate, to determine the extent, if any, to which the net asset value per share of the Money Market Fund calculated by using available market quotations deviates from $1.00 per Share. In the event such deviation exceeds one-half of one percent, Rule 2a-7 requires that the Board of Directors promptly consider what action, if any, should be initiated. If the Directors believe that the extent of any deviation from the Money Market Fund's $1.00 amortized cost price per Share may result in material dilution or other unfair results to new or existing investors, they will take such steps as they consider appropriate to eliminate or reduce, to the extent reasonably practicable, any such dilution or unfair results. These steps may include selling portfolio instruments prior to maturity, shortening the average portfolio maturity, withholding or reducing dividends, reducing the number of the Money Market Fund's outstanding Shares without monetary consideration, or utilizing a net asset value per share determined by using available market quotations.
Valuation of the Other Funds.
Each security traded on a U.S. national securities exchange or quoted on the NASDAQ National Market System ordinarily will be valued on the basis of its last sale price on the date of valuation or, if there are no sales that day, at the closing bid quotation. Securities traded on exchanges located outside of the U.S. will be valued on the basis of the price as of the most recent close of business on the exchange preceding the time of valuation. Securities and other assets for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures established by and under the general supervision of the Directors of the Company. Short-term securities are valued at either amortized cost or original cost plus accrued interest, which approximates current value.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are sold on a continuous basis by the Distributor, and the Distributor has agreed to use appropriate efforts to solicit purchase orders. In addition to purchasing Shares directly through the Distributor, Shares may be purchased through procedures established by the Distributor in connection with the requirements of accounts at the Adviser or the Adviser's correspondent or affiliated banks. Customers purchasing Shares of the Funds may include officers, directors, or employees of the Adviser or the Adviser's correspondent or affiliated banks.
The Company may suspend the right of redemption or postpone the date of payment for Shares of a Fund during any period when (a) trading on the New York Stock Exchange is restricted by applicable rules and regulations of the Commission, (b) the New York Stock Exchange is closed for other than customary weekend and holiday closings, (c) the Commission has by order permitted such suspension, or (d) an emergency exists as a result of which (i) disposal by the Company of securities owned by it is not reasonably practical, or (ii) it is not reasonably practical for the Company to determine the fair value of its net assets.
The Company may redeem Shares of the Money Market Fund involuntarily if redemption appears appropriate in light of the Company's responsibilities under the 1940 Act. See "NET ASSET VALUE-Valuation of the Money Market Fund" in this Statement of Additional Information.
Overall responsibility for management of the Company rests with its Board of Directors, which is elected by the Shareholders of the Company. The Directors elect the officers of the Company to supervise actively its day-to-day operations.
The names of the Directors and officers of the Company, their addresses, and principal occupations during the past five years are as follows:
* Denotes "interested directors" as defined in the 1940 Act.
The following table sets forth certain information concerning compensation to be paid by the Company to its Directors and officers.
* Estimated amounts to be paid during the Company's first fiscal year.
As of the date of this Statement of Additional Information, the Company's officers and Directors, as a group, own less than 1% of each Fund's outstanding Shares.
The officers of the Company receive no compensation directly from the Company for performing the duties of their offices. Sunstone Financial Group, Inc. receives fees from each of the Funds for acting as Administrator and may receive fees from each of the Funds pursuant to the Distribution and Service Plan and the Administrative Services Plan described below. Messrs. Pavlick and Snyder are employees of, and are compensated by, the Administrator.
Investment advisory services are provided to each of the Funds by First National Bank of Omaha, Omaha, Nebraska, the Adviser, pursuant to the Investment Advisory Agreement dated as of December 20, 1994 (the "Investment Advisory Agreement"). The Adviser is a wholly owned subsidiary of First National of Nebraska, Inc., a Nebraska corporation.
Under the Investment Advisory Agreement, the Adviser has agreed to provide investment advisory services as described in the Prospectus of the Funds. For the services provided and expenses assumed pursuant to the Investment Advisory Agreement, the Money Market Fund, the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund pay the Adviser a fee equal to the lesser of (a) a fee computed daily and paid monthly, at an annual rate of twenty-five one-hundredths of one percent (.25%), seventy-five one-hundredths of one percent (.75%), fifty one-hundredths of one percent (.50%) and sixty one-hundredths of one percent (.60%), respectively, of the average daily net assets of that Fund, or (b) such other fee as may be agreed upon from time to time in writing by the Company and the Adviser. The Adviser may periodically voluntarily reduce all or a portion of its advisory fee with respect to any Fund, which reduction would increase the net income of that Fund available for distribution as dividends.
Unless sooner terminated, the Investment Advisory Agreement will continue in effect until June 30, 1996, and from year to year thereafter, if, as to each Fund, such continuance is approved at least annually by the Company's Board of Directors or by vote of a majority of the outstanding Shares of that Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the Prospectus), and a majority of the Directors who are not parties to the Investment Advisory Agreement or interested persons (as defined in the 1940 Act) of any party to the Investment Advisory Agreement by votes cast in person at a meeting called for such purpose. The Investment Advisory Agreement is terminable as to a Fund at any time on 60 days written notice without penalty by the Directors, by vote of a majority of the outstanding Shares of that Fund, or by the Adviser. The Investment Advisory Agreement also terminates automatically in the event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by a Fund in connection with the performance of the Investment Advisory Agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith, or gross negligence on the part of the Adviser in the performance of its duties, or from reckless disregard by the Adviser of its duties and obligations thereunder.
The Adviser also serves as the Funds' custodian as more fully discussed under "Custodian" below.
Pursuant to the Investment Advisory Agreement, the Adviser determines, subject to the general supervision of the Board of Directors of the Company and in accordance with each Fund's investment objective and restrictions, which securities are to be purchased and sold by a Fund, and which brokers are to be eligible to execute such Fund's portfolio transactions. Purchases and sales of portfolio securities with respect to the Money Market Fund, the Short/Intermediate Fund and the Fixed Income Fund usually are principal transactions in which portfolio securities are normally purchased directly from the issuer or from an underwriter or market maker for the securities. Purchases from underwriters of portfolio securities generally include a commission or concession paid by the issuer to the underwriter, and purchases from dealers serving as market makers may include the spread between the bid and asked price. Transactions on stock exchanges involve the payment of negotiated brokerage commissions. Transactions in the over-the-counter market are generally principal transactions with dealers. With respect to the over-the-counter market, the Company, where possible, will deal directly with dealers who make a market in the securities involved except in those circumstances where better price and execution are available elsewhere.
Allocation of transactions, including their frequency, to various brokers and dealers is determined by the Adviser in its best judgment and in a manner deemed fair and reasonable to Shareholders. The primary consideration is prompt execution of orders in an effective manner at the most favorable price. Subject to this consideration, brokers and dealers who provide supplemental investment research to the Adviser may receive orders for transactions on behalf of the Funds. Information so received is in addition to and not in lieu of services required to be performed by the Adviser and does not reduce the advisory fees payable to the Adviser by the Funds. Such information may be useful to the Adviser in serving a Fund and other clients and, conversely, supplemental information obtained by the placement of business of other clients may be useful to the Adviser in carrying out its obligations to each of the Funds. The Adviser may authorize a Fund to pay a commission in excess of the commission another broker-dealer would have charged if the Adviser determines in good faith that such commission is reasonable in relation to the value of the brokerage and research services provided by such broker-dealer, viewed either in terms of that particular transaction or the Adviser's overall responsibilities to the accounts it manages.
While the Adviser generally seeks competitive commissions, the Company may not necessarily pay the lowest commission available on each brokerage transaction, for reasons discussed above.
Except as otherwise disclosed to the Shareholders of the Funds and as permitted by applicable laws, rules and regulations, the Company will not, on behalf of any of the Funds, execute portfolio transactions through, acquire portfolio securities issued by, make savings deposits in, or enter into repurchase or reverse repurchase agreements with the Adviser, the Distributor, or their affiliates, and will not give preference to the Adviser's with respect to such transactions, securities, savings deposits, repurchase agreements, and reverse repurchase agreements.
Investment decisions for each Fund are made independently from those for the other Funds of the Company, any other investment company or account managed by the Adviser. Any such other fund, investment company or account may also invest in the same securities as the Company. When a purchase or sale of the same security is made at substantially the same time on behalf of a Fund and another investment company or account, the transaction will be averaged as to price, and available investments will be allocated as to amount in a manner which the Adviser believes to be equitable to the Fund and such other investment company or account. In some instances, this investment procedure may adversely affect the price paid or received by a Fund or the size of the position obtained by a Fund. To the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased for a Fund with those to be sold or purchased for the other investment companies or accounts in order to obtain best execution. As provided by the Investment Advisory Agreement, in making investment recommendations for each of the Funds, the Adviser will not inquire or take into consideration whether an issuer of securities proposed for purchase or sale by the Company is a customer of the Adviser, its parent or its subsidiaries or affiliates and, in dealing with its customers, the Adviser, its parent, subsidiaries, and affiliates will not inquire or take into consideration whether securities of such customers are held by the Funds.
In 1971, the United States Supreme Court held in Investment Company Institute v. Camp that the Federal statutes commonly referred to as the Glass-Steagall Act prohibit a national bank from operating a mutual fund for the collective investment of managing agency accounts. Subsequently, the Board of Governors of the Federal Reserve System (the "Board") issued a regulation and interpretation to the effect that the Glass-Steagall Act and such decision: (a) forbid a bank holding company registered under the Federal Bank Holding Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from sponsoring, organizing, or controlling a registered, open-end investment company continuously engaged in the issuance of its shares, but (b) do not prohibit such a holding company or affiliate from acting as investment adviser, transfer agent, and custodian to such an investment company. In 1981, the United States Supreme Court held in Board of Governors of the Federal Reserve System v. Investment Company Institute that the Board did not exceed its authority under the Holding Company Act when it adopted its regulation and interpretation authorizing bank holding companies and their non-bank affiliates to act as investment advisers to registered closed-end investment companies. In the Board of Governors case, the Supreme Court also stated that if a national bank complied with the restrictions imposed by the Board in its regulation and interpretation authorizing bank holding companies and their non-bank affiliates to act as investment advisers to investment companies, a national bank performing investment advisory services for an investment company would not violate the Glass-Steagall Act.
The Adviser believes that it possesses the legal authority to perform the services for each of the Funds contemplated by the Prospectus, this Statement of Additional Information, the Investment Advisory Agreement, the Custodian Agreement and the Servicing Agreement without violation of applicable statutes and regulations. The Adviser has been advised by its counsel that counsel believes that such laws should not prevent the Adviser from providing the services required of it under the Investment Advisory Agreement, the Custodian Agreements, and the Servicing Agreement. Future changes in either Federal or state statutes and regulations relating to the permissible activities of banks or bank holding companies and the subsidiaries or affiliates of those entities, as well as further judicial or administrative decisions or interpretations of present and future statutes and regulations, could prevent or restrict the Adviser from continuing to perform such services for the Company. Depending upon the nature of any changes in the services which could be provided by the Adviser, the Board of Directors of the Company would review the Company's relationship with the Adviser and consider taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit or restrict the proposed activities of the Adviser and its affiliated and correspondent banks in connection with Customer purchases of Shares of any of the Funds, those banks might be required to alter materially or discontinue the services offered by them to Customers. It is not anticipated, however, that any change in the Company's method of operations would affect its net asset value per share or result in financial losses to any Customer.
Sunstone Financial Group, Inc. serves as administrator and fund accountant (the "Administrator") to each of the Funds pursuant to the Administration and Fund Accounting Agreement dated April 10, 1995 (the "Administration Agreement"). The Administrator assists in supervising all operations of each Fund (other than those performed by the Adviser under the Investment Advisory Agreement, the Custodian Agreement and the Transfer Agency Agreement). The Administrator is a broker-dealer registered with the Commission, and is a member of the National Association of Securities Dealers, Inc. The Administrator provides administration, distribution and fund accounting services to other investment companies.
Under the Administration Agreement, the Administrator has agreed to provide office space, facilities, equipment and personnel, compile data for and prepare with respect to the Funds timely Notices to the Commission required pursuant to Rule 24f-2 under the Act and semi-annual reports on Form N-SAR; prepare and file all federal income and excise tax returns and state income tax returns (and such other required tax filings as may be agreed to by the parties) other than those required to be made by the Funds' custodian or transfer agent; prepare compliance filings relating to the registration of the securities of the Funds pursuant to state securities laws with the advice of Funds' counsel; perform securities valuations; determine the income and expense accruals of the Funds; calculate daily net asset values and income factors of the Funds; maintain all general ledger accounts and related subledgers; prepare financial statements for the Annual and Semi-Annual Reports required pursuant to Section 30(d) under the Act; review the Registration Statement for the Funds (on Form N-1A or any replacement therefor) and any amendments thereto, and proxy materials; prepare and monitor each Fund's expense accruals and cause all appropriate expenses to be paid from Fund assets on proper authorization from the Funds; assist in the acquisition of First Omaha Funds' fidelity bond required by the Act, monitor the amount of the bond and make the necessary Commission filings related thereto; check each Fund's compliance with the policies and limitations relating to portfolio investments as set forth in the Prospectus, Statement of Additional Information and Articles of Incorporation and monitor each Fund's status as a regulated investment company under Subchapter M of the Internal Revenue Code, as amended; maintain, and/or coordinate with the other service providers the maintenance of, the accounts, books and other documents required pursuant to Rule 31a-1(a) and (b) under the Act; and generally assist in each Fund's administrative operations.
The Administrator receives a fee from each Fund for its services as administrator and fund accountant and expenses assumed pursuant to the Administration Agreement, equal to the lesser of a fee calculated daily and paid periodically, at the annual rate of twenty one-hundredths of one percent (.20%) of that Fund's average daily net assets or such other fee as may be agreed upon in writing by the Company and the Administrator. The Administrator may periodically voluntarily reduce all or a portion of its fee with respect to a Fund in order to increase the net income of one or more of the Funds available for distribution as dividends.
Unless sooner terminated as provided therein, the Administration Agreement will continue in effect until December 20, 1998. The Administration Agreement thereafter shall be renewed automatically for successive one-year terms, unless earlier terminated. The Administration Agreement is terminable with respect to a particular Fund only upon mutual agreement of the parties to the Administration Agreement and, after the initial term, on not less than 90 days' notice by the Company's Board of Directors or by the Administrator.
The Administration Agreement provides that the Administrator shall not be liable for any error of judgment or mistake of law or any loss suffered by any of the Funds in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad faith, or gross negligence in the performance of its duties, or from the reckless disregard by the Administrator of its obligations and duties thereunder.
If total expenses borne by any of the Funds in any fiscal year exceed expense limitations imposed by applicable state securities regulations, the Adviser will reimburse that Fund by the amount of such excess in proportion to its respective fees. As of the date of this Statement of Additional Information, the most restrictive expense limitation applicable to the Funds limits each Fund's aggregate annual expenses, including management and advisory fees but excluding interest, taxes, brokerage commissions, and certain other expenses, to 2 1/2% of the first $30 million of a Fund's average net assets, 2% of the next $70 million of such Fund's average net assets, and 1-1/2% of such Fund's remaining average net assets. Any expense reimbursements will be estimated daily and reconciled and paid on a monthly basis. Fees imposed upon customer accounts by the Adviser or its affiliated or correspondent banks for cash management services are not included within Fund expenses for purposes of any such expense limitation.
Sunstone Financial Group, Inc. serves as agent for each of the Funds in the distribution of its Shares pursuant to a Distribution Agreement dated April 10, 1995 (the "Distribution Agreement") . Unless otherwise terminated, the Distribution Agreement remains in effect from year to year for successive annual periods ending on June 30 if approved at least annually (a) by the Company's Board of Directors or by the vote of a majority of the outstanding shares of the Company, and (b) by the vote of a majority of the Directors of the Company who are not parties to the Distribution Agreement or interested persons (as defined in the 1940 Act) of any party to the Distribution Agreement, cast in person at a meeting called for the purpose of voting on such approval. The Distribution Agreement may be terminated in the event of any assignment, as defined in the 1940 Act.
The Distributor solicits orders for the sale of Shares, advertises and pays the costs of advertising, office space and the personnel involved in such activities. The Distributor receives no compensation under the Distribution Agreement with the Company, but may receive compensation under the Distribution and Service Plan described below.
As described in the Prospectus, the Company has adopted a Distribution and Service Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act under which each Fund is authorized to make payments to banks, including the Adviser, other institutions and broker-dealers, (with all of the foregoing organizations being referred to as "Participating Organizations") for providing distribution or shareholder service assistance. Payments to such Participating Organizations may be made pursuant to agreements entered into upon the recommendation of the Distributor. The Plan authorizes each Fund to make payments in an amount not in excess, on an annual basis, of 0.25% of the average daily net assets of that Fund. As required by Rule 12b-1, the Plan was approved by the sole shareholder of each of the Funds and by the Board of Directors, including a majority of the Directors who are not interested persons of any of the Funds and who have no direct or indirect financial interest in the operation of the Plan (the "Independent Directors"). The Plan may be terminated as to a Fund by vote of a majority of the Independent Directors, or by vote of majority of the outstanding Shares of that Fund. Any change in the Plan that would materially increase the distribution cost to a Fund requires Shareholder approval. The Directors review quarterly a written report of such costs and the purposes for which such costs have been incurred. The Plan may be amended by vote of the Directors including a majority of the Independent Directors, cast in person at a meeting called for that purpose. For so long as the Plan is in effect, selection and nomination of those Directors who are not interested persons of the Company shall be committed to the discretion of such disinterested persons. All agreements with any person relating to the implementation of the Plan may be terminated at any time on 60 days' written notice without payment of any penalty, by vote of a majority of the Independent Directors or by a vote of the majority of the outstanding Shares of any of the Funds. The Plan will continue in effect for successive one-year periods, provided that each such continuance is specifically approved (a) by the vote of a majority of the Independent Directors, and (b) by a vote of a majority of the entire Board of Directors cast in person at a meeting called for that purpose. The Board of Directors has a duty to request and evaluate such information as may be reasonably necessary for them to make an informed determination of whether the Plan should be implemented or continued. In addition, the Directors in approving the Plan must determine that there is a reasonable likelihood that the Plan will benefit each Fund and its Shareholders.
The Board of Directors of the Company believes that the Plan is in the best interests of each Fund since it encourages Fund growth. As a Fund grows in size, certain expenses, and therefore total expenses, per Share, may be reduced and overall performance per Share may be improved.
As of the date of this Statement of Additional Information, the Company, on behalf of the Funds, does not have a Rule 12b-l Agreement and does not pay any fees under the Plan.
As described in the Prospectus, the Company has also adopted an Administrative Services Plan (the "Services Plan") under which each Fund is authorized to pay certain financial institutions, including the Adviser, its correspondent and affiliated banks, and the Distributor (a "Service Organization"), to provide certain ministerial, record keeping, and administrative support services to their customers who own of record or beneficially Shares in a Fund. Payments to such service organizations are made pursuant to Servicing Agreements between the Company and the Service Organization. The Services Plan authorizes each Fund to make payments to Service Organizations in an amount, on an annual basis, of up to 0.25% of the average daily net assets of that Fund. The Services Plan has been approved by the Board of Directors of the Company, including a majority of the Directors who are not interested persons of the Company (as defined in the 1940 Act) and who have no direct or indirect financial interest in the operation of the Services Plan or in any Servicing Agreements thereunder (the "Disinterested Directors"). The Services Plan may be terminated as to a Fund by a vote of a majority of the Disinterested Directors. The Directors review quarterly a written report of the amounts expended pursuant to the Services Plan and the purposes for which such expenditures were made. The Services Plan may be amended by a vote of the Directors, provided that any material amendments also require the vote of a majority of the Disinterested Directors. For so long as the Services Plan is in effect, selection and nomination of those Disinterested Directors shall be committed to the discretion of the Company's Disinterested Directors. All Servicing Agreements may be terminated at any time without the payment of any penalty by a vote of a majority of the Disinterested Directors. The Services Plan will continue in effect for successive one-year periods, provided that each such continuance is specifically approved by a majority of the Board of Directors, including a majority of the Disinterested Directors.
As authorized by the Services Plan, the Company has entered into a Servicing Agreement with the Adviser pursuant to which the Adviser has agreed to provide certain administrative support services in connection with Shares of the Funds owned of record or beneficially by its customers. Such administrative support services may include, but are not limited to, (a) processing dividend and distribution payments from a Fund on behalf of customers; (b) providing periodic statements to its customers showing their positions in the Shares; (c) arranging for bank wires; (d) responding to routine customer inquiries relating to services performed by the Adviser; (e) providing sub-accounting with respect to the Shares beneficially owned by the Adviser's customers or the information necessary for sub-accounting; (f) if required by law, forwarding shareholder communications from a Fund (such as proxies, shareholder reports, annual and semi-annual financial statements and dividend, distribution and tax notices) to its customers; (g) aggregating and processing purchase, exchange, and redemption requests from customers and placing net purchase, exchange, and redemption orders for customers; and (h) providing customers with a service that invests the assets of their account in the Shares pursuant to specific or preauthorized instructions. In consideration of such services, the Company, on behalf of each Fund, may pay the Adviser a monthly fee, computed at the annual rate of .25% of the average aggregate net asset value of Shares of that Fund held during the period by customers for whom the Adviser has provided services under the Servicing Agreement. However, the Servicing Agreement with the Adviser provides that no payments may be made under the Services Plan until such time as the Board of Directors of the Company authorizes the commencement of such payments.
In addition, the Company, on behalf of a Fund, may enter into, from time to time, other Servicing Agreements with other service organizations pursuant to which such Service Organizations will provide similar services as those discussed above.
First National Bank of Omaha, One First National Center, Omaha, Nebraska 68102, in addition to serving as the investment adviser and transfer agent to the Funds, also serves as custodian (the "Custodian") to each of the Funds pursuant to the Custodian Agreement dated December 20, 1994 (the "Custodian Agreement"). The Custodian's responsibilities include safeguarding and controlling each Fund's cash and securities, handling the receipt and delivery of securities, and collecting interest on each Fund's investments. In consideration of such services, each Fund pays the Custodian a fee, computed daily and paid monthly, at the annual rate of .03% of such Fund's average daily net assets.
Unless sooner terminated, the Custodian Agreement will continue in effect until terminated by either party upon 60 days advance written notice to the other party. Notwithstanding the foregoing, the Custodian Agreement, with respect to a Fund, will be approved at least annually by the Company's Board of Directors or by vote of a majority of the outstanding Shares of that Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the Prospectus), and a majority of the Directors who are not parties to the Custodian Agreement or interested persons (as defined in the 1940 Act) of any party to the Custodian Agreement by votes cast in person at a meeting called for such purpose.
In the opinion of the staff of the Commission, since the custodian is serving as both the investment adviser and custodian of each of the Funds, each of the Funds and the Custodian are subject to the requirements of Rule 17f-2 under the 1940 Act, and therefore the Funds and the Custodian will comply with the requirements of such rule.
First National Bank of Omaha serves as Transfer Agent and dividend disbursing agent (the "Transfer Agent") for the Company pursuant to the Transfer Agency Agreement dated December 20, 1994. Pursuant to such Agreement, the Transfer Agent, among other things, performs the following services in connection with each Fund's shareholders of record: maintenance of shareholder records for each of the Company's shareholders of record; processing shareholder purchase and redemption orders; processing transfers and exchanges of shares of the Company on the shareholder files and records; processing dividend payments and reinvestments; and assistance in the mailing of shareholder reports and proxy solicitation materials. For such services the Transfer Agent receives a fee based on the number of shareholders of record. Pursuant to authority in the Transfer Agency Agreement the Transfer Agent has appointed as sub-transfer agent DST Systems, Inc., 210 West 10th Street, Kansas City, Missouri 64105.
The financial statements of each Fund as of February 10, 1995, appearing in this Statement of Additional Information have been audited by KPMG Peat Marwick LLP, Two Central Park Plaza, Suite 1501, Omaha, Nebraska 68102, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report and on the authority of such firm as experts in auditing and accounting.
Cline, Williams, Wright, Johnson & Oldfather, 1900 FirsTier Bank Building, Lincoln, Nebraska 68508, is counsel to the Company and will pass upon the legality of the Shares offered hereby.
The Company is authorized to issue a total of 1,000,000,000 Shares of common stock in series with a par value of $.00001 per share. Four Hundred fifty million of these Shares have been authorized by the Board of Directors to be issued in series designated for the existing four Funds. The Board of Directors may authorize additional Shares in series, or may divide the Shares of any existing or new series into two or more subseries or classes, all without shareholder approval.
All Shares, when issued, will be fully paid and non-assessable and will be redeemable and freely transferable. All Shares have equal voting rights. They can be issued as full or fractional Shares. A fractional Share has pro rata the same kind of rights and privileges as a full Share. The Shares possess no preemptive or conversion rights.
Each Share of a Fund has one vote (with proportionate voting for fractional shares) irrespective of the relative net asset value of the Shares. On some issues, such as the election of directors, all Shares of the Fund vote together as one series. Cumulative voting is authorized. This means that in a vote for the election of directors, Shareholders may multiply the number of Shares they own by the number of directorships being filled and then allocate such votes to one or more directors. On issues affecting only a particular Fund, the Shares of the affected Fund vote as a separate series. An example of such an issue would be a fundamental investment restriction pertaining to only one Fund.
It is possible that the Fund will not hold annual or periodically scheduled regular meetings of Shareholders. Annual meetings of Shareholders will not be held unless called by the Shareholders pursuant to the Nebraska Business Corporation Act or unless required by the Investment Company Act of 1940 and the rules and regulations promulgated thereunder. Special meetings of the Shareholders may be held, however, at any time and for any purpose, if called by (a) the Chairman of the Board, the President and two or more directors, (b) by one or more Shareholders holding ten percent or more of the Shares entitled to vote on matters presented to the meeting, or (c) if the annual meeting is not held within any thirteen month period, the local district court, upon application of any Shareholder, may summarily order that such meeting be held. In addition, the 1940 Act requires a Shareholder vote for all amendments to fundamental investment policies, investment advisory contracts and amendments thereto.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted to the holders of the outstanding voting securities of an investment company such as the Company shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each Fund affected by the matter. For purposes of determining whether the approval of a majority of the outstanding shares of a Fund will be required in connection with a matter, a Fund will be deemed to be affected by a matter unless it is clear that the interests of each Fund in the matter are identical, or that the matter does not affect any interest of the Fund. Under Rule 18f-2, the approval of an investment advisory agreement or any change in investment policy would be effectively acted upon with respect to a Fund only if approved by a majority of the outstanding shares of such Fund. However, Rule 18f-2 also provides that the ratification of independent public accountants, the approval of principal underwriting contracts, and the election of Directors may be effectively acted upon by Shareholders of the Company voting without regard to series.
As of the date of this Prospectus, no person was known to own of record 5% or more of the outstanding shares of any Fund. The Adviser will possess, in a fiduciary capacity on behalf of its underlying accounts, voting or investment power with respect to a substantial majority of the outstanding Shares of each of the Funds and therefore will be presumed to control each of the Funds within the meaning of the 1940 Act.
Vote of a Majority of the Outstanding Shares
As used in the Prospectus and this Statement of Additional Information, a "vote of a majority of the outstanding Shares" of a Fund means the affirmative vote, at a meeting of Shareholders duly called, of the lesser of (a) 67% or more of the votes of Shareholders of such Fund present at a meeting at which the holders of more than 50% of the votes attributable to Shareholders of record of that Fund are represented in person or by proxy, or (b) the holders of more than 50% of the outstanding Shares of that Fund.
Although each Fund expects to qualify as a "regulated investment company" and to be relieved of all or substantially all federal income taxes, depending upon the extent of its activities in states and localities in which its offices are maintained, in which its agents or independent contractors are located, or in which it is otherwise deemed to be conducting business, a Fund may be subject to the tax laws of such states or localities. In addition, if for any taxable year that Fund does not qualify for the special tax treatment afforded regulated investment companies, all of its taxable income will be subject to federal tax at regular corporate rates (without any deduction for distributions to its Shareholders). In such event, dividend distributions would be taxable to Shareholders to the extent of earnings and profits, and would be eligible for the dividends received deduction for corporations.
Foreign taxes may be imposed on a Fund by foreign countries with respect to its income from foreign securities. Since less than 50% in value of a Fund's total assets at the end of its fiscal year are expected to be invested in stocks or securities of foreign corporations, such Fund will not be entitled under the Code to pass through to its Shareholders their pro rata share of the foreign taxes paid by the Fund. These taxes will be taken as a deduction by such Fund.
Each Fund will be required in certain cases to withhold and remit to the United States Treasury 31% of taxable dividends paid to any Shareholder who has provided either an incorrect tax identification number or no number at all, or who is subject to withholding by the Internal Revenue Service for failure properly to include on their return payments of interest or dividends.
Information set forth in the Prospectus and this Statement of Additional Information which relates to federal taxation is only a summary of some of the important federal tax considerations generally affecting purchasers of Shares of a Fund. No attempt has been made to present a detailed explanation of the federal income tax treatment of a Fund or its Shareholders and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential purchasers of Shares of a Fund are urged to consult their tax advisers with specific reference to their own tax situation. In addition, the tax discussion in the Prospectus and this Statement of Additional Information is based on tax laws and regulations which are in effect on the date of the Prospectus and this Statement of Additional Information; such laws and regulations may be changed by legislative or administrative action.
Yield of the Money Market Fund
For the seven-day period ended July 31, 1995, the yield and effective yield, respectively, of the Money Market Fund were 5.24% and 5.37%. For the 30-day period ended July 31, 1995, the yield for such Fund was 5.30%. In the absence of fee waivers, the yields for the period ended July 31, 1995 would have been 5.19%, 5.33% and 5.26%, respectively. The standardized seven-day yield for the Money Market Fund is computed by determining the net change, exclusive of capital changes, in the value of a hypothetical pre-existing account in the Money Market Fund 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 multiplying the base period return by (365/7). The net change in the account value of the Money Market Fund includes the value of additional Shares purchased with dividends from the original Share, dividends declared on both the original Share and any such additional Shares, and all fees, other than non-recurring account or sales charges, that are charged to all Shareholder accounts in proportion to the length of the base period and assuming the Money Market Fund's average account size. The capital changes to be excluded from the calculation of the net change in account value are realized gains and losses from the sale of securities and unrealized appreciation and depreciation. The 30-day yield and effective yield are calculated as described above except that the base period is 30 days rather than seven days.
The effective yield for the Money Market Fund is computed by compounding the base period return, as calculated above, by adding 1 to the base period return raising the sum to a power equal to 365 divided by seven and subtracting 1 from the result.
Yield of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund
As summarized in the Prospectus under the heading "PERFORMANCE INFORMATION," yield of each of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund will be computed by annualizing net investment income per share for a recent 30-day period and dividing that amount by such Share's net asset value per share (reduced by any undeclared earned income expected to be paid shortly as a dividend) on the last trading day of that period. Net investment income will reflect amortization of any market value, premium or discount of fixed income securities (except for obligations backed by mortgages or other assets) and may include recognition of a pro rata portion of the stated dividend rate of dividend paying portfolio securities. The yield of each of the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund will vary from time to time depending upon market conditions, the composition of such Fund's portfolio and operating expenses of the Company allocated to such Fund. These factors and possible differences in the methods used in calculating yield, should be considered when comparing a Fund's yield to yields published for other investment companies and other investment vehicles. Yield should also be considered relative to changes in the value of a Fund's shares and to the relative risks associated with the investment objective and policies of each Fund.
For the 30-day period ended July 31, 1995, the yields for the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund were 2.37%, 5.33% and 5.78%, respectively. In the absence of fee waivers, the yields for the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund would have been 2.30%, 5.21% and 5.65%, respectively.
As summarized in the Prospectus under the heading "PERFORMANCE INFORMATION," average annual total return is a measure of the change in value of an investment in a Fund over the period covered, which assumes any dividends or capital gains distributions are reinvested in such Fund immediately rather than paid to the investor in cash. Average annual total return will be calculated by: (a) adding to the total number of Shares purchased by a hypothetical $10,000 investment in that Fund all additional Shares which would have been purchased if all dividends and distributions paid or distributed during the period had been immediately reinvested; (b) calculating the value of the hypothetical initial investment of $10,000 as of the end of the period by multiplying the total number of Shares owned at the end of the period by the net asset value per share on the last trading day of the period; (c) assuming redemption at the end of the period; and (d) dividing this account value for the hypothetical investor by the initial $10,000 investment. Aggregate total return is a measure of change in value of an investment in a Fund over the relevant period and is similarly to average annual total return except that the result is not annualized.
For the one-year periods ended July 31, 1995 and 1994, the Money Market Fund, the Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund, including their respective immediate predecessors, had average annual total returns of 4.94% and 2.84%; 23.85% and 7.81%; 7.57% and 0.69%; and 9.98% and (1.23%), respectively.
The Equity Fund, the Short/Intermediate Fund and the Fixed Income Fund may from time to time advertise current distribution rates which are calculated in accordance with the method discussed in such Funds' Prospectus.
Investors may judge the performance of each of the Funds by comparing them to the performance of other mutual funds with comparable investment objectives and policies through various mutual fund or market indices such as those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation and to data prepared by Lipper Analytical Services, Inc., a widely recognized independent service which monitors the performance of mutual funds. Comparisons may also be made to indices or data published in Donoghue's MONEY MARKET REPORT, a nationally recognized money market fund reporting service, Money Magazine, Forbes, Barron's, The Wall Street Journal, Morningstar, Inc., Ibbotson Associates, CDA/Wiesenberger, The New York Times, Business Week, U.S.A. Today and local periodicals. In addition to performance information, general information about each of the Funds that appears in a publication such as those mentioned above may be included in advertisements, in sales literature and in reports to Shareholders.
From time to time, each of the Funds may include general comparative information, such as statistical data regarding inflation, securities indices or the features or performance of alternative investments, in advertisements, sales literature and reports to Shareholders. A Fund may also include calculations, such as hypothetical compounding examples, which describe hypothetical investment results in such communications. Such performance examples will be based on an express set of assumptions and are not indicative of performance of any of the Funds.
Current yields or total return will fluctuate from time to time and are not necessarily representative of future results. Accordingly, a Fund's yield or total return may not provide for comparison with bank deposits or other investments that pay a fixed return for a stated period of time. Yield and total return are functions of a Fund's quality, composition and maturity, as well as expenses allocated to such Fund. Fees imposed upon Customer accounts by the Adviser or its affiliated or correspondent banks for cash management services will reduce a Fund's effective yield and total return to Customers.
The Prospectus and this Statement of Additional Information omit certain of the information contained in the Registration Statement filed with the Commission. Copies of such information may be obtained from the commission upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an offering of the securities herein described in any state in which such offering may not lawfully be made. No salesman, dealer, or other person is authorized to give any information or make any representation other than those contained in the Prospectus and this Statement of Additional Information.
The following audited financial statements are attached hereto:
2. Statement of Assets and Liability as of February 10, 1995 3. Notes to Financial Statements
The following unaudited financial statements are attached hereto:
1. Statements of Assets and Liabilities as of July 31, 1995 2. Statements of Operations for the period ended July 31, 1995 3. Statements of Changes in Net Assets for the period ended 5. Schedules of Investments as of July 31, 1995 6. Notes to the Financial Statements
(With Independent Auditors' Report Thereon)
[KPMG PEAT MARWICK LLP LETTERHEAD]
To the Shareholders and Board of Directors of First Omaha Funds, Inc.:
We have audited the accompanying statement of assets and liability of First Omaha Funds, Inc. (comprised of the First Omaha Equity Fund, the First Omaha Short/Intermediate Fixed Income Fund, the First Omaha Fixed Income Fund and the First Omaha U.S. Government Obligations Fund) as of February 10, 1995. This statement of assets and liability is the responsibility of the Fund's management. Our responsibility is to express an opinion on this statement of assets and liability 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 liability referred to above presents fairly, in all material respects, the financial position of First Omaha Funds, Inc. as of February 10, 1995, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Statement of Assets and Liability
See accompanying notes to financial statement.
First Omaha Funds Inc. (the "Company") was organized in October 1994 as a Nebraska corporation and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company issuing its shares in series, each series representing a distinct portfolio with its own investment objectives and policies. At February 10, 1995, the only series presently authorized are the Equity Fund, Short/Intermediate Fixed Income Fund, the Fixed Income Fund and the U.S. Government Obligations Fund. The Company has had no operations other than the sale of the shares to capitalize the Funds which were sold to Miriam M. Allison on February 10, 1995 for cash in the amount of $100,000.
Each Fund intends to comply with the requirements of the Internal Revenue Code necessary to qualify as a regulated investment company and to make the requisite distributions of the income to its shareholders which will be sufficient to relieve it from all or substantially all Federal income taxes.
Costs incurred by the Funds in connection with their organization, registration and the initial public offering of shares have been deferred and will be amortized on a straight-line basis over a period of five years from the date upon which the Funds commence their investment activities. Organization costs have been allocated to the respective portfolios, equally by classes of shares or by specific identification, as applicable. If any of the original shares of a Fund purchased by Miriam M. Allison are redeemed by any holder thereof prior to the end of the amortization period, the redemption proceeds will be reduced by the pro rata share of the unamortized expenses as of the date of redemption. The pro rata share by which the proceeds are reduced will be derived by dividing the number of original shares of the Fund being redeemed by the total number of original shares outstanding at the time of redemption.
The Funds have an agreement with First National Bank of Omaha (the "Adviser"), to furnish investment advisory services to the Funds. Under the terms of this agreement, the Funds will pay the Adviser a monthly fee at the annual rate of the following percentages on average daily net assets: 0.75 percent of the Equity Fund, 0.45 percent for the Short/Intermediate Fixed Income Fund, 0.55 percent for the Fixed Income Fund and 0.25 percent for the U.S. Government Obligations Fund.
First National Bank of Omaha also serves as custodian for each of the Funds. The custodian receives compensation from each of the Funds for such services in an amount equal to a fee, computed daily and paid monthly, at the annual rate of 0.03 percent of each Fund's average daily net assets.
Sunstone Financial Group, Inc. (the "Administrator" or the "Distributor") acts as Administrator and Distributor for each of the Funds as compensation for its administrative services and the assumption of certain administrative expenses the Administrator is entitled to a fee, computed daily and payable monthly, at an annual rate of 0.20 percent of each Fund's average net assets subject to a minimum fee of $300,000.
The Administrator may periodically volunteer to reduce all or a portion of its administrative fee with respect to one or more Funds. These waivers may be terminated at any time at the Administrator's discretion. The Administrator may not seek reimbursement of such voluntarily reduced fees at a later date. The reduction of such fee will cause the yield of that Fund to be higher than it would be in the absence of such reduction. The Distributor receives no compensation from the Funds under its Distribution Agreement with the Company, but may receive compensation under the Distribution and Shareholder Service Plan.
Pursuant to Rule 12b-1 under the 1940 Act, the Company has adopted a Distribution and Shareholder Service Plan, under which each Fund is authorized to pay a periodic amount representing distribution expenses calculated at an annual rate not to exceed 0.25 percent of the average daily net assets of that Fund. Such amount may be used to pay banks (including the Adviser), broker-dealers and other institutions (a "Participating Organization") for distribution and/or shareholder service assistance pursuant to an agreement between Sunstone Financial Group, Inc. and the Participating Organization. Under the Plan, a Participating Organization may include Sunstone Financial Group, Inc., its subsidiaries and its affiliates.
The Company has adopted an Administrative Services Plan pursuant to which each Fund is authorized to pay compensation to banks and other financial institutions, which may include the Adviser, its correspondent and affiliated banks and Sunstone Financial Group, Inc. (each a "Service Organization"). Such Service Organizations agreed to provide certain ministerial, record keeping and/or administrative support services for their customers or account holders who are the beneficial or record owner of shares of that Fund. In consideration for such services, a Service Organization receives a fee from a Fund, computed daily and paid monthly at an annual rate of up to 0.25 percent of the average daily net asset value of shares of that Fund owned beneficially or of record by such Service Organization's customers for whom the Service Organization provides such services.
At the date of the Fund's capitalization, Miriam M. Allison, president of the Administrator and Distributor, owns all of the outstanding shares of each fund.
The Funds are authorized to issue a total of 1,000,000,000 shares of common stock in series with a par value of $0.00001 per share. 450,000,000 of these shares have been authorized by the Board of Directors to be issued in total for the series designated Equity Fund, Short/Intermediate Fixed Income Fund, Fixed Income Fund and U.S. Government Obligations Fund shares. The Board of Directors is empowered to issue other series of the Funds' shares without shareholder approval.
Each share of stock will have a pro rata interest in the assets of the Fund to which the stock of that series relates and will have no interest in the assets of any other Fund.
The following summarizes the shares of each Fund at February 10, 1995:
STATEMENTS OF ASSETS AND LIABILITIES
See notes to financial statements.
For the period from April 10, 1995(1) to July 31, 1995
See notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS For the period from April 10, 1995(1) to July 31, 1995
See notes to financial statements.
For the period from April 10, 1995(1) to July 31, 1995
See notes to financial statements.
(4) Without fees waived, the ratio of net expenses to average net assets would have been 1.04% for the Equity Fund, 1.00% for the Short/Intermediate Fixed Income Fund, 0.95% for the Fixed Income Fund, and 0.57% for the U.S. Government Obligations Fund. The ratio of net investment income to average net assets would have been 2.28% for the Equity Fund, 5.16% for the Short/Intermediate Fixed Income Fund, 6.16% for the Fixed Income Fund, and 5.26% for the U.S. Government Obligations Fund.
FIRST OMAHA U.S. GOVERNMENT OBLIGATIONS FUND
FIRST OMAHA SHORT/INTERMEDIATE FIXED INCOME FUND
FIRST OMAHA SHORT/INTERMEDIATE FIXED INCOME FUND
FIRST OMAHA FIXED INCOME FUND
FIRST OMAHA FIXED INCOME FUND
FIRST OMAHA FIXED INCOME FUND
FIRST OMAHA FIXED INCOME FUND
FIRST OMAHA FIXED EQUITY FUND
First Omaha Funds, Inc. (the "Company") was organized in October, 1994 as a Nebraska corporation and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its shares in series, each series representing a distinct portfolio with its own investment objectives and policies. At July 31, 1995, the only series presently authorized are the U.S. Government Obligations Fund, the Short/Intermediate Fixed Income Fund, the Fixed Income Fund and the Equity Fund (the "Funds").
On April 9, 1995, each of the Short/Intermediate Fixed Income Fund, the Fixed Income Fund and the Equity Fund completed an exchange of all their outstanding shares as follows:
On April 10, 1995, each series of the Company acquired all of the net assets of the respective series of The Sessions Group, pursuant to a plan of reorganization approved by each series of The Sessions Group's shareholders on April 5, 1995. The acquisition was accomplished by a tax-free exchange of shares on a 1 for 1 basis, as follows:
Each series of the Sessions Group's net assets at that date were combined with those of each series of the Company. The aggregate net assets of each series immediately before and after the acquisition was as follows:
Each series of The Sessions Group's net assets included the following:
The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements. These policies are in conformity with generally accepted accounting principles.
Securities traded over-the-counter or on a national securities exchange are valued on the basis of market value in their principal and most representative market. Securities where the principal and most representative market is a national securities exchange are valued at the latest reported sale price on such exchange. Exchange-traded securities for which there were no transactions are valued at the latest reported bid price.
Securities traded on only over-the-counter markets are valued at the latest bid price. Debt securities (other than short-term instruments) are valued at prices furnished by a pricing service, subject to review by the Funds' Adviser and determination of the appropriate price whenever a furnished price is significantly different from the previous day's furnished price. Short-term obligations (maturing within 60 days) are valued on an amortized cost basis. Securities for which quotations are not readily available and other assets are valued at fair value as determined in good faith by the adviser under the supervision of the Board of Directors.
Investments of the U.S. Government Obligations Fund are valued at either amortized cost, which approximates market value, or at original cost, which combined with accrued interest, approximates market value. Under the amortized cost valuation method, discount or premium is amortized on a constant basis to the maturity of the security. In addition, the Fund may not i) purchase any instrument with a remaining maturity greater than thirteen months unless such investment is subject to a demand feature, or ii) maintain a dollar-weighted average portfolio maturity which exceeds 90 days.
Each Fund intends to comply with the requirements of the Internal Revenue Code necessary to qualify as a regulated investment company and to make the requisite distributions of the income to its shareholders which will be sufficient to relieve it from all or substantially all Federal income taxes.
All of the Funds pay dividends of net investment income monthly. Distributions of net realized capital gains, if any, will be declared at least annually. Distributions to shareholders are recorded on the ex-dividend date.
The Funds are charged for those expenses that are directly attributable to each portfolio, such as advisory and custodian fees. Expenses that are not directly attributable to a portfolio are typically allocated among the portfolios in proportion to their respective net assets.
Costs incurred by the Funds in connection with their organization, registration and the initial public offering of shares have been deferred and will be amortized on a straight-line basis over a period of five years from the date upon which the Funds commence their investment activities. Organization costs have been allocated to the respective portfolios, equally by classes of shares or by specific identification, as applicable. If any of the original shares of a Fund are redeemed by any holder thereof prior to the end of the amortization period, the redemption proceeds will be reduced by the pro rata share of the unamortized expenses as of the date of redemption. The pro rata share by which the proceeds are reduced will be derived by dividing the number of original shares of the Fund being redeemed by the total number of original shares outstanding at the time of redemption.
The Funds may acquire repurchase agreements from financial institutions such as banks and broker dealers which FNBO deems creditworthy under guidelines approved by the Board of Directors, subject to the seller's agreement to repurchase such securities at a mutually agreed-upon date and price. The repurchase price generally equals the price paid by each Fund plus interest negotiated on the basis of current short-term rates, which may be more or less than the rate on the underlying portfolio securities. The seller, under a repurchase agreement, is required to maintain the value of collateral held pursuant to the agreement at not less than the repurchase price (including accrued interest). Securities subject to repurchase agreements are held by the Funds' custodian or another qualified custodian or in the Federal Reserve/Treasury book-entry system. Repurchase agreements are considered to be loans by the Funds under the 1940 Act.
Investment transactions are accounted for on the trade date plus one. The Funds determine the gain or loss realized from investment transactions by comparing the original cost of the security lot sold with the net sale proceeds. Dividend income is recognized on the ex-dividend date and interest income is recognized on an accrual basis.
The accompanying unaudited interim financial statements include all adjustments which, in the opinion of management, are necessary to a fair presentation of the results for the period ended July 31, 1995. All such adjustments are, in the opinion of management, of a normal recurring nature.
The Funds have an agreement with the First National Bank of Omaha (the "Adviser") to furnish investment advisory services to the Funds. Under the terms of this agreement, the Funds will pay the Adviser a monthly fee at the annual rate of the following percentages on average daily net assets: 0.25 percent for the U.S. Government Obligations Fund, 0.50 percent for the Short/Intermediate Fixed Income Fund, 0.60 percent for the Fixed Income Fund, and 0.75 percent for the Equity Fund. Advisory fees of $3,489 and $10,843 were waived in the Short/Intermediate Fixed Income Fund and the Fixed Income Fund, respectively.
First National Bank of Omaha also serves as custodian for each of the Funds. The custodian receives compensation from each of the Funds for such services in an amount equal to a fee, computed daily and paid monthly, at the annual rate of 0.03 percent of each Fund's average daily net assets. Custody fees of $2,088, $6,487 and $16,094 were waived in the Short/Intermediate Fixed Income Fund, the Fixed Income Fund and the Equity Fund, respectively.
Sunstone Financial Group, Inc. (the "Administrator" or the "Distributor") acts as Administrator and Distributor for each of the Funds. As compensation for its administrative services and the assumption of certain administrative expenses, the Administrator is entitled to a fee, computed daily and payable monthly, at an annual rate of 0.20 percent of each Fund's average net assets, subject to a minimum fee of $300,000. Administrative fees of $12,158, $3,238, $10,061 and $24,952 were waived in the U.S. Government Obligations Fund, the Short/Intermediate Fixed Income Fund, the Fixed Income Fund, and the Equity Fund, respectively.
The Administrator may periodically volunteer to reduce all or a portion of its administrative fee with respect to one or more Funds. These waivers may be terminated at any time at the Administrator's discretion. The Administrator may not seek reimbursement of such voluntarily reduced fees at a later date. The reduction of such fee will cause the yield of that Fund to be higher than it would be in the absence of such reduction. The Distributor receives no compensation from the Funds under its Distribution Agreement with the Company, but may receive compensation under the Distribution and Service Plan.
5) DISTRIBUTION AND SERVICE PLAN
Pursuant to Rule 12b-1 under the 1940 Act, the Company has adopted a Distribution and Service Plan, under which each Fund is authorized to pay a periodic amount representing distribution expenses calculated at an annual rate not to exceed 0.25 percent of the average daily net assets of that Fund. Such amount may be used to pay banks (including the Adviser), broker-dealers and other institutions (a "Participating Organization") for distribution and/or shareholder service assistance pursuant to an agreement between the Distributor and the Participating Organization. Under the Plan, a Participating Organization may include the Distributor, its subsidiaries and its affiliates. As of the date of these financial statements, there are no 12b-1 Agreements with any Participating Organizations.
The Company has adopted an Administrative Services Plan pursuant to which each Fund is authorized to pay compensation to banks and other financial institutions, which may include the Adviser, its correspondent and affiliated banks and the Administrator (each a "Service Organization"). Such Service Organizations agree to provide certain ministerial, record keeping and/or administrative support services for their customers or account holders who are the beneficial or record owner of shares of that Fund. In consideration for such services, a Service Organization receives a fee from a Fund, computed daily and paid monthly at an annual rate of up to 0.25 percent of the average daily net asset value of shares of that Fund owned beneficially or of record by such Service Organization's customers for whom the Service Organization provides such services. Currently, the Board of Directors has not authorized payments under the Administrative Services Plan.
The Funds are authorized to issue a total of 1,000,000,000 shares of common stock in series with a par value of $0.00001 per share. The Board of Directors is empowered to issue other series of the Company's shares without shareholder approval.
Each share of stock will have a pro rata interest in the assets of the Fund to which the stock of that series relates and will have no interest in the assets of any other Fund.
Transactions in shares of the Funds for the period from April 10, 1995 to July 31, 1995 were as follows:
The aggregate purchases and sales of securities, excluding short-term investments, for the Funds for the period from April 10, 1995 to July 31, 1995 were as follows:
At July 31, 1995, gross unrealized appreciation and depreciation of investments were as follows:
Commercial Paper Ratings. Commercial paper ratings of Standard & Poor's Corporation ("S&P") are current assessments of the likelihood of timely payment of debt considered short-term in the relevant market. Commercial paper rated A-1 by S&P indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted A-1+. Commercial paper rated A-2 by S&P indicates that capacity for timely payment on issues is satisfactory. However, the relative degree of safety is not as high as for issues designated A-1. Commercial paper rated A-3 by S&P indicates adequate capacity for timely payment. Such paper is, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. Commercial paper rated B by S&P is regarded as having only speculative capacity for timely payment. Commercial paper rated C by S&P is regarded as short-term obligations with a doubtful capacity for payment. Commercial paper rated D by S&P 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.
Moody's Investors Service, Inc.'s ("Moody's") commercial paper rating are opinions of the ability of issuers to repay punctually senior debt obligations which have an original maturity not exceeding one year. The rating Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers rated Prime-1 (or supporting institutions) are considered to have a superior capacity for repayment of senior short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; and well-established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated Prime-2 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics of Prime-1 rated issuers, but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variations. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained. Issuers rated Prime-3 (or supporting institutions) have a strong ability for repayment of senior short-term debt obligations. The effects of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained. Issuers rated Not Prime do not fall within any of the Prime rating categories.
Commercial paper rated F-1+ by Fitch Investors Service ("Fitch") is regarded as having the strongest degree of assurance for timely payments. Commercial paper rated F-1 by Fitch is regarded as having an assurance of timely payment only slightly less than the strongest rating, i.e., F-1+. Commercial paper rated F-2 by Fitch is regarded as having a satisfactory degree of assurance of timely payment, but the margin of safety is not as great as for issues assigned F-1+ or F-1 ratings. Commercial paper rated F-3 by Fitch is regarded as having characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse changes could cause these securities to be rated below investment grade. Commercial paper rated F-S by Fitch is regarded as having characteristics suggesting a minimal degree of assurance for timely payment and is vulnerable to near term adverse changes in financial and economic conditions. Commercial paper rated D by Fitch is in actual or imminent payment default.
The description of the three highest short-term debt ratings by Duff & Phelps, Inc. ("Duff") (Duff incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist investors in recognizing quality differences within the highest rating category) are as follows. Duff 1+ is regarded as having the highest certainty of timely payment. Short-term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding, and safety is just below risk-free U.S. Treasury short-term obligations. Duff 1 is regarded as having a very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Duff 1- is regarded as having a high certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are minor. Duff 2 is regarded as having a good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. Duff 3 is regarded as having a satisfactory liquidity and other protection factors qualify issue as to investment grade. Risk factors are larger and subject to more variation. Nevertheless, timely payment is expected. Duff 4 is considered as having speculative investment characteristics. Liquidity is not sufficient to insure against disruption in debt service. Operating factors and market access may be subject to a high degree of variation. Duff 5 indicates that the issuer has failed to meet scheduled principal and/or interest payments.
Commercial paper rated Al by IBCA Limited and its affiliate, IBCA Inc. (collectively "IBCA") is regarded by IBCA as obligations supported by the highest capacity for timely repayment. Where issues possess a particularly strong credit feature, a rating of Al+ is assigned. Obligations rated A2 are supported by a good capacity for timely repayment. Obligations rated A3 are supported by a satisfactory capacity for timely repayment. Obligations rated B are those for which there is an uncertainty as to the capacity to ensure timely repayment. Obligations rated C are those for which there is a high risk of default or which are currently in default.
The following summarizes the description of the three highest short-term ratings of Thomson BankWatch, Inc. ("Thomson"). TBW-1 is the highest category and indicates a very high likelihood that principal and interest will be paid on a timely basis. TBW-2 is the second highest category indicating that while the degree of safety regarding timely repayment of principal and interest is strong, the relative degree of safety is not as high as for issues rated "TBW-l." TBW-3 is the lowest investment grade category and indicates that while more susceptible to adverse developments (both internal and external) than obligations with higher ratings, capacity to service principal and interest in a timely fashion is considered adequate. TBW-4 is the lowest rating category and is regarded as non-investment grade and therefore speculative.
The plus (+) sign is used after a rating symbol to designate the relative position of an issuer within the rating category.
Corporate Debt Ratings. A S&P corporate debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. Debt rated AA has a very strong capacity to pay interest and to repay principal and differs from the highest rated issues only in small degree. Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to 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.
The following summarizes the four highest ratings used by Moody's for corporate debt. Bonds that 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 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. Bonds that 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. Bonds that 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 some time in the future. Bonds that 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.
Moody's applies numerical modifiers (1, 2, and 3) with respect to bonds rated Aa through Baa. The modifier 1 indicates that the bond being rated 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 bond ranks in the lower end of its generic rating category.
The following summarizes the four highest long-term debt ratings by Duff. Debt rated AAA has the highest credit quality. The risk factors are negligible being only slightly more than for risk-free U.S. Treasury debt. Debt rated AA has a high credit quality and protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions. Debt rated A has protection factors that are average but adequate. However, risk factors are more variable and greater in periods of economic stress. Debt rated BBB has below average protection factors but is still considered sufficient for prudent investment. However, there is considerable variability in risk during economic cycles.
To provide more detailed indications of credit quality, the ratings from AA to BBB may be modified by the addition of a plus or minus sign to show relative standing within this major rating category.
The following summarizes the four highest long-term debt ratings by Fitch (except for AAA ratings, plus or minus signs are used with a rating symbol to indicate the relative position of the credit within the rating category). Bonds rated AAA are considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. Bonds rated AA are considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as 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 issues is generally rated "F-1+". Bonds rated as A are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. Bonds rated BBB are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore, impair timely payment. The likelihood that the ratings for these bonds will fall below investment grade is higher than for bonds with higher ratings.
The following summarizes IBCA's four highest long-term debt ratings. Obligations rated AAA are those for which there is the lowest expectation of investment risk. Capacity for timely repayment of principal and interest is substantial, such that adverse changes in business, economic or financial conditions are unlikely to increase investment risk significantly. Obligations rated AA are those for which there is a very low expectation of investment risk. Capacity for timely repayment of principal and interest is substantial. Adverse changes in business, economic, or financial conditions may increase investment risk albeit not very significantly. Obligations rated A are those for which there is a low expectation of investment risk. Capacity for timely repayment of principal and interest is strong, although adverse changes in business, economic or financial conditions may lead to increased investment risk. Obligations rated BBB are those for which there is currently a low expectation of investment risk. Capacity for timely repayment of principal and interest is adequate, although adverse changes in business, economic, or financial conditions are more likely to lead to increased investment risk than for obligations in other categories.
The following summarizes Thomson's description of its four highest long-term debt ratings (Thomson may include a plus (+) or minus (-) designation to indicate where within the respective category the issue is placed). AAA is the highest category and indicates that the ability to repay principal and interest on a timely basis is very high. AA is the second highest category and indicates a superior ability to repay principal and interest on a timely basis with limited incremental risk versus issues rated in the highest category. A is the third highest category and indicates the ability to repay principal and interest is strong. Issues rated "A" could be more vulnerable to adverse developments (both internal and external) than obligations with higher ratings. BBB is the lowest investment grade category and indicates an acceptable capacity to repay principal and interest. Issues rated BBB are, however, more vulnerable to adverse developments (both internal and external) than obligations with higher ratings.
The following summarizes the three highest ratings used by Moody's for state and municipal short-term obligations. Obligations bearing MIG-1 or VMIG-1 designations are of the best quality, enjoying strong protection by established cash flows, superior liquidity support or demonstrated broad-based access to the market for refinancing. Obligations rated MIG-2 or VMIG-2 denote high quality with ample margins of protection although not so large as in the preceding rating group. Obligations bearing MIG-3 or VMIG-3 denote favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established.
S&P SP-1, SP-2, and SP-3 municipal note ratings (the three highest ratings assigned) are described 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.
"SP-3": Speculative capacity to pay principal and interest.
The following summarizes the four highest ratings used by Moody's for state and municipal bonds:
"Aaa": Bonds 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 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 which 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 which 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.
The following summarizes the four highest ratings used by S&P for state and municipal bonds:
"AAA": Debt which has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong.
"AA": Debt which has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree.
"A": Debt which 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 than debt in higher rated categories.
"BBB": Debt which has 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.
Definitions of Certain Money Market Instruments
Commercial paper consists of unsecured promissory notes issued by corporations. Issues of commercial paper normally have maturities of less than nine months and fixed rates of return.
Certificates of Deposit are negotiable certificates issued against funds deposited in a commercial bank or a savings and loan association for a definite period of time and earning a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations are obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Government. These obligations may include Treasury bills, notes and bonds, and issues of agencies and instrumentalities of the U.S. Government, provided such obligations are guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations of the U.S. Government include Treasury bills, certificates of indebtedness, notes and bonds, and issues of agencies and instrumentalities of the U.S. Government, such as the Government National Mortgage Association, the Tennessee Valley Authority, the Farmers Home Administration, the Federal Home Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal Land Banks, the Federal Housing Administration, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Student Loan Marketing Association. Some of these obligations, such as those of the Government National Mortgage Association, are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal National Mortgage Association, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Student Loan Marketing Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations, still others, such as those of the Federal Farm Credit Banks, are supported only by the credit of the instrumentality. No assurance can be given that the U. S. Government would provide financial support to U.S. Government sponsored instrumentalities if it is not obligated to do so by law.
Item 24. Financial Statements and Exhibits
(2) Included in Part B:
A. Accountants' Report dated February 10, 1995. Statements of Assets and Liabilities as of February 10, 1995. Notes to Financial Statements dated February 10, 1995.
B. Statements of Assets and Liabilities as of July 31, 1995. Statements of Operations for the period ended July 31, 1995. Statements of Changes in Net Assets for the period ended July 31, 1995. Financial Highlights. Notes to Financial Statements. Schedules of Investments.
(3) Included in Part C (incorporated by reference from Post-Effective Amendment No. 1 filed September 18, 1995):
Consent of KPMG Peat Marwick LLT*
Item 25. Persons Controlled by or under Common Control with Registrant
Item 26. Number of Holders of Securities
Section 21-2004(15) of the Nebraska Business Corporation Act allows indemnification of officers and directors of the Registrant under circumstances set forth therein. The Registrant has made such indemnification mandatory. Reference is made to Article 8-D of the Articles of Incorporation (Exhibit 1), Article XIII of the Bylaws of Registrant (Exhibit 2).
The general effect of such provision is to require indemnification of persons who are in an official capacity with the corporation against judgments, penalties, fines and reasonable expenses including attorneys' fees incurred by said person if: (1) the person has not been indemnified by another organization for the same judgments, penalties, fines and expenses for the same acts or omissions; (2) the person acted in good faith; (3) the person received no improper personal benefit; (4) in the case of a criminal proceeding, the person had no reasonable cause to believe the conduct was unlawful; and (5) in the case of directors, officers and employees of the corporation, such persons reasonably believed that the conduct was in the best interests of the corporation, or in the case of directors, officers or employees serving at the request of the corporation for another organization, such person reasonably believed that the conduct was not opposed to the best interests of the corporation. A corporation is permitted to maintain insurance on behalf of any officer, director, employee or agent of the corporation, or any person serving as such at the request of the corporation, against any liability of such person.
Nevertheless, Article 8-D of the Articles of Incorporation prohibits any indemnification which would be in violation of Section 17(h) of the Investment Company Act of 1940, as now enacted or hereafter amended and Article XIII of the Fund's Bylaws prohibits any indemnification inconsistent with the guidelines set forth in Investment Company Act Releases No. 7221 (June 9, 1972) and No. 11330 (September 2, 1980). Such Releases prohibit indemnification in cases involving willful misfeasance, bad faith, gross negligence and reckless disregard of duty and establish procedures for the determination of entitlement to indemnification and expense advances.
Insofar as indemnification for liabilities 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 by the Registrant is against public policy as expressed in the Act and, therefore, may be unenforceable. In the event that a claim for such indemnification (except insofar as it provides for the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted against the Registrant by such director, officer or controlling person and the Securities and Exchange Commission is still of the same opinion, 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 of whether or not such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
In addition to the indemnification provisions contained in the Registrant's Articles and Bylaws, there are also indemnification and hold harmless provisions contained in the Investment Advisory Agreement, Distribution Agreement, Administration and Fund Accounting Agreement and Custodian Agreement. Finally, the Registrant has also included in its Articles of Incorporation (See Article X of the Articles of Incorporation (Exhibit 1)) a provision which eliminates the liability of outside directors to monetary damages for breach of fiduciary duty by such directors. Pursuant to Neb. Rev. Stat. Section 21-2035(2), such limitation of liability does not eliminate or limit liability of such directors for any act or omission not in good faith which involves intentional misconduct or a knowing violation of law, any transaction from which such director derived an improper direct or indirect financial benefit, for paying a divided or approving a stock repurchase which was in violation of the Nebraska Business Corporation Act and for any act or omission which violates a declaratory or injunctive order obtained by the Registrant or its shareholders.
Item 28. Business and Other Connections of Investment Adviser
First National Bank of Omaha (the "Adviser") is the investment adviser for First Omaha Small Cap Value Fund, First Omaha U.S. Government Obligations Fund, First Omaha Equity Fund, First Omaha Short/Intermediate Fixed Income Fund, and First Omaha Fixed Income Fund. The Adviser is a subsidiary of First National of Nebraska, Inc., a Nebraska corporation with total assets of approximately $5.3 billion as of December 31, 1994. The Adviser provides a full range of financial and trust services to businesses, individuals, and government entities. The Adviser serves Nebraska, as well as other areas of the Midwest. As of December 31, 1994, the Adviser's Trust Division had approximately $5.2 billion of assets under administration, including approximately $1.9 billion under management.
To the knowledge of Registrant, none of the directors or officers of the Adviser is or has been at any time during the past two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature, except that certain officers and directors of the Adviser also hold positions with the Adviser's parent, First National of Nebraska, Inc., or its subsidiaries or affiliates.
(a) Sunstone Financial Group, Inc. currently serves as administrator and distributor of the shares of Haven Capital Management Trust and Northern Funds Trust.
(b) To the best of Registrant's knowledge, the directors and executive officers of Sunstone Financial Group, Inc., distributor for Registrant, are as follows:
Item 30. Location of Accounts and Records
Records relating to Sunstone Financial Group, Inc.'s functions as distributor, fund accountant and administrator for the Registrant are located at 207 E. Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202. All other accounts, books and other documents required to be maintained under Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are in the physical possession of the Adviser, One First National Center, Omaha, Nebraska 68102 or DST Systems, Inc., 210 W. 10th Street, Kansas City, Missouri 64105.
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.
The Registrant undertakes to provide a copy of its Annual Report to Shareholders upon request and without charge to each person to whom the Prospectus of the Funds has been delivered.
The Registrant undertakes, if requested to do so by the holders of at least 10% of Registrant's outstanding shares, to call a meeting of shareholders for the purpose of voting upon the question of removal of any director and to assist in communications with other shareholders as required by Section 16(c).
Registrant undertakes to file a post-effective amendment, using financial statements of the Small Cap Value Fund which need not be certified, within four to six months from the effective date of this Amendment.
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Post-Effective 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 Omaha and the State of Nebraska, on the 10th day of January, 1996.
By: /s/ Marc M Diehl by Marc M Diehl, Attorney-in-Fact
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 indicated on January 10, 1996.
Between First Omaha Funds, Inc. and First National Bank of Omaha dated as of December 20, 1994
* All fees are computed daily and paid monthly
By: /s/ David P. Greer
FIRST NATIONAL BANK OF OMAHA By: /s/ Marc M Diehl
* All fees are computed daily and paid monthly
FIRST OMAHA FUNDS, INC. SUNSTONE FINANCIAL GROUP, INC.
By:/s/ David P. Greer By: /s/ Miriam M. Allison David P. Greer Miriam M. Allison
between First Omaha Funds, Inc. and First National Bank of Omaha Dated as of December 20, 1994
By /s/ David P. Greer
FIRST NATIONAL BANK OF OMAHA By /s/ Marc M. Diehl Marc M. Diehl, Trust Division Head
*All fees, are computed daily and paid monthly.
ADMINISTRATION AND FUND ACCOUNTING AGREEMENT FIRST OMAHA FUNDS, INC. SUNSTONE FINANCIAL GROUP, INC.
FIRST OMAHA FUNDS, INC. SUNSTONE FINANCIAL GROUP, INC.
By: /s/ David P. Greer By: /s/ Miriam M. Allison David P. Greer Miriam M. Allison
TO SERVICING AGREEMENT FOR ADMINISTRATIVE SERVICING PLAN FOR FIRST OMAHA FUNDS, INC.
First Omaha U.S. Government Obligations Fund First Omaha Short/Intermediate Fixed Income Fund First Omaha Fixed Income Fund First Omaha Small Cap Value Fund
Signed: /s/ Marc M. Diehl | 485APOS | 485APOS | 1996-01-12T00:00:00 | 1996-01-12T14:18:15 |
0000950147-96-000014 | 0000950147-96-000014_0006.txt | <DESCRIPTION>AMENDED AND RESTATED PROMISSORY NOTE
AMENDED AND RESTATED PROMISSORY NOTE EXHIBIT 10.5
Principal Amount: $15,000,000.00 Date: November 30, 1995 Bank One Center, Phoenix , Arizona.
PROMISE TO PAY AND INTEREST. For value received, the undersigned ("Borrower"), promises to pay to BANK ONE, ARIZONA, NA, a national banking association formerly known as The Valley National Bank of Arizona, or order ("Bank") at its above office, or at such other place as Bank may designate in writing, in lawful money of the United States of America, the principal sum of FIFTEEN MILLION AND NO/100 DOLLARS ($15,000,000.00), or such lesser amount as shall have been disbursed and is unpaid as shown on the records of Bank which shall be conclusive as to such amount, with interest thereon from the date advanced at the applicable rate from time to time ("Interest Rate") from time to time on each advance ("Advance") under the Loan Agreement (as hereafter defined), from the date advanced as follows:
(a) Except to the extent that an Advance bears interest at the Fixed Rate, as defined herein, pursuant to this Note, interest shall accrue on the unpaid principal of each Advance at the Variable Rate. Interest at the Variable Rate shall be computed on the basis of a 360 day year and accrue on a daily basis for the actual number of days elapsed.
(b) To the extent Borrower shall elect as provided in this Note and to the extent not otherwise provided in this Note, interest shall accrue on the unpaid principal of an Advance at the Fixed Rate. Interest at the Fixed Rate shall be computed on the basis of a 360 day year and accrue on a daily basis for the actual number of days elapsed.
As used in this Note:
"Applicable Spread" means, on any date, the applicable spread set forth below, based upon the ratings ("Ratings") issued by Standard & Poor's (Claim Paying Ability) and Moody's (Financial Strength) and applicable on such date to the Public Notes:
BBB- or above/Baa3 or above 1.25% 0% B or below/B2 or below 2.50% .25%
The Applicable Spread shall be the amount set forth in the above table that is opposite the lower of said Moody's and Standard & Poor's Ratings for the type of Advance; provided, however, (i) if more than one rating level exists between the Ratings of the two agencies on the date of determination, the Applicable Spread shall be the number set forth above that is opposite the Rating that is one level below the highest of the two Ratings; (ii) if either rating agency shall not have in effect a Rating with respect to the Public Notes for a reason related to the creditworthiness of Borrower or to any act or failure on the part of Borrower, the Applicable Spread shall be determined by reference to the single Rating that shall be in effect or, if no Rating shall be in effect from either agency, by reference to the last category described in the foregoing table; (iii) if any Rating shall be changed (other than as a result of a change in the rating system of Moody's or S&P), such change shall be effective as of the date on which it is first announced by the applicable rating agency. Each change in the Applicable Spread shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change.
If the rating system of Moody's or S&P shall change, or if either such rating agency shall no longer have in effect a rating for the Public Notes and Clause (ii) above shall not be applicable, Borrower and Bank shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system or the non-availability of ratings from such rating agency.
"Business Day" means a day of the year on which banks are not required or authorized to close in Phoenix, Arizona, and, with respect to a Fixed Rate Advance, a day on which dealings are carried on in the London interbank market.
"Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors to the Federal Reserve System, as in effect from time to time.
"Eurodollar Rate Reserve Percentage" for the Interest Period for each Fixed Rate Advance means the reserve percentage applicable two (2) Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental, or other marginal reserve requirement) for a member bank of the Federal Reserve System in San Francisco with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities which includes deposits by reference to which the Interest Rate on Fixed Rate Advances is determined) having a term equal to such Interest Period.
"Fixed Rate" means the rate per annum equal to the sum of (i) the Applicable Spread (on a per annum basis), and (ii) the rate per annum obtained by dividing (A) the rate of interest determined by Bank, based on Telerate System reports or such other source as may be selected by Bank, to be the "London Interbank Offered Rate" at which deposits in United States dollars are offered by major banks in London, England, one (1) Business Day before the first day of the respective Interest Period by (B) a percentage equal to one hundred percent (100%) minus the Eurodollar Rate Reserve Percentage for the period equal to such Interest Period.
"Fixed Rate Advance" means an Advance that bears or is requested to bear interest at the Fixed Rate.
"Interest Period" means, for each Fixed Rate Advance, the period commencing on the date of such Fixed Rate Advance and ending on the last day of the period selected by Borrower pursuant to the provisions herein and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by Borrower pursuant to the provisions herein. The duration of each Interest Period shall be 30, 60, 90, or 120 days, as selected by Borrower (A), for a new Advance, in the request for a Fixed Rate Advance or (B), for an outstanding Advance, in the request for a Fixed Rate Advance to continue bearing interest at the Fixed Rate; provided, however, that:
(i) Interest Periods commencing on the same date shall be of the same duration;
(ii) Whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and
(iii) No Interest Period with respect to any Advance shall extend beyond the Maturity Date.
"Regulatory Change" means any change effective after the date of this Note in United States federal, state, or foreign law, regulations, or rules or the adoption or making after such date of any interpretation, directive, or request applying to a class of banks including Bank, of or under any United States federal, state, or foreign law, regulation or rule (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof.
"Variable Rate" means the rate per annum equal to the sum of (i) the Applicable Spread (on a per annum basis), and (ii) the rate per annum most recently publicly announced by Bank, or its successors, in Phoenix, Arizona, as its "prime rate," as in effect from time to time. The Variable Rate will change on each day that the "prime rate" changes. The "prime rate" is not necessarily the best or lowest rate offered by Bank, and Bank may lend to its customers at rates that are at, above, or below its "prime rate."
"Variable Rate Advance" means an Advance that bears or that is requested to bear interest at the Variable Rate.
If the rating system of Moody's or S&P shall change, or if either such rating agency shall no longer have in effect a rating for the Public Notes and Clause (ii) above shall not be applicable, Borrower and Bank shall negotiate in good faith to amend the references to specific ratings in this definition to reflect such changed rating system or the non-availability of ratings from such rating agency.
Each request for an Advance under the Loan Agreement shall, in addition to complying with the other requirements in the Loan Agreement, (i) specify the date and amount of the requested Advance, (ii) specify whether the Advance shall be an Advance that bears interest at the Variable Rate or shall be an Advance that bears interest at the Fixed Rate, and (iii) if the Advance is to bear interest at the Fixed Rate, (A) specify the Interest Period, (B) be delivered to Bank at least two (2) Business Days prior to the date of the requested Advance, (C) be in a minimum amount of $1,000,000 with integral multiples of $500,000 in excess thereof, and, (D), when added to the number of previous Advances bearing interest at the Fixed Rate, not cause the aggregate number of all outstanding Advances bearing interest at the Fixed Rate to exceed four (4). Any Advance not complying with the foregoing requirements for an Advance bearing interest at the Fixed Rate shall bear interest at the Variable Rate.
If Borrower desires that a Fixed Rate Advance continue to bear interest at the Fixed Rate after the end of an existing Interest Period, Borrower shall deliver to Bank a notice making such election and specifying the new Interest Period. If Borrower does not deliver such notice within such time, then after the existing Interest Period the Fixed Rate Advance shall become a Variable Rate Advance and shall bear interest at the Variable Rate.
Borrower may on any Business Day, upon written notice to and received by Bank not later than 12:00 p.m. (Phoenix, Arizona local time) (i) on the second Business Day, in the case of any conversion of a Variable Rate Advance into a Fixed Rate Advance and (ii) on the first Business Day in the case of any conversion of a Fixed Rate Advance into a Variable Rate Advance, prior to the date of the proposed conversion, convert any Advance of one type into an Advance of the other type; provided, however, that any conversion of a Fixed Rate Advance (A) shall only be made on the last day of the applicable Interest Period, (B) shall be made only as to an Advance in a minimum amount of $1,000,000 with integral multiples of $500,000 in excess thereof, and (C) shall not result after such requested conversion in the aggregate number of Fixed Rate Advances exceeding four (4). Each such notice of a conversion shall specify the date of such conversion and the Advance(s) to be converted.
Notwithstanding any provision of the Loan Documents to the contrary, Bank shall be entitled to fund and maintain its funding of all or any part of any Advance in any manner it sees fit; provided, however, that for the purposes of this Note, all determinations hereunder shall be made as if Bank had actually funded and maintained each Fixed Rate Advance during the Interest Period therefor through the purchase of deposits having a maturity corresponding to the last day of the Interest Period and bearing an interest rate equal to the Fixed Rate for such Interest Period.
If, due to any Regulatory Change, there shall be any increase in the cost to Bank of agreeing to make or making, funding, or maintaining Fixed Rate Advances (including, without limitation, any increase in any applicable reserve requirement), then Borrower shall from time to time, upon demand by Bank, pay to Bank such amounts as Bank may reasonably determine to be necessary to compensate Bank for any additional costs that Bank reasonably determines are attributable to such Regulatory Change and Bank will notify the Borrower of any Regulatory Change that will entitle Bank to compensation pursuant to this paragraph as promptly as practicable, but in any event within 90 days after Bank obtains knowledge thereof; provided, however, that if Bank fails to give such notice within 90 days after it obtains knowledge of such a Regulatory Change, Bank shall, with respect to compensation payable in respect of any costs resulting from such Regulatory Change, only be entitled to payment for costs incurred from and after the date that Bank does give such notice. Bank will furnish to Borrower a certificate setting forth in reasonable detail the basis for the amount of each request by Bank for compensation under this paragraph. Determinations by Bank of the amounts required to compensate Bank shall be conclusive, absent manifest error. Bank shall be entitled to compensation in connection with any Regulatory Change only for costs actually incurred by Bank.
Notwithstanding any provision of the Loan Documents, if Bank shall notify Borrower that as a result of a Regulatory Change it is unlawful for Bank to make Advances at the Fixed Rate, or to fund or maintain Fixed Rate Advances, (i) the obligations of Bank to make Advances at the Fixed Rate and to convert Advances to the Fixed Rate shall be suspended until Bank shall notify Borrower that the circumstances causing such suspension no longer exist, and (ii) in the event such Regulatory Change makes the maintenance of Advances at the Fixed Rate unlawful, Borrower shall forthwith prepay in full all Fixed Rate Advances then outstanding, together with interest accrued thereon and all amounts in connection with such prepayment specified in the paragraph in this Note titled "PREPAYMENT," unless Borrower, within five (5) Business Days of notice from Bank, converts all Fixed Rate Advances then outstanding into Variable Rate Advances pursuant to the conversion procedures in this Note and pays all amounts in connection with such prepayments or conversions specified in the paragraph in this Note titled "PREPAYMENT."
Notwithstanding any other provision of the Loan Documents, if prior to the commencement of any Interest Period, Bank shall determine (i) that United States dollar deposits in the amount of any Fixed Rate Advance to be outstanding during such Interest Period are not readily available to Bank in the London interbank market, or (ii) by reason of circumstances affecting the London interbank market, adequate and reasonable means do not exist for ascertaining the Fixed Rate for such Interest Period in the manner prescribed above in the definition of "Fixed Rate," then Bank shall promptly give notice thereof to Borrower and the obligation of Bank to create, continue, or effect by conversion any Fixed Rate Advance in such amount and for such Interest Period shall terminate until United States dollar deposits in such amount and for the Interest Period shall again be readily available in the London interbank market and adequate and reasonable means exist for ascertaining the Fixed Rate.
Interest shall be due and payable commencing on December 1, 1995, and continuing on the same day of each successive month thereafter until November 30, 1996 ("Maturity Date"). No payments of principal shall be due and payable until the Maturity Date.
On the Maturity Date Borrower shall pay to Bank the unpaid principal, all accrued and unpaid interest, and all other amounts ("Other Amounts") payable by Borrower to Bank under the Loan Documents. "Loan Documents" means this Note, the Amended and Restated Loan Agreement of even date herewith (the "Loan Agreement") between Borrower and Bank, and any other agreements, documents, and instruments evidencing, guarantying, securing, or otherwise relating to this Note, as they may be amended, modified, extended, renewed, restated, or supplemented from time to time.
Principal shall bear interest at the Interest Rate from the date of disbursement until the due date thereof, whether due by acceleration or otherwise. Principal, interest, and Other Amounts not paid when due and any judgment therefor shall bear interest from its due date or the judgment date, as applicable, until paid at a rate ("Default Rate") equal to the sum of (i) four percent (4%) per annum and (ii) the Variable Rate, and such interest shall be immediately due and payable.
All 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. Borrower agrees to pay an effective rate of interest that is the sum of (i) the interest rate provided herein and (ii) any additional rate of interest resulting from any other charges or fees paid or to be paid in connection herewith that are determined to be interest or in the nature of interest.
APPLICATION OF PAYMENTS. At the option of Bank, payments shall be applied to principal, interest, and Other Amounts in such order as Bank shall determine.
PREPAYMENT. Except as to payments due under this paragraph with respect to payment or conversion of a Fixed Rate Advance on a day other than the last Business Day in the Interest Period for such Fixed Rate Advance, Borrower may prepay the outstanding principal balance hereof in whole or in part at any time prior to the Maturity Date without penalty or premium as stated in such notice by Borrower; provided, however, that if any payment of all or any portion of a Fixed Rate Advance shall be made other than on the last day of the Interest Period for such Fixed Rate Advance for any reason (including, without limitation, any optional or required prepayment and any acceleration of the Maturity Date) then, anything in the Loan Documents to the contrary notwithstanding, Borrower shall pay to Bank contemporaneously with such prepayment, a payment equal to any losses, costs, or expenses that Bank may reasonably incur as a result of such prepayment, including, without limitation, any loss (including, without limitation, loss of anticipated profits), cost, or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by Bank to fund or maintain such Fixed Rate Advance. Borrower agrees to also make a payment under the immediately preceding sentence upon each conversion of a Fixed Rate Advance to a Variable Rate Advance on a date other than the last Business Day of the Interest Period for such Fixed Rate Advance to be determined as if the amount so converted had been prepaid on the date of conversion. The obligations of Borrower and the rights of Bank under this paragraph shall survive payment and performance of the obligations of the Loan Parties under the Loan Documents and shall remain in full force and effect without termination. Bank will furnish to Borrower a certificate setting forth in reasonable detail the basis for the amount of each request by Bank for payment under this paragraph. The determination by Bank of amounts due under this paragraph shall be conclusive, absent manifest error.
LATE CHARGE. If any payment of principal and/or interest is not received by Bank within fifteen (15) days after its due date, then, in addition to the other rights and remedies of Bank, a late charge of four percent (4%) of the amount due and unpaid will be charged to Borrower without notice to Borrower. Such late charge shall be immediately due and payable.
NO COUNTERCLAIMS, DEDUCTIONS, ETC. All payments and other obligations of Borrower under the Loan Documents will be made and performed without counterclaim, deduction, defense, deferment, reduction, or set-off.
EVENTS OF DEFAULT. Each of the following shall be an event of default ("Event of Default"):
13.1 Failure by any Loan Party to pay when due (i) any amount payable by such Loan Party under any of the Loan Documents and the expiration of ten (10) days after notice of such failure from Bank to Borrower, or (ii) any other indebtedness of such Loan Party to Bank and the expiration of any notice and grace periods with respect to such failure as provided din the documents governing such other indebtedness. "Loan Party" means Borrower and any other person that from time to time is obligated to Bank under any of the Loan Documents or grants any property, interests in property, or rights to property to secure any or all obligations of any person under the Loan Documents.
13.2 Failure by any Loan Party to perform any obligation not involving the payment of money (other than those obligations referred to in paragraph 12 below, which shall be governed by such paragraph), or to comply with any other term or condition applicable to such Loan Party, in any of the Loan Documents and the expiration of twenty (20) days after notice of such failure from Bank to Borrower.
13.3 Any representation or warranty made by any Loan Party in any of the Loan Documents or otherwise or any information delivered by any Loan Party to Bank in obtaining or hereafter in connection with the credit evidenced by this Note is materially incomplete, incorrect, or misleading as of the date made or delivered.
13.4 Bank in good faith deems itself insecure or believes in good faith that a Material Adverse Change has occurred after the date of the financial statements and other information provided by any Loan Party in obtaining the credit evidenced by this Note. "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 in the Loan Documents, (ii) could affect the ability of any Loan Party to perform any of the obligations in any of the Loan Documents, (iii) could affect the legality, validity, or binding nature of any of the obligations in the Loan Documents or any lien or encumbrance securing any of the obligations under the Loan Documents, or (iv) could affect the priority of any lien, security interest, or other encumbrance securing any of the obligations in the Loan Documents.
13.5 Any Loan Party (i) is unable or admits in writing such Loan Party's inability to pay such Loan Party's monetary obligations as they become due, (ii) makes a general assignment for the benefit of creditors, or (iii) applies for, consents to, or acquiesces in, appointment of a trustee, receiver, or other custodian for such Loan Party or any or all of the property of such Loan Party, or in the absence of such application, consent, or acquiescence by such Loan Party a trustee, receiver, or other custodian is appointed for such Loan Party or any or all of the property of such Loan Party.
13.6 Commencement of any case under the Bankruptcy Code (Title 11) of the United States Code) or commencement of any other bankruptcy, arrangement, reorganization, receivership, custodianship, or similar proceeding under any federal, state, or foreign law by or against any Loan Party.
13.7 The death, incompetence, dissolution, or liquidation of any Loan Party; the consolidation or merger of any Loan Party with any other Person; or the taking of any action by any Loan Party toward a dissolution, liquidation, consolidation, or merger.
13.8 Any Loan Party or any other person on behalf of any Loan Party claims that any Loan Document is not legal, valid, binding, and enforceable against any Loan Party, that any lien, security interest, or other encumbrance securing any of the obligations under the Loan Documents is not legal, valid, binding, and enforceable, or that the priority of any lien, security interest, or other encumbrance securing any of the obligations in the Loan Documents is different than the priority represented and warranted in the Loan Documents.
13.9 The occurrence of (i) any of the events described in Section 6.01(1) through (7) inclusive of the Indenture (as defined in the Loan Agreement) regardless of whether or not the trustee or holders of the Public Notes (as defined in the Loan Agreement) have notified Borrower of such event or exercised any of their rights and remedies with respect thereto, or (ii) any of the events described in Section 6.01(1) through (7) inclusive of the Subordinated Notes Indenture (as defined in the Loan Agreement) regardless of whether or not the trustee or holders of the Subordinated Notes (as defined in the Loan Agreement) have notified the Borrower of such event or exercised any of their rights and remedies with respect thereto.
13.10 Failure of Borrower to pay the entire outstanding principal, all accrued and unpaid interest, and all other amounts due under the Convertible Notes Indenture and/or the Convertible Notes (as defined in the Loan Agreement) on or before December 11, 1995.
13.11 The occurrence of any Change of Control (as defined in the Loan Agreement).
13.12 The occurrence of any condition or event that is a default or is designated as a default, an event of default, or an Event of Default in any other Loan Document or in any agreement, document, or instrument relating to any other indebtedness of any Loan Party to Bank or any indebtedness of any Subsidiary to Bank, including, without limitation, the Warehousing Facility (as defined in the Loan Agreement).
13.13 Borrower fails to comply with the financial covenants set forth in Section 6.12.1, 6.12.2, or 6.12.3 of the Loan Agreement in each of two consecutive quarterly fiscal periods and/or Borrower violates any of the negative covenants set forth in Section 7 of the Loan Agreement.
13.14 The occurrence of any condition or event that is a default or designated as a default, or event of default or other event or occurrence that permits the exercise of rights and remedies in any agreement, document or instrument relating to any Bank Facility (as defined in the Loan Agreement) or any other Debt of any Loan Party.
13.15 Any default under any future senior note offering. If requested by Bank, after Borrower issues such Senior Notes, Borrower will sign a further amendment confirming such cross default.
RIGHTS AND REMEDIES OF BANK. Upon occurrence of an Event of Default, Bank may, at its option, in its absolute and sole discretion, and without demand or notice, (i) declare the obligations in the Loan Documents to be immediately due and payable, whereupon the obligations in the Loan Documents shall be immediately due and payable, and (ii) exercise any or all other rights and remedies of Bank concurrently or consecutively in such order as Bank elects. The rights and remedies of Bank shall be cumulative and non-exclusive. Delay, discontinuance, or failure to exercise any right or remedy of Bank shall not be a waiver thereof, or of any other right or remedy of Bank, or of the time of the essence provision. Exercise of any right or remedy of Bank shall not cure or waive any Event of Default or invalidate any act done in response to any Event of Default.
LIMIT OF LIABILITY OF BANK. In exercising rights and remedies, neither Bank nor any stockholder, director, officer, employee, agent, or representative of Bank shall have any liability for any injury to the assets, business, operations, or property of Borrower or any other liability to Borrower, other than for its own gross negligence or willful misconduct.
SURVIVAL. The representations, warranties, and covenants of the Loan Parties in the Loan Documents shall survive the execution and delivery of the Loan documents and the making of advances to Borrower.
INTEGRATION, ENTIRE AGREEMENT, CHANGE, DISCHARGE, TERMINATION, WAIVER, APPROVAL, CONSENT, ETC. The Loan Documents contain the complete understanding and agreement of Borrower and Bank and supersede all prior representations, warranties, agreements, arrangements, understandings, and negotiations. No provision of the Loan Documents may be changed, discharged, supplemented, terminated, or waived except in a writing signed by the parties thereto. Delay or failure by Bank to insist on performance of any obligation when due or compliance with any other term or condition in the Loan Documents shall not operate as a waiver thereof or of any other obligation, term, or condition or of the time of the essence provision. Acceptance of late payments shall not be a waiver of the time of the essence provision, the right of Bank to require that subsequent payments be made when due, or the right of Bank to declare an Event of Default if subsequent payments are not made when due. Any approval, consent, or statement that a matter is satisfactory by Bank under the Loan Documents must be in writing executed by Bank and shall be construed to apply only to the person(s) and facts specifically set forth in the writing.
BINDING EFFECT. The loan documents shall be binding upon and shall inure to the benefit of bank and the loan parties and their successors and assigns and the executors, legal administrators, personal representatives, heirs, devisees, and beneficiaries of the Loan Parties, provided, however, that the Loan Parties may not assign any of their rights or delegate any of their obligations under the Loan Documents and any purported assignment or delegation shall be void. Bank may from time to time in its absolute and sole discretion assign it rights and delegate its obligations under the Loan Documents, in whole or in part, without notice to or consent by any Loan Party (including, without limitation, participations). In addition to any greater or lesser limitation provided by law, no Loan Party shall assert against any assignee of Bank any claims or defenses such Loan Party may have against Bank, except claims and defenses arising under the Loan Documents.
COSTS, EXPENSES, AND FEES. Borrower agrees to pay on demand all external and internal costs, expenses, and fees (including, without limitation, as applicable, inside and outside attorneys, paralegals, document clerks and specialists, appraisal, appraisal review, environmental assessment, environmental testing, environmental cleanup, other inspection, processing, title, filing, and recording costs, expenses, and fees) of bank (i) in the negotiation, execution, delivery, and modification of the Loan Documents, (ii) in enforcement of the Loan Documents and exercise of the rights and remedies of Bank, (iii) in defense of the legality, validity, binding nature, and enforceability of the Loan Documents and the perfection and priority of the liens and encumbrances granted in the Loan documents, (iv) in gaining possession of, holding, repairing, maintaining, preserving, and protecting the property ("Collateral") securing the obligations in the Loan Documents, (v) in selling or otherwise disposing of the Collateral, (vi) otherwise in relation to the Loan Documents, the Collateral, or the rights and remedies of Bank under the Loan Documents or relating to the Collateral, and (vii) in preparing for the foregoing, whether or not any legal proceeding is brought or other action is taken. Such costs, expenses, and fees shall include, without limitation, all such costs, expenses, and fees incurred in connection with any bankruptcy, receivership, replevin, or other court proceedings (whether at the trial or appellate level). Borrower agrees to pay interest on such costs, expenses, and fees at the Default Rate from the date incurred by Bank until paid in full.
SEVERABILITY. If any provision or any part of any provision of the Loan Documents is unenforceable, the enforceability of the other provisions or the other provisions and the remainder of the subject provision, respectively, shall not be affected and they shall remain in full force and effect.
CHOICE OF LAW. The Loan Documents shall be governed by the laws of the State of Arizona, without giving effect to conflict of laws principles.
TIME OF ESSENCE. Time is of the essence with regard to each provision of the Loan Documents as to which time is a factor.
NOTICES AND DEMANDS. All demands or notices under the Loan Documents shall be in writing (including, without limitation, telecopy, telegraphic, telex, or cable communication) and mailed, telecopied, telegraphed, telexed, cabled, or delivered to the respective party hereto at the address specified at the end of this paragraph or such other address as shall have been specified in a written notice. Any demand or notice mailed shall be mailed first-class mail, postage-prepaid, return receipt requested and shall be effective upon the earlier of (i) actual receipt by the addressee, and (ii) the date shown on the return receipt. Any demand or notice not mailed will be effective upon the earlier of (i) actual receipt by the addressee, and (ii) the time the receipt of the telecopy, telegram, telex, or cable is mechanically confirmed.
Address for Notices to Borrower: 7001 North Scottsdale Road, Suite 2050, Scottsdale, Arizona 85253, Attention: Kenda Gonzales, with a copy to Timothy Westfall at the same address.
Address for Notices to Bank: Western Region Real Estate, P. O. Box 29542, Phoenix, Arizona 85038, Attention: Dept. A-383.
JOINT AND SEVERAL OBLIGATIONS. All obligations in any of the Loan Documents executed by more than one Loan Party shall be the joint and several obligations of each such person. In each Loan Document executed by more than one Loan Party, each reference to Borrower, Obligor, or Trustor shall be a reference to each person executing such Loan document individually and to all such persons collectively.
COMMUNITY PROPERTY AND SEPARATE PROPERTY OF BORROWER. If Borrower includes one or more persons who are married to each other or to other persons, each such person included in Borrower agrees that (i) the Loan documents executed by Borrower are made on behalf of the marital community of each person included in Borrower and his or her spouse, and (ii) Bank may have recourse against the separate property of each person included in Borrower and the community property of each such person included in Borrower and his or her spouse for satisfaction of the obligations of Borrower under the Loan Documents.
BANK'S RIGHT OF SET-OFF. Borrower grants to Bank (i) the right at any time and from time to time after an Event of Default, in the absolute and sole discretion of Bank and without demand or notice to the Borrower, to set-off and apply deposits (whether certificates of deposit, demand, general, savings, special, time, or other, and whether provisional or final) held by Bank for Borrower and any other liabilities or other obligations of Bank to Borrower ("Deposits, Liabilities, and Obligations") against or to the obligations of Borrower under the Loan Documents, regardless of whether the Deposits, Liabilities, and Obligations are contingent, matured, or unmatured, and (ii) a security interest in the Deposits, Liabilities, and Obligations to secure the obligations of Borrower under the Loan Documents. In addition, Borrower grants to Bank the right upon the occurrence of an event that with notice, passage of time, or both would be an Event of Default to segregate all Deposits, Liabilities, and Obligations into an account or otherwise under the sole control of Bank.
INDEMNIFICATION OF BANK. Borrower agrees to indemnify, hold harmless, and on demand defend Bank and its stockholders, directors, officers, employees, agents, and representatives for, from, and against any and all damages, losses, liabilities, costs, and expenses (including, without limitation, costs and expenses of litigation and reasonable attorneys' fees) arising from any claim or demand in respect of the Loan Documents, the Collateral, or the transaction described in the Loan Documents and arising at any time, whether before or after payment and performance of the Obligations in full, excepting any such matters arising solely from the gross negligence or willful misconduct of Bank. The obligations of Borrower and the rights of Bank under this paragraph shall survive payment and performance of the Obligations in full and shall remain in full force and effect without termination.
RESCISSION OR RETURN OF PAYMENTS. If at any time or from time to time, whether before or after payment and performance of the obligations of the Loan Parties under the Loan Documents in full, all or any part of any amount received by Bank in payment of, or on account of, any obligation of the Loan Parties under the Loan Documents is or must be, or is claimed to be, avoided, rescinded, or returned by Bank to Borrower or any other Person for any reason whatsoever (including, without limitation, bankruptcy, insolvency, or reorganization of Borrower or any other Person), such obligation and any liens, security interests, and other encumbrances that secured such obligations at the time such avoided, rescinded, or returned payment was received by Bank shall be deemed to have continued in existence or shall be reinstated, as the case may be, all as though such payment had not been received.
HEADINGS. The headings at the beginning of each section of the Loan Documents are solely for convenience and are not part of the Loan Documents.
NUMBER AND GENDER. In the Loan Documents the singular shall include the plural and vice versa and each gender shall include the other genders.
MULTIPLE CREDIT ACCOMMODATIONS. If from time to time Borrower has more than one loan or other credit accommodation with Bank, Borrower agrees that, unless otherwise agreed by Bank and Borrower in writing, (i) the Loan Documents and the agreements, documents, and instruments evidencing and relating to such other loan(s) and credit accommodation(s) shall all remain in effect and neither shall supersede the other, regardless of whether the Loan Documents and such other agreements, documents, and instruments have differing terms, conditions, and requirements (ii), regardless of any such differences, Borrower shall comply with all the terms, conditions, and requirements of the Loan Documents and of such other agreements, documents, and instruments.
WAIVER OF STATUTE OF LIMITATIONS. Borrower waives, to the full extent permitted by law, the right to plead any statutes of limitations as a defense to any or all obligations under the Loan Documents.
WAIVERS BY BORROWER. Borrower (i) waives, to the full extent permitted by law, presentment, notice of dishonor, protest, notice of protest, notice of intent to accelerate, notice of acceleration, notice of dishonor, and all other notices or demands of any kind (except notices specifically provided for in the Loan Documents), and (ii) agrees that Bank may enforce this Note and any other Loan Documents against any person included in Borrower without first having sought enforcement against any other Loan Party or any Collateral.
SENIOR INDEBTEDNESS. The obligations evidenced by this Note constitute "Senior Indebtedness" pursuant to the terms of the Subordinated Notes Indenture and Bank is and shall be entitled to all of the rights and benefits accruing to the holders of Senior Indebtedness pursuant to the Subordinated Notes Indenture.
REPLACEMENT NOTE. This Note is a replacement of that Promissory Note dated February 25, 1993 in the principal amount of $10,000,000.00 made by Borrower and payable to Bank.
CONTINENTAL HOMES HOLDING CORP., a
By: /s/ Kenda B. Gonzales | 10-Q | EX-10.5 | 1996-01-12T00:00:00 | 1996-01-12T16:40:21 |
0000950147-96-000014 | 0000950147-96-000014_0001.txt | MANUFACTURERS AND TRADERS TRUST COMPANY,
Dated as of November 1, 1995
6 7/8% CONVERTIBLE SUBORDINATED NOTES DUE 2002
(b) ...................................... 7.08; 7.10; 12.02 (c) ...................................... N.A. (c) ...................................... N.A. (b)(1)...................................... N.A. (b)(2)...................................... N.A. (b) ...................................... N.A. (c)(3)...................................... N.A. (d) ...................................... N.A. (f) ...................................... N.A. (a)(2)...................................... N.A. (c) ...................................... N.A.
This cross-reference table does not constitute a part of the Indenture.
DEFINITIONS AND INCORPORATION BY REFERENCE
1.03. Incorporation by Reference of Trust
2.03. Registrar, Paying Agent and Conversion 2.04. Paying Agent to Hold Money in 2.09. Securities Held by the Company or an
3.01. Notices to Trustee and DTC 3.02. Selection of Securities to be Redeemed 3.04. Effect of Notice of Redemption 3.05. Deposit of Redemption Price
3.06. Securities Redeemed in Part
4.02. Maintenance of Office or Agency 4.05. Stay, Extension and Usury Laws
5.01. When Company May Merge, etc.
6.04. Waiver of Past Defaults 6.07. Rights of Holders to Receive Payment 6.08. Collection Suit by Trustee 6.09. Trustee May File Proofs of Claim
7.03. Individual Rights of Trustee 7.06. Reports by Trustee to Holders 7.09. Successor Trustee by Merger, etc. 7.11. Preferential Collection of Claims
8.02. Application of Trust Money
9.01. Without Consent of Holders 9.02. With Consent of Holders 9.03. Compliance with Trust Indenture Act 9.04. Revocation and Effect of Consents 9.05. Notation on or Exchange of Securities
10.05. Company to Provide Stock 10.06. Adjustment for Change in Capital Stock 10.07. Adjustment for Shares Issued Below 10.08. Adjustment for Other Distributions 10.09. Adjustment for Cash Distributions 10.13. When Adjustment May be Deferred 10.14. When No Adjustment Required 10.16. Notice of Certain Transactions 10.17. Reorganization of the Company
11.04. Company Not to Make Payments with Respect to Securities in Certain 11.06. When Distribution Must be Paid Over 11.09. Subordination May Not be Impaired by 11.10. Distribution or Notice to 11.11. Rights of Trustee and Paying Agent 11.13. Obligation of Company Unconditional
12.01. Trust Indenture Act Controls 12.03. Communication by Holders with Other 12.04. Certificate and Opinion as to Conditions 12.05. Statements Required in Certificate or 12.06. Rules by Trustee and Agents 12.08. No Recourse Against Others 12.11. No Adverse Interpretation of Other
12.14. Table of Contents, Headings, etc.
INDENTURE dated as of November 1, 1995, between CONTINENTAL HOMES HOLDING CORP., a Delaware corporation (the "Company"), and MANUFACTURERS AND TRADERS TRUST COMPANY, a duly organized and existing banking corporation organized under the laws of the State of New York, as trustee (the "Trustee").
Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Company's 6 7/8% due 2002 (the "Securities").
DEFINITIONS AND INCORPORATION BY REFERENCE
"Affiliate" means any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company. For this purpose, "control" shall mean the power to direct the management and policies of a person through the ownership of securities, by contract or otherwise.
"Agent" means any Registrar, Paying Agent, Conversion Agent or co-Registrar.
"Board of Directors" means the Board of Directors of the Company or any committee of the Board authorized to act for it hereunder.
"Capital Stock" means any and all shares, interests, participations or other equivalents (however designated) of capital stock of the Company and all warrants or options to acquire such capital stock.
"Common Stock" means the Common Stock, par value $.01 per share, of the Company or any security into which the Common Stock may be converted.
"Company" means the party named as such above and any other obligor until a successor replaces it pursuant to the applicable provision hereof and thereafter means such successor.
"Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 12.02 or such other address as the Trustee may give notice of to the Company.
"DTC" means The Depositary Trust Company.
"Default" means any event which is, or after notice or passage of time or both would be, an Event of Default.
"High and Low Sale Prices" of the Common Stock on any trading day means the average of the high and low sale price of the Common Stock as reported on the Composite Tape for New York Stock Exchange-Listed Stocks (or if not listed or admitted to trading on the New York Stock Exchange, then on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if not listed or admitted to trading on any national securities exchange, then as reported by the National Association of Securities Dealers, Inc., through NASDAQ or a similar organization if NASDAQ is no longer reporting information) on such trading day or if no such sale takes place on such day, the average of the highest bid and lowest asked prices regular way on the New York Stock Exchange (or if not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if not listed or admitted to trading on any national securities exchange, the average of the highest bid and lowest asked prices as reported by the National Association of Securities Dealers, Inc., through NASDAQ or a similar organization if NASDAQ is no longer reporting information) on such trading day. If on such trading day the Common Stock is not quoted by any such organization, the fair market value of such Common Stock on such day, as determined by the Board of Directors, shall be used.
"Holder" or "Securityholder" means a person in whose name a Security is registered on the Registrar's books.
"Indenture" means this Indenture as amended from time to time.
"Officer" means the Chief Executive Officer, the President, the Chief Operating Officer, any Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers or by an Officer and an Assistant Treasurer or an Assistant Secretary of the Company.
"Opinion of Counsel" means a written opinion from legal counsel who may be an employee of or counsel for the Company or other counsel reasonably acceptable to the Trustee.
"person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof.
"principal" of a debt security means the principal of the security plus the premium, if any, on the security.
"SEC" means the Securities and Exchange Commission.
"Securities" means the Securities described above issued under this Indenture.
"subsidiary" means (i) a corporation a majority of whose capital stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by the Company, by one or more subsidiaries of the Company or by the Company and one or more subsidiaries thereof or (ii) any other person (other than a corporation) in which the Company, one or more subsidiaries thereof or the Company and one or more subsidiaries thereof, directly or indirectly, at the date of determination thereof have at least majority ownership interest.
"TIA" means the Trust Indenture Act of 1939, as amended (15 U.S. Code {{ 77aaa-77bbbb), as in effect on the date of this Indenture, except as provided in Section 9.03.
"Trustee" means the party named as such in this Indenture until a successor replaces it and thereafter means the successor.
"Trust Officer" means any officer of the Trustee assigned by the Trustee to administer its corporate trust matters.
"Change in Control" ...................... 4.08 "Event of Default" ....................... 6.01 "Repurchase Right Notice" ................ 4.08 "U.S. Government Obligations" ............ 8.01
SECTION 1.03. Incorporation by Reference of Trust
Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Securities.
"indenture security holder" means a Securityholder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company.
All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them.
SECTION 1.04. Rules of Construction.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles in effect on the date hereof;
(3) "or" is not exclusive;
(4) words in the singular include the plural and in the plural include the singular;
(5) provisions apply to successive events
(6) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other Subdivision.
SECTION 2.01. Form and Dating.
The Securities and the Trustee's certificate of authentication shall be substantially in the form set forth in Exhibit A, which is incorporated in and forms a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Security shall be dated the date of its authentication.
SECTION 2.02. Execution and Authentication.
Two Officers shall sign the Securities for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Securities.
If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid.
A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture.
The Trustee shall authenticate Securities for original issue in the aggregate principal amount of up to $75,000,000, upon a written order of the Company signed by two Officers or by an Officer and an Assistant Treasurer or Assistant Secretary of the Company; provided that if such order directs the issuance of $75,000,000 in aggregate principal amount of Securities, the Trustee shall, upon a second written order dated not later than December 6, 1995, authenticate additional Securities for original issue not to exceed $11,250,000 in aggregate principal amount as specified in the second order to cover over-allotments, if any. Each order shall specify the amount of Securities to be authenticated and the date on which the original issue of Securities is to be authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed the amount of Securities issued pursuant to this paragraph except as provided in Section 2.07.
The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate.
The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof.
SECTION 2.03. Registrar, Paying Agent and
The Company shall maintain in the Borough of Manhattan, The City of New York, an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar"), an office or agency where Securities may be presented for payment ("Paying Agent") and an office or agency where Securities may be presented for conversion ("Conversion Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may appoint or change one or more co-registrars, one or more additional paying agents and one or more additional conversion agents without notice and may act in any such capacity on its own behalf. The term "Paying Agent" includes any additional paying agent; the term "Conversion Agent" includes any additional conversion agent.
The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company fails to maintain a Registrar, Paying Agent or Conversion Agent, the Trustee shall act as such.
The Company initially appoints the Trustee as Paying Agent, Registrar and Conversion Agent.
SECTION 2.04. Paying Agent to Hold Money in
Each Paying Agent shall hold in trust for the benefit of the Securityholders or the Trustee all moneys held by such Paying Agent for the payment of principal of or interest on the Securities, and shall notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, such Paying Agent shall have no further liability for the money. If the Company acts as Paying Agent, it shall segregate and hold as a separate trust fund all money held by it as Paying Agent.
The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee on or before each interest payment date and at such other times as the Trustee may request in writing a list, in such form and as of such date as the Trustee may reasonably require, of the names and addresses of Securityholders.
SECTION 2.06. Transfer and Exchange.
Where Securities are presented to the Registrar or a co-Registrar with a request to register the transfer or to exchange them for an equal principal amount of Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange if the requirements of Section 8-401(1) of the New York Uniform Commercial Code are met. To permit registrations of transfer and exchanges, the Trustee shall authenticate Securities at the Registrar's request. The Company or the Trustee, as the case may be, shall not be required (a) to issue, authenticate, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the mailing of a notice of redemption of the Securities selected for redemption under Section 3.02 and ending at the close of business on the day of such mailing, or (b) to register the transfer of or exchange any Security so selected for redemption, in whole or in part, except the unredeemed portion of Securities being redeemed in part.
No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer, registration of transfer or exchange of Securities, other than exchanges pursuant to Section 2.10, 3.06, 9.05 or 10.02 not involving any transfer.
If the Holder of a Security claims that the Security has been mutilated, lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the requirements of Section 8-405 of the New York Uniform Commercial Code are met and, in the case of a mutilated Security, such mutilated Security is surrendered to the Trustee. If required by the Trustee or the Company, an indemnity bond must be sufficient in the judgment of both to protect the Company, the Trustee, or any Agent from any loss which any of them may suffer if a Security is replaced. The Company or the Trustee may charge for its expenses in replacing a Security.
In case any such mutilated, destroyed or wrongfully taken Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security when due.
Every replacement Security is an additional obligation of the Company.
Securities outstanding at any time are all the Securities authenticated by the Trustee except for those converted, those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. A Security does not cease to be outstanding because the Company or one of its subsidiaries or Affiliates holds the Security.
If a Security is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it, or a court holds, that the replaced Security is held by a bona fide purchaser.
If the Paying Agent (other than the Company) holds on a redemption date, repurchase date or maturity date money sufficient to pay Securities payable on that date, then on and after that date, such Securities shall be deemed to be no longer outstanding and interest on them shall cease to accrue.
SECTION 2.09. Securities Held by the Company or an Affiliate.
In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or a subsidiary or an Affiliate shall be disregarded, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee actually knows are so owned shall be so disregarded.
Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Securities in exchange for temporary Securities.
The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar, Paying Agent and Conversion Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange, payment or conversion. The Trustee shall cancel all Securities surrendered for registration of transfer, exchange, payment, conversion or cancellation and may destroy cancelled Securities and deliver a certificate of any such destruction to the Company. The Company may not issue new Securities to replace Securities that it has paid or delivered to the Trustee for cancellation or that any Securityholder has converted pursuant to Article 10.
If and to the extent the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest in any lawful manner plus, to the extent not prohibited by applicable statute or case law, interest payable on the defaulted interest. It may pay the defaulted interest to the persons who are Securityholders on a subsequent special record date. The Company shall fix such record date and payment date. At least 15 days before the record date, the Company shall mail to Securityholders a notice that states the record date, payment date and amount of interest to be paid.
SECTION 3.01. Notices to Trustee and DTC.
If the Company wants to redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the Trustee at least 20 days prior to the redemption date (unless a shorter notice period shall be satisfactory to the Trustee) of the redemption date and the principal amount of Securities to be redeemed.
If the Company wants to redeem Securities pursuant to paragraph 5 of the Securities and DTC is a Securityholder, the Company shall notify DTC at least 30 days prior to the redemption date if the operational arrangements of DTC in effect at the time of any such redemption require such notice period.
SECTION 3.02. Selection of Securities to Be Redeemed.
If less than all the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed on either a pro rata basis or by lot or such other method as the Trustee shall deem fair and equitable, but in any event, in such manner as complies with applicable legal and stock exchange requirements. The Trustee shall make the selection from Securities outstanding not previously called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000. Securities and portions of them it selects shall be in amounts of $1,000 or whole multiples of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption.
SECTION 3.03. Notice of Redemption.
At least 15 days but not more than 60 days before a redemption date, the Company shall mail by first-class mail a notice of redemption to each Holder whose Securities are to be redeemed.
The notice shall identify the Securities and the principal amount thereof to be redeemed and shall state:
(2) the redemption price (including the amount of accrued and unpaid interest to be paid on the Securities called for redemption);
(3) the then current conversion rate;
(4) the name and address of the Paying Agent and Conversion Agent;
(5) that the right to convert Securities called for redemption shall terminate at the close of business on the second business day before the
(6) that Holders who want to convert Securities must satisfy the requirements in paragraph 8 of the Securities;
(7) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price;
(8) that interest on Securities called for redemption ceases to accrue on and after the redemption date; and
(9) the CUSIP number of the Securities.
At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense.
SECTION 3.04. Effect of Notice of Redemption.
Once a notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date at the redemption price and, on and after such date (unless the Company shall default in the payment of the redemption price), such Securities shall cease to bear interest. Upon surrender to the Paying Agent, such Securities shall be paid at the redemption price plus accrued interest to the redemption date.
SECTION 3.05. Deposit of Redemption Price.
On or before 10:00 a.m. on the redemption date, the Company shall deposit with the Paying Agent money in funds immediately available on the redemption date sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on that date. The Paying Agent shall return to the Company, as soon as practicable, any money not required for that purpose because of conversion of Securities.
SECTION 3.06. Securities Redeemed in Part.
Upon surrender of a Security that is redeemed in part, the Trustee shall authenticate for the Holder a new Security equal in principal amount to the unredeemed portion of the Security surrendered.
If any Security selected for partial redemption is converted in part, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption.
SECTION 4.01. Payment of Securities.
The Company shall pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities. Principal and interest shall be considered paid on the date due if the Paying Agent holds on that date money sufficient to pay all principal and interest then due.
The Company shall pay interest on overdue principal at the rate borne by the Securities. The Company shall pay interest on overdue installments of interest at the same rate to the extent not prohibited by applicable statute or case law.
SECTION 4.02. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan, The City of New York, an office or agency where Securities may be surrendered for registration of transfer or exchange or conversion and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of the Trustee in the Borough of Manhattan, the City of New York, an agency of the Company in accordance with Section 2.03.
The Company shall file with the Trustee within 15 days after it files them with the SEC copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Company is required to file with the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company also shall comply with the other provisions of TIA { 314(a).
So long as the Securities remain outstanding, the Company shall cause its annual reports to shareholders and any other financial reports furnished by it to shareholders generally to be mailed to the Holders at their addresses appearing in the register of Securities maintained by the Registrar.
The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company an Officers' Certificate stating whether or not the signatories know of any Default by the Company in performing any of its obligations under this Indenture or the Securities. If they do know of any such Default, the certificate shall describe the Default and its status.
SECTION 4.05. Stay, Extension and Usury Laws.
The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.
Subject to Article 5, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate existence of each subsidiary in accordance with the respective organizational documents of each subsidiary and the rights (charter and statutory), licenses and franchises to the Company and its subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate existence of any subsidiary, if in the judgment of the Board of Directors of the Company, (i) such preservation or existence is not material to the conduct of business of the Company and (ii) the loss of such right, license or franchise or the dissolution of such subsidiary does not have a material adverse impact on the Holders.
SECTION 4.07. Notice of Default.
In the event that any Default under Section 6.01 hereof shall occur, the Company will give prompt written notice of such Default to the Trustee.
SECTION 4.08. Change in Control.
(a) In the event that there shall occur a Change in Control (as defined below) of the Company, each Holder of a Security shall have the right (the "Repurchase Right") upon receipt of a Repurchase Right Notice (as defined below), at such Holder's option, to require the Company to repurchase any Security of such Holder or any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000, on the date (the "Repurchase Date") that is 45 days after the date of the Repurchase Right Notice, or, if such 45th day is a Legal Holiday, the next subsequent day which is not a Legal Holiday, unless otherwise required by applicable law, at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the Repurchase Date (the "Repurchase Price"). The right to require the repurchase of Securities shall not continue after a discharge of the Company from its obligations with respect to the Securities in accordance with Article 8.
(b) Within 30 days after the occurrence of a Change in Control, the Company, or, at the request of the Company, the Trustee, shall give notice of the occurrence of the Change in Control and of the Repurchase Right set forth herein to each Holder (the "Repurchase Right Notice"). The Company shall also deliver a copy of the Repurchase Right Notice to the Trustee. Any such notice shall contain all instructions and materials necessary to enable such Holders to deliver Securities pursuant to the Repurchase Right including, without limitation, the following:
(2) the date by which the Repurchase Right must be exercised;
(4) that Securities are to be surrendered for payment of the
(5) that the exercise of the Repurchase Right is irrevocable, except that Holders who elect to exercise the Repurchase Right will retain the right to convert Securities submitted for repurchase until the close of business on the second business day before the Repurchase Date; and
(6) the then existing Conversion Rate for conversion of Securities, the date on which the right to convert the principal of the Securities to be repurchased will terminate and the place or places where such Securities may be surrendered for conversion.
(c) To exercise a Repurchase Right, a Holder shall deliver to the Company (if it is acting as its own Paying Agent) or to a Paying Agent designated by the Company for such purpose in the notice referred to above on or before the 30th day after the date of the Repurchase Right Notice, or, if such day is a Legal Holiday, the next subsequent day which is not a Legal Holiday, (i) written notice of the Holder's exercise of such right, which notice shall set forth the name of the Holder, the principal amount of Securities (or portions thereof) to be repurchased, a statement that an election to exercise the Repurchase Right is being made thereby and (ii) the Securities with respect to which the Repurchase Right is being exercised, duly endorsed for transfer to the Company, and the Holder of such Securities shall be entitled to receive from the Company (if it is acting as its own Paying Agent) or such Paying Agent a nontransferable receipt of deposit evidencing such deposit. Such written notice shall be irrevocable, except as provided in Section 4.08(b) above. If the Repurchase Date is between a regular record date for the payment of interest and the next succeeding interest payment date, any Security to be repurchased must be accompanied by funds equal to the interest payable on such succeeding interest payment date on the principal amount to be repurchased (unless such Security shall have been called for redemption, in which case no such payment shall be required), and the interest on the principal amount of the Security being repurchased will be paid on such next succeeding interest payment date to the registered holder of such Security on the immediately preceding record date. A Security repurchased on an interest payment date need not be accompanied by any payment, and the interest on the principal amount of the Security being repurchased will be paid on such interest payment date to the registered holder of such Security on the immediately preceding record date.
(d) In the event a Repurchase Right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid the applicable Repurchase Price with respect to the Securities as to which the Repurchase Right shall have been exercised to the Holder on the Repurchase Date.
(e) Prior to a Repurchase Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust in accordance with Section 2.04) an amount of money sufficient to pay the Repurchase Price payable in respect of all of the Securities which are to be repurchased on that date. If any Security submitted for repurchase is converted prior to the repurchase thereof, any money deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Security shall be paid to the Company on its request, or, if then held by the Company, shall be discharged from such trust.
(f) Both the notice of the Company and the notice of the Holder having been given as specified in this Section 4.08, the Securities so to be repurchased shall, on the Repurchase Date, become due and payable at the Repurchase Price applicable thereto and from and after such date (unless the Company shall default in the payment of the Repurchase Price) such Securities shall cease to bear interest. Upon surrender of any such Security for repurchase in accordance with said notice, such Security shall be paid by the Company at the Repurchase Price. If any Security shall not be paid upon surrender thereof for repurchase, the principal and premium, if any, shall, until paid, bear interest from the Repurchase Date at the rate borne by such Security.
(g) Any Security which is to be submitted for repurchase only in part shall be delivered pursuant to this Section 4.08 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and make available for delivery to the Holder of such Security without any service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, of the same tenor and in aggregate principal amount equal to and in exchange for the portion of the principal of such Security not submitted for repurchase.
(h) If any repurchase pursuant to the foregoing provisions constitutes an "issuer tender offer" as defined in Rule 13e-4 under the Exchange Act, the Company will comply with the requirements of Rule 13e-4, Rule 14e-1 and any other tender offer rules under the Exchange Act which then may be applicable, including the filing of an Issuer Tender Offer Statement on Schedule 13E-4 with the SEC and the furnishing of certain information contained therein to the Holders.
(i) As used in this Section 4.08:
A "Change in Control" of the Company shall be deemed to have occurred at such time as any person, together with its affiliates or associates, other than the Management Group (as defined below) is or becomes the beneficial owner, directly or indirectly, through a purchase, merger or other acquisition transaction, of shares of capital stock of the Company entitling such person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote in elections of directors; provided that a Change in Control shall not be deemed to have occurred if either (i) the last sale price of the Common Stock for any five trading days during the ten trading days immediately preceding the Change in Control is at least equal to 105% of the Conversion Price in effect on the day of the Change in Control or (ii) all of the consideration (excluding cash payments for fractional shares) in the transaction or transactions constituting the Change in Control consists of shares of common stock traded on a national securities exchange or through NASDAQ or another comparable quotation system. "Beneficial owner" shall be determined in accordance with Rule 13d-3, as in effect on the date of the execution of this Indenture, promulgated by the Securities and Exchange Commission under the Exchange Act. The "Management Group" shall consist of the executive officers of the Company as of the date hereof, members of their immediate families, certain trusts for their benefit, and legal representatives of, or heirs, beneficiaries or legatees receiving Common Stock under, any such person's estate.
"Conversion Price" shall be deemed to equal $1,000 divided by the conversion rate on the date of calculation.
SECTION 5.01. When Company May Merge, etc.
The Company shall not consolidate with or merge into, or directly or indirectly transfer or lease all or substantially all of its assets to, any person unless:
(1) the person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale or conveyance shall have been made, is a person organized and existing under the laws of the United States, any State thereof or the District of Columbia;
(2) the person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale or conveyance shall have been made, assumes by supplemental indenture all the obligations of the Company under the Securities and this Indenture; and
(3) immediately after giving effect to such transaction no Default or Event of Default exists.
The Company shall deliver to the Trustee prior to the consummation of the proposed transaction an Officers' Certificate to the foregoing effect and an Opinion of Counsel stating that the proposed transaction and such supplemental indenture comply with this Indenture.
Upon any consolidation or merger or transfer or lease of all or substantially all of the assets of the Company in accordance with Section 5.01, the successor person formed by such consolidation or into which the Company is merged or to which such transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, and shall assume every duty and obligation of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein. When the successor corporation assumes all obligations of the Company hereunder, all obligations of the predecessor corporation shall terminate.
SECTION 6.01. Events of Default.
An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest on any Security when the same becomes due and payable and the default continues for a period of 30 days, whether or not such payment shall be prohibited by the provisions of Article 11 hereof;
(2) the Company defaults in the payment of the principal of any Security when the same becomes due and payable at maturity, upon acceleration or otherwise, whether or not such payment shall be prohibited by the provisions of Article 11 hereof;
(3) the Company fails to comply with any of its other agreements in the Securities or this Indenture and the default continues for the period and after the notice specified below;
(4) an event of default shall have occurred and be continuing under any security or other evidence of indebtedness of the Company or any of its subsidiaries whether such indebtedness now exists or shall be created hereafter, which event of default results in an acceleration of a principal amount of such indebtedness which, together with any such other indebtedness so accelerated, aggregates more than $10,000,000, and such acceleration is not waived or rescinded or such indebtedness, paid or discharged within a period and after the notice specified below;
(5) a final judgment or judgments for the payment of money in excess of $10,000,000 in the aggregate are rendered against the Company and such judgment or judgments remain unstayed, unsatisfied or undischarged for the period and after the notice specified below;
(6) the Company pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in
(C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or
(D) makes a general assignment for the benefit of its
(7) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that:
(A) is for relief against the Company in an involuntary case,
(B) appoints a Custodian of the Company for all or substantially all of its property, or
(C) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 90 days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.
A default under clause (3), (4) or (5) is not an Event of Default until the Trustee or the Holders of at least 25% in principal amount of the Securities notify the Company of the default and the Company does not cure the default within 60 days with respect to clause (3) or (5), and within 30 days with respect to clause (4), after receipt of the notice. The notice must specify the default, demand that it be remedied and state that the notice is a "Notice of Default". If the Holders of 25% in principal amount of the outstanding Securities request the Trustee to give such notice on their behalf, the Trustee shall do so.
The Trustee shall not be deemed to have notice of any Default hereunder unless it shall have actual knowledge of such Default or it shall have received written notice thereof making specific reference to such Default as a Default.
If an Event of Default (other than an Event of Default specified in Section 6.01(6) or (7)) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the Securities by notice to the Company and the Trustee, may declare the principal of and accrued interest on all the Securities to be due and payable. Upon such declaration such principal and interest shall be due and payable immediately. If an Event of Default specified in Section 6.01(6) or (7) occurs, all unpaid principal and accrued interest on the Securities then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholder. The Holders of a majority in principal amount of the Securities by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration.
Notwithstanding any other provision of this Indenture, if an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults.
Subject to Sections 6.07 and 9.02, the Holders of a majority in principal amount of the Securities by notice to the Trustee may waive an existing Default and its consequences. When a Default is waived, it is cured and ceases.
SECTION 6.05. Control by Majority.
The Holders of a majority in principal amount of the Securities 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 it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, is unduly prejudicial to the rights of other Securityholders or would involve the Trustee in personal liability and the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction.
SECTION 6.06. Limitation on Suits.
Except as provided in Section 6.07, a Securityholder may pursue a remedy with respect to this Indenture or the Securities only if:
(1) the Holder gives to the Trustee written notice of a continuing
(2) the Holders of at least 25% in principal amount of the Securities make a written request to the Trustee to institute proceedings in respect of such Event of Default;
(3) such Holder or Holders offer to the Trustee reasonable indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and
(5) during such 60-day period the Holders of a majority in principal amount of the Securities do not give the Trustee a direction inconsistent with the request.
A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder.
SECTION 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal of and interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder.
Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to bring suit for the enforcement of the right to convert the Security shall not be impaired or affected without the consent of the Holder.
SECTION 6.08. Collection Suit by Trustee.
If an Event of Default specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid.
SECTION 6.09. Trustee May File Proofs of Claim.
The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee, any predecessor Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, its creditors or its property.
Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder of the Securities any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder of the Securities in any such proceeding.
If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order:
First: to the Trustee for amounts due under Section 7.07;
Second: to holders of Senior Indebtedness to the extent required by
Third: to Securityholders for amounts due and unpaid on the Securities for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and interest, respectively; and
The Trustee may fix a record date and payment date for any payment by it to Securityholders pursuant to this Section.
SECTION 6.11. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit other than the Trustee of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of more than 10% in principal amount of the Securities.
SECTION 7.01. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the continuance of an Event of Default:
(1) The Trustee need perform only those duties that are specifically set forth in this Indenture and no others.
(2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that:
(1) This paragraph does not limit the effect of paragraph (b) of this Section 7.01.
(2) The Trustee shall not be liable for any error ofjudgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts.
(3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 7.01.
(e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense.
(f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law.
SECTION 7.02. Rights of Trustee.
(a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate and/or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Certificate or Opinion.
(c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers.
SECTION 7.03. Individual Rights of Trustee.
The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or an Affiliate thereof with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. The Trustee, however, must comply with Sections 7.10 and 7.11.
The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities; it shall not be accountable for the Company's use of the proceeds from the Securities; and it shall not be responsible for any statement in the Securities other than its certificate of authentication.
SECTION 7.05. Notice of Defaults.
If a Default occurs and is continuing and if it is actually known to the Trustee or the Trustee has received written notice thereof, the Trustee shall mail to each Securityholder a notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of principal of or interest on any Security, the Trustee may withhold the notice if and so long as it in good faith determines that withholding the notice is in the interests of Securityholders.
SECTION 7.06. Reports by Trustee to Holders.
If required by TIA { 313(a), within 60 days after each May 1 beginning with May 1, 1996, the Trustee shall mail to each Securityholder as required by TIA { 313(c) a brief report dated as of such date that complies with TIA { 313(a). The Trustee also shall comply with TIA { 313(b).
A copy of each report at the time of its mailing to Securityholders shall be filed by the Trustee with the SEC and each stock exchange, if any, on which the Securities are listed. The Company shall notify the Trustee when the Securities are listed on any stock exchange.
SECTION 7.07. Compensation and Indemnity.
The Company shall pay to the Trustee from time to time such compensation for its services as shall be agreed upon in writing. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses shall include the reasonable compensation and out-of-pocket expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee against any loss or liability (including the fees and expenses of counsel) incurred by it in connection with the administration of this trust and the performance of its duties hereunder. The Company need not pay for any settlement made without its consent. The Trustee shall notify the Company promptly of any claim for which it may seek indemnification. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through the Trustee's negligence or bad faith.
To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Securities.
When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(6) or (7) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law.
SECTION 7.08. Replacement of Trustee.
A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section.
The Trustee may resign by so notifying the Company. The Holders of a majority in principal amount of the Securities may remove the Trustee by so notifying the Trustee and the Company and may appoint a successor Trustee with the Company's consent. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent;
(3) a receiver or other public officer takes charge of the Trustee
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company.
If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.07.
SECTION 7.09. Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to another corporation, the successor corporation without any further act shall be the successor Trustee.
This Indenture shall always have a Trustee who satisfies the requirements of TIA { 310(a)(1). The Trustee shall always have a combined capital and surplus of at least $50,000,000 as set forth in its most recent published annual report of condition. The Trustee shall comply with TIA { 310(b).
SECTION 7.11. Preferential Collection of Claims Against Company.
The Trustee shall comply with TIA { 311(a), excluding any creditor relationship listed in TIA { 311(b). A Trustee who has resigned or been removed shall be subject to TIA { 311(a) to the extent indicated.
SECTION 8.01. Termination of Company's Obligations.
The Company may terminate all of its obligations under this Indenture if all Securities previously authenticated and delivered (other than mutilated, destroyed, lost or stolen Securities which have been replaced or paid) have been delivered to the Trustee for cancellation or if:
(1) the Securities mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption;
(2) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations sufficient to pay principal of and interest on the Securities to maturity or redemption, as the case may be. Immediately after making the deposit, the Company shall give notice of such event to the Securityholders;
(3) the Company has paid or caused to be paid all sums then payable by the Company to the Trustee hereunder as of the date of such deposit;
(4) the Company has delivered to the Trustee an Officers' Certificate stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been complied with. The Company may make the deposit only during the one-year period and only if Article 11 permits it.
However, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 4.01, 7.07, 7.08 and 8.03, and in Article 10, shall survive until the Securities are no longer outstanding. Thereafter the Company's obligations in Sections 7.07 and 8.03 shall survive.
After a deposit pursuant to this Section 8.01, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Securities and this Indenture except for those surviving obligations specified above.
In order to have money available on a payment date to pay principal or interest on the Securities, the U.S. Government Obligations shall be payable as to principal or interest on or before such payment date in such amounts as will provide the necessary money.
"U.S. Government Obligations" means direct non- callable obligations of, or non-callable obligations guaranteed by, the United States of America for the payment of which the full faith and credit of the United States of America is pledged.
SECTION 8.02. Application of Trust Money.
The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal of and interest on the Securities. Money and securities so held in trust are not subject to the subordination provisions of Article 11.
SECTION 8.03. Repayment to Company.
The Trustee and the Paying Agent shall promptly pay to the Company upon request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may, at the expense of the Company, cause to be published once in a newspaper of general circulation in The City of New York or cause to be mailed to each Holder, notice stating that such money remains and that, after a date specified therein, which shall not be less than 30 days form the date of such publication or mailing, any unclaimed balance of such money then remaining will be repaid to the Company. After payment to the Company, Securityholders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person.
If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.01 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.01; provided, however, that if the Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent.
SECTION 9.01. Without Consent of Holders.
The Company, with the consent of the Trustee, may amend or supplement this Indenture or the Securities without notice to or the consent of any Securityholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Sections 5.01 and 10.17;
(3) to provide for uncertificated Securities in addition to
(4) to make any change that does not materially adversely affect the rights of any Securityholder.
SECTION 9.02. With Consent of Holders.
The Company, with the consent of the Trustee, may amend or supplement this Indenture or the Securities without notice to any Securityholder but with the written consent of the Holders of at least a majority in principal amount of the Securities then outstanding. Subject to Section 6.07, the Holders of a majority in principal amount of the Securities then outstanding may waive compliance by the Company with any provision of this Indenture or the Securities without notice to any Securityholder. However, without the consent of each Securityholder affected, an amendment, supplement or waiver, including a waiver pursuant to Section 6.04, may not:
(1) reduce the amount of Securities whose Holders must consent to an
(2) reduce the rate of or change the time for payment of interest on
(3) reduce the principal of or change the fixed maturity of any Security (including, without limitation, the optional redemption provisions, but excluding Section 4.08);
(4) waive a default in the payment of principal of or interest on
(5) make any Security payable in money other than that stated in the
(6) make any change in Section 6.04, Section 6.07 or Section 9.02;
(7) make any change that adversely affects the right to convert any Security, including decreasing the conversion rate of any Security (except as such rate may be decreased pursuant to the provisions of Article Ten hereof).
Promptly after an amendment under this Section becomes effective, the Company shall mail to Securityholders a notice briefly describing the amendment.
It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment or supplement, but it shall be sufficient if such consent approves the substance thereof.
SECTION 9.03. Compliance with Trust Indenture Act.
Every amendment to this Indenture or the Securities shall comply with the TIA as then in effect.
SECTION 9.04. Revocation and Effect of Consents.
Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of a Security if the Trustee receives the notice of revocation before the date the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver becomes effective in accordance with its terms and thereafter binds every Securityholder.
After an amendment, supplement or waiver becomes effective with respect to the Securities, it shall bind every Securityholder unless it makes a change described in any of clauses (1) through (7) of Section 9.02. In that case the amendment, supplement or waiver shall bind each Holder of a Security who has consented to it and, provided that notice of such amendment, supplement or waiver is reflected on a Security that evidences the same debt as the consenting Holder's Security, every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security.
SECTION 9.05. Notation on or Exchange of Securities.
If an amendment, supplement or waiver changes the terms of a Security, the Trustee may require the Holder of the Security to deliver it to the Trustee. The Trustee may place an appropriate notation on the Security about the changed terms and return it to the Holder. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Security shall issue and the Trustee shall authenticate a new Security that reflects the changed terms.
The Trustee need not sign any amendment, supplement or waiver authorized pursuant to this Article that adversely affects the Trustee's rights. The Trustee shall be entitled to receive and rely upon an Opinion of Counsel and an Officers' Certificate that any supplemental indenture complies with the Indenture.
A Holder of a Security may convert it into Common Stock at any time during the period stated in paragraph 8 of the Securities.
The initial conversion rate is stated in paragraph 8 of the Securities. The conversion rate is subject to adjustment in accordance with Sections 10.06 through 10.14.
A Holder may convert a portion of a Security if the portion is $1,000 or integral multiples thereof. Provisions of this Indenture that apply to conversion of all of a Security also apply to conversion of a portion of it.
To convert a Security a Holder must satisfy the requirements in paragraph 8 of the Securities. The date on which the Holder satisfies all those requirements is the conversion date. As soon as practicable, the Company shall deliver to the Holder through the Conversion Agent a certificate for the number of full shares of Common Stock issuable upon the conversion and a check in lieu of any fractional share. The person in whose name the certificate is registered shall be treated as a stockholder of record on and after the conversion date.
If any Security is converted between the record date for the payment of interest and the next succeeding interest payment date, such Security must be accompanied by funds equal to the interest payable on such succeeding interest payment date on the principal amount so converted (unless such Security shall have been called for redemption, in which case no such payment shall be required). A Security converted on an interest payment date need not be accompanied by any payment, and the interest on the principal amount of the Security being converted will be paid on such interest payment date to the registered Holder of such Security on the immediately preceding record date. Subject to the aforesaid right of the registered Holder to receive interest, no payment or adjustment will be made on conversion for interest accrued on the converted Security or for dividends on the Common Stock issued upon conversion.
If a Holder converts more than one Security at the same time, the number of full shares issuable upon the conversion shall be based on the total principal amount of the Securities converted.
Upon surrender of a Security that is converted in part the Trustee shall authenticate for the Holder a new Security equal in principal amount to the unconverted portion of the Security surrendered.
If the last day on which a Security may be converted is a Legal Holiday in a place where a Conversion Agent is located, the Security may be surrendered to that Conversion Agent on the next succeeding day that is not a Legal Holiday.
The Company will not issue a fractional share of Common Stock upon conversion of a Security. Instead the Company will deliver its check for the market value of a fractional share. The market value of a fraction of a share is determined as follows: Multiply the market price of a full share by the fraction and round the result to the nearest cent.
The market price of a share of Common Stock for the purposes of Section 10.03 is the last reported sale price of a share of Common Stock on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or on the National Association of Securities Dealers National Market System ("NMS") on the business day next preceding the date of conversion, or, if the Common Stock is not then listed on an exchange, the closing sale price (or the quoted closing bid price if there were no sales) as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") on the business day next preceding the date of conversion. In the absence of one or more such quotations, the Board of Directors shall determine the current market price on the basis of such quotations as it considers appropriate.
SECTION 10.04. Taxes on Conversion.
If a Holder of a Security converts it, the Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Common Stock upon the conversion. However, the Holder shall pay any such tax which is due because the shares are issued in a name other than the Holder's name.
SECTION 10.05. Company to Provide Stock.
The Company shall reserve out of its authorized but unissued Common Stock or its Common Stock held in treasury enough shares of Common Stock to permit the conversion of all of the Securities.
All shares of Common Stock which may be issued upon conversion of the Securities shall be validly issued, fully paid and non-assessable.
The Company will endeavor to comply with all securities laws regulating the offer and delivery of shares of Common Stock upon conversion of Securities and will endeavor to list such shares on each national securities exchange on which the Common Stock is listed.
SECTION 10.06. Adjustment for Change in Capital Stock.
(1) pays a dividend or makes a distribution on its Capital Stock in shares of its Common Stock;
(2) subdivides its outstanding shares of Common Stock into a greater
(3) combines its outstanding shares of Common Stock into a smaller
(4) issues by reclassification of its Common Stock any shares of its
then the conversion privilege and the conversion rate in effect immediately prior to such action shall be adjusted so that the Holder of a Security thereafter converted may receive the number of shares of Capital Stock of the Company which he would have owned immediately following such action if he had converted the Security immediately prior to such action.
The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification.
If after an adjustment a Holder of a Security may, upon conversion, receive shares of two or more classes of Capital Stock of the Company, the Board of Directors shall determine the allocation of the adjusted conversion rate between or among the classes of Capital Stock. After such allocation, the conversion privilege and the conversion rate of each class of Capital Stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Stock in this Article 10.
SECTION 10.07. Adjustment for Shares Issued Below Market Price.
If the Company issues to all holders of Common Stock shares of Common Stock or rights, options or warrants to subscribe for or purchase shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock, or rights, options or warrants to subscribe for or purchase such convertible or exchangeable securities (excluding shares of Common Stock, rights, options, warrants therefor or convertible or exchangeable securities or rights, options, or warrants therefor issued in transactions described in Section 10.06) at a Price Per Share (as defined and determined according to the formula given below) lower than the current market price (see Section 10.12) on the date of such issuance, the conversion rate shall be adjusted in accordance with the following formula:
AC = CC x O + N______ O + (N x R)
AC = the adjusted conversion rate.
CC = the then current conversion rate.
O = the number of shares of Common Stock outstanding immediately prior to such issuance.
N = the "Number of Shares," which (i) in the case of shares of Common Stock is the number of shares issued; (ii) in the case of rights, options or warrants to subscribe for or purchase shares of Common Stock or of securities convertible into or exchangeable for shares of Common Stock, is the maximum number of shares of Common Stock initially issuable upon exercise, conversion or exchange thereof; and (iii) in the case of rights, options or warrants to subscribe for or purchase convertible or exchangeable securities, is the maximum number of shares of Common Stock initially issuable upon the conversion or exchange of the convertible or exchangeable securities issuable upon the exercise of such rights, options or warrants.
R = the proceeds received or receivable by the Company, which (i) in the case of shares of Common Stock is the total amount received or receivable by the Company in consideration for the sale and issuance of the shares; (ii) in the case of rights, options or warrants to subscribe for or purchase shares of Common Stock or of securities convertible into or exchangeable for shares of Common Stock, is the total amount received or receivable by the Company in consideration for the sale and issuance of such rights, options, warrants or convertible or exchangeable securities, plus the minimum aggregate amount of additional consideration, other than the convertible or exchangeable securities, payable to the Company upon exercise, conversion or exchange thereof; and (iii) in the case of rights, options or warrants to subscribe for or purchase convertible or exchangeable securities, is the total amount received or receivable by the Company in consideration for the sale and issuance of such rights, options or warrants, plus the minimum aggregate consideration payable to the Company upon the exercise thereof, plus the minimum aggregate amount of additional consideration, other than the convertible or exchangeable securities, payable upon the conversion or exchange of the convertible or exchangeable securities; provided that in each case the proceeds received or receivable by the Company shall be deemed to be the amount of gross cash proceeds without deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services or any expenses incurred in connection therewith.
M = the current market price per share of Common Stock (see Section 10.12) on the date of issue of the shares of Common Stock or the rights, options or warrants to subscribe for or purchase shares of Common Stock or the securities convertible into or exchangeable for shares of Common Stock or the rights, options or warrants to subscribe for or purchase convertible or exchangeable securities.
"Price Per Share" shall be defined and determined according to the following formula:
P = Price Per Share.
R and N have the meanings assigned above.
If the Company shall issue shares of Common Stock or rights, options, warrants or convertible or exchangeable securities for a consideration consisting, in whole or in part, of property other than cash, the amount of such consideration shall be determined in good faith by the Board of Directors whose determination shall be conclusive and evidenced by a resolution of the Board of Directors filed with the Trustee.
The adjustment shall be made successively whenever any such additional shares of Common Stock or such rights, options, warrants or convertible or exchangeable securities are issued, and shall become effective immediately after the date of issue of such shares, rights, options, warrants or convertible or exchangeable securities; provided, however, that if any such rights, options or warrants issued by the Company as described in this Section 10.07 are only exercisable upon the occurrence of certain triggering events, then the conversion rate will not be adjusted as provided in this Section 10.07 until such triggering events occur.
To the extent that such rights, options or warrants expire unexercised or to the extent any convertible or exchangeable securities are redeemed by the Company or otherwise cease to be convertible or exchangeable into shares of Common Stock, the conversion rate shall be readjusted to the conversion rate which would be in effect had the adjustment made upon the date of issuance of such rights, options, warrants or convertible or exchangeable securities been made upon the basis of the issuance of rights, options or warrants to subscribe for or purchase only the number of shares of Common Stock as to which such rights, options or warrants were actually exercised and the number of shares of Common Stock that were actually issued upon the conversion or exchange of the convertible or exchangeable securities.
SECTION 10.08. Adjustment for Other Distributions.
If the Company distributes to all holders of Common Stock evidences of indebtedness, shares of Capital Stock other than Common Stock, cash or other assets (including securities, but other than (x) dividends or distributions exclusively in cash or (y) any dividend or distribution for which an adjustment is required to be made in accordance with Section 10.06 or 10.07), the conversion rate shall be adjusted in accordance with the following formula:
AC = CC x __(O x M)__ (O x M) - F
AC = the adjusted conversion rate.
CC = the then current conversion rate.
O = the number of shares of Common Stock outstanding on the record date mentioned below.
M = the current market price per share of Common Stock (see Section 10.12) on the record date mentioned below.
F = the fair market value on the record date mentioned below of the evidences of indebtedness, assets, securities or cash distributed. The Board of Directors shall determine the fair market value.
The adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive the distribution.
SECTION 10.09. Adjustment for Cash Distributions.
If the Company distributes to all holders of Common Stock cash (excluding any cash portion of distributions for which an adjustment is required to be made in accordance with Section 10.08) in an aggregate amount that, combined together with (i) all other such all-cash distributions made within the preceding 12 months for which no adjustment has been made and (ii) any cash and the fair market value of other consideration paid or payable in respect of any tender offer (as defined in Rule 13e-4 under the Exchange Act) by the Company or any of its Subsidiaries for Common Stock concluded within the preceding 12 months for which no adjustment has been made, exceeds 20% of the Company's market capitalization (the product of the then current market price per share of the Common Stock (see Section 10.12) times the number of shares of Common Stock then outstanding) on the record date mentioned below, the conversion rate shall be adjusted in accordance with the following formula:
AC = CC x M
AC = the adjusted conversion rate.
CC = the then current conversion rate.
M = the current market price per share of Common Stock (see Section 10.12) on the record date mentioned below.
C = the amount of cash distributed applicable to one share of Common Stock.
Notwithstanding the foregoing, in the event that the cash so distributed applicable to one share of Common Stock equals or exceeds such current market price per share of Common Stock, or such current market price per share exceeds such amount of cash by less than $0.10 per share, the conversion rate shall not be adjusted pursuant to this Section 10.09.
The adjustment shall become effective immediately after the record date for the determination of the stockholders entitled to receive such distribution.
SECTION 10.10. Adjustment for Tender Offers.
If the Company or any of its Subsidiaries completes a tender offer (as defined in Rule 13e-4 under the Exchange Act) for all or any portion of the Common Stock (any such tender offer being referred to as an "Offer") that involves an aggregate consideration having a fair market value as of the expiration of such Offer (the "Expiration Time") that, together with (i) any cash and the fair market value of any other consideration payable in respect of any other Offer which expired within the 12 months preceding the Expiration Time, for which no conversion rate adjustment has been made, and (ii) the aggregate amount of any all-cash distributions referred to in Section 10.09 to all holders of Common Stock within the 12 months preceding the expiration of such Offer for which no conversion rate adjustment pursuant to such Section 10.09 has been made, exceeds 20% of the Company's market capitalization (the product of the then current market price per share (see Section 10.12) of the Common Stock at the Expiration Time times the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time), the conversion rate shall be increased in accordance with the following formula:
AC = CC x M x (O - P) (M x O) - F
AC = the adjusted conversion rate.
CC = the then current conversion rate.
M = the current market price per share of Common Stock (see Section 10.12) at the Expiration Time.
O = the number of shares of Common Stock outstanding (including any tendered shares) at the Expiration Time.
F = the fair market value of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the Offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted being referred to as the "Purchased Shares"). The Board of Directors shall determine the fair market value.
The adjustment shall become effective immediately prior to the opening of business on the day following the Expiration Time.
The Company at any time may increase the conversion rate, temporarily or otherwise, by any amount but in no event shall such conversion rate result in the issuance of Common Stock at a price less than the par value of the Common Stock at the time such increase is made.
SECTION 10.12. Current Market Price.
In Sections 10.07, 10.08, 10.09 and 10.10, the current market price per share of Common Stock on any date is the average of the last reported sale prices of a share of Common Stock on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or on the NMS, or, if the Common Stock is not then listed on an exchange or on the NMS, the closing sale prices (or the quoted closing bid prices if there were no sales) as reported by NASDAQ 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 quotations as it considers appropriate.
SECTION 10.13. When Adjustment May be Deferred.
No adjustment in the conversion rate need be made unless the adjustment would require a change of at least 1% in the conversion rate. Any adjustments that are not made due to the immediately preceding sentence shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Article shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be.
SECTION 10.14. When No Adjustment Required.
Except as set forth in Section 10.07, no adjustment in the conversion rate shall be made because the Company issues, in exchange for cash, property or services, shares of Common Stock, or any securities convertible into shares of Common Stock, or securities carrying the right to purchase shares of Common Stock or such convertible securities.
No adjustment in the conversion rate need be made for rights to purchase or the sale of Common Stock pursuant to a Company plan providing for reinvestment of dividends or interest.
No adjustment in the conversion rate need be made for a change in the par value of the Common Stock.
No adjustment need be made for a transaction referred to in Section 10.06, 10.07, 10.08, 10.09 or 10.10 if Security- holders are to participate in the transaction on a basis and with notice that the Board of Directors determines to be fair and appropriate in light of the basis and notice on which holders of Common Stock participate in such transaction.
SECTION 10.15. Notice of Adjustment.
Whenever the conversion rate is adjusted, the Company shall promptly mail to Securityholders a notice of the adjustment. The Company shall file with the Trustee an Officers' Certificate or a certificate from the Company's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. The certificate shall be conclusive evidence that the adjustment is correct, absent manifest error.
SECTION 10.16. Notice of Certain Transactions.
(1) the Company proposes to take any action that would require an adjustment in the conversion rate,
(2) the Company proposes to take any action that would require a supplemental indenture pursuant to Section 10.17, or
(3) there is a proposed liquidation or dissolution of the Company,
the Company shall mail to Securityholders a notice stating the proposed record date for a dividend or distribution or the proposed effective date of a subdivision, combination, reclassification, consolidation, merger, transfer, lease, liquidation or dissolution. The Company shall mail the notice at least 15 days before such date. Failure to mail the notice or any defect in it shall not affect the validity of the transaction.
SECTION 10.17. Reorganization of the Company.
If the Company is a party to a transaction subject to Section 5.01 or a merger which reclassifies or changes its outstanding Common Stock, the successor corporation shall enter into a supplemental indenture which shall provide that the Holder of a Security may convert it into the kind and amount of securities, cash or other assets which he would have owned immediately after the consolidation, merger, transfer or lease if he had converted the Security immediately before the effective date of the transaction. The supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this Article 10. The successor Company shall mail to Securityholders a notice briefly describing the supplemental indenture.
If this Section applies, Sections 10.06, 10.07, 10.08, 10.09 and 10.10 do not apply.
SECTION 10.18. Rights and Warrants.
If the Company distributes pro rata to all holders of Common Stock rights or warrants (other than those referred to in Section 10.07 above), so long as any such rights or warrants have not expired or been redeemed by the Company, the Company shall make proper provision so that the Holder of any Security surrendered for conversion will be entitled to receive upon such conversion, in addition to the shares of Common Stock issuable upon such conversion (the "Conversion Shares"), a number of rights or warrants to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of Common Stock of rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants to which a holder of a number of shares of Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the rights or warrants, and (ii) if such conversion occurs after such Distribution Date, the same number of rights or warrants to which a holder of the number of shares of Common Stock into which the principal amount of such Security so converted was convertible immediately prior to such Distribution Date would have been entitled on such Distribution Date in accordance with the terms and provisions of and applicable to the rights or warrants.
SECTION 10.19. Company Determination Final.
Any determination that the Board of Directors must make pursuant to this Article 10 is conclusive, absent manifest error.
The Trustee has no duty to determine when an adjustment under this Article 10 or under the terms of the Securities should be made, how it should be made or what it should be. The Trustee has no duty to determine whether any provisions of a supplemental indenture under Section 10.17 are correct. The Trustee makes no representation as to the validity or value of any securities or assets issued upon conversion of Securities. The Trustee shall not be responsible for the Company's failure to comply with this Article 10. Each Conversion Agent other than the Company shall have the same protection under this Section 10.20 as the Trustee.
SECTION 11.01. Agreement to Subordinate.
The Company agrees, and each Securityholder by accepting a Security agrees, that the indebtedness evidenced by the Securities and the payment of principal thereof and interest thereon are subordinated in right of payment, to the extent and in the manner provided in this Article 11, to the prior payment in full of all Senior Indebtedness and that the subordination is for the benefit of the holders of Senior Indebtedness.
Money and securities held in trust pursuant to Article 8 are not subject to the subordination provisions of this Article 11.
"Representative" means the indenture trustee or other trustee, agent or representative for an issue of Senior Indebtedness.
"Senior Indebtedness" means the principal of (and premium, if any) and interest on (a) any and all indebtedness and obligations of the Company (including indebtedness of others guaranteed by the Company) other than the Securities, whether or not contingent and whether outstanding on the date of this Indenture or thereafter created, incurred or assumed, which (i) is for money borrowed; (ii) is evidenced by any bond, note, debenture or similar instrument; (iii) represents the unpaid balance on the purchase price of any property, business or asset of any kind; (iv) is an obligation of the Company as lessee under any and all leases of property, equipment or other assets required to be capitalized on the balance sheet of the lessee under generally accepted accounting principles; (v) is a reimbursement obligation of the Company with respect to letters of credit; (vi) are obligations of the Company with respect to interest swap obligations and foreign exchange agreements; or (vii) are obligations of others secured by a lien to which any of the properties or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of the Company are subject, whether or not the obligations secured thereby shall have been assumed by the Company or shall otherwise be the Company's legal liability and (b) any deferrals, amendments, renewals, extensions, modifications and refundings of any indebtedness or obligations of the types referred to above; provided that Senior Indebtedness shall not include (i) the Securities; (ii) the Company's 6 7/8% Convertible Subordinated Notes due 2002; (iii) any indebtedness or obligation of the Company which, by its terms or the terms of the instrument creating or evidencing it, is not superior in right of payment to the Securities; (iv) any indebtedness or obligation of the Company to any of its subsidiaries and (v) any indebtedness or obligation incurred by the Company in connection with the purchase of assets, materials or services in the ordinary course of business and which constitutes a trade payable.
SECTION 11.03. Liquidation; Dissolution; Bankruptcy.
Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property:
(1) holders of Senior Indebtedness shall be entitled to receive payment in full of the principal of and interest to the date of payment on the Senior Indebtedness before Securityholders shall be entitled to receive any payment of principal of or interest on Securities; and
(2) until the Senior Indebtedness is paid in full, any distribution to which Securityholders would be entitled but for this Article 11 shall be made to holders of Senior Indebtedness as their interests may appear, except the Securityholders may receive securities that are subordinated to Senior Indebtedness to at least the same extent as the Securities.
SECTION 11.04. Company Not to Make Payments in Certain Circumstances.
Except for payment in or distribution of securities that are subordinated to Senior Indebtedness to at least the same extent as the Securities, the Company shall not make any payment with respect to the principal of or interest on any of the Securities, or make any other payment with respect to the purchase or other acquisition of any of the Securities:
(a) if there shall have occurred a default in the payment of the principal of or interest on any Senior Indebtedness; or
(b) if there shall exist at the time of such payment, or such payment would create, an event of default (or an event which, with the giving of notice or the passage of time or both, would become an event of default) with respect to any Senior Indebtedness which would permit the holders (or any specified proportion of such holders) of such Senior Indebtedness to accelerate the maturity thereof, and if notification of such default or event of default has been given to the Company by a holder of such Senior Indebtedness or by a trustee, agent or Representative for an issue of Senior Indebtedness;
unless and until, in each case, whether described in clause (a) or clause (b), such default or event of default shall have been cured or waived in the manner required by the instrument relating to such Senior Indebtedness or shall otherwise have ceased to exist.
Regardless of anything to the contrary herein, nothing shall prevent (a) any payment by the Trustee to the Securityholders of amounts deposited with it pursuant to Article Eight or (b) any payment by the Trustee or the Paying Agent as permitted by Section 11.11.
SECTION 11.05. Acceleration of Securities.
If payment of the Securities is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Indebtedness of the acceleration.
SECTION 11.06. When Distribution Must be Paid Over.
In the event that the Company shall make any payment to the Trustee of the principal of or interest on the Securities at a time when such payment is prohibited by Section 11.03 or 11.04, such payment shall be held by the Trustee, in trust for the benefit of, and shall be paid forthwith over and delivered to, the holders of Senior Indebtedness (pro rata as to each of such holders on the basis of the respective amounts of Senior Indebtedness held by them) or their Representative or the trustee under the indenture or other agreement (if any) pursuant to which Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness.
If a distribution is made to Securityholders that because of this Article 11 should not have been made to them, the Securityholders who receive the distribution shall hold it in trust for holders of Senior Indebtedness and pay it over to them as their interests may appear.
SECTION 11.07. Notice by Company.
The Company shall promptly notify the Trustee and the Paying Agent in writing of any facts known to the Company that would cause a payment of principal of or interest on Securities to violate this Article 11.
After all Senior Indebtedness is paid in full and until the Securities are paid in full, Securityholders shall be subrogated to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the Security-holders have been applied to the payment of Senior Indebtedness. A distribution made under this Article 11 to holders of Senior Indebtedness which otherwise would have been made to Securityholders is not, as between the Company and Securityholders, a payment by the Company on Senior Indebtedness.
SECTION 11.09. Subordination May Not be Impaired by Company.
No right of any holder of Senior Indebtedness to enforce the subordination of the indebtedness evidenced by the Securities shall be impaired by any act or failure to act by the Company or by its failure to comply with this Indenture.
SECTION 11.10. Distribution or Notice to Representative.
Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their Representative.
SECTION 11.11. Rights of Trustee and Paying Agent.
The Trustee or Paying Agent may continue to make payments on the Securities until it receives written notice of facts that would cause a payment of principal of or interest on the Securities to violate this Article 11. Only the Company, a Representative or a holder of an issue of Senior Indebtedness that has no Representative may give the notice.
The Trustee shall be entitled to rely on the delivery to it of a written notice by a person representing himself to be a holder of Senior Indebtedness (or a Representative on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a Representative on behalf of any such holder. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any person who is a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article 11, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article 11, and if such evidence is not furnished the Trustee may defer any payment to such person pending judicial determination as to the right of such person to receive such payment or until such time as the Trustee shall be otherwise satisfied as to the right of such person to receive such payment.
The Trustee in its individual or any other capacity may hold Senior Indebtedness with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights.
The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and shall not be liable to any such holder if it shall mistakenly pay over or distribute to Securityholders or the Company or any other person money or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article 11 or otherwise.
If there occurs an event referred to in Section 11.03 or 11.04, the Company shall promptly give to the Trustee an Officers' Certificate (on which the Trustee may conclusively rely) identifying all holders of Senior Indebtedness or their Representatives and the principal amount of Senior Indebtedness then outstanding held by each such holder and stating the reasons why such Officers' Certificate is being delivered to the Trustee.
SECTION 11.13. Obligation of Company Unconditional.
Nothing contained in this Article 11 or elsewhere in this Indenture or in any Security is intended to or shall impair, as between the Company, its creditors other than holders of Senior Indebtedness and the Holders of the Securities, the obligation of the Company, which is absolute and unconditional, to pay to the Holders of the Securities the principal of and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the Holders of the Securities and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article 11 of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. Upon any distribution of assets of the Company referred to in this Article 11, the Trustee, subject to the provisions of Sections 7.01 and 7.02, and the Holders of the Securities shall be entitled to rely upon any order or decree by any court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending, or a certificate of the liquidating trustee or agent or other person making any distribution to the Trustee or the Holders of the Securities, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 11. Nothing contained in this Article 11 or elsewhere in this Indenture or in any Security is intended to or shall affect the obligation of the Company to make, or prevent the Company from making, at ay time except during the pendency of any dissolution, winding up, liquidation or reorganization proceeding, and except during the continuance of any default specified in Section 11.04 (not cured or waived), payments at any time of the principal or of interest on the Securities.
SECTION 12.01. Trust Indenture Act Controls.
If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control.
Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in person, mailed by first-class mail or by express delivery to the other's address stated in this Section 12.02. The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications.
Any notice or communication to a Securityholder shall be mailed by first-class mail to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders.
If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it.
If the Company mails a notice or communication to Securityholders, it shall mail a copy to the Trustee and each Agent at the same time.
All notices or communications shall be in writing.
Manufacturers and Traders Trust Company
SECTION 12.03. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA { 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA { 312(c).
SECTION 12.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take any action under this Indenture the Company shall furnish to the Trustee:
(1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with.
Each signer of an Officers' Certificate or an Opinion of Counsel may (if so stated) rely, effectively, upon an Opinion of Counsel as to legal matters and an Officers' Certificate as to factual matters if such signer reasonably and in good faith believes in the accuracy of the document relied upon.
SECTION 12.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include:
(1) a statement that the person making such certificate or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has
(4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with.
SECTION 12.06. Rules by Trustee and Agents.
The Trustee may make reasonable rules for action by or at a meeting of Securityholders. The Registrar, Paying Agent or Conversion Agent may make reasonable rules and set reasonable requirements for their respective functions.
A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions are not required to be open in The City of New York, in the State of New York or in the city in which the Trustee administers its corporate trust business. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue on that payment for the intervening period.
A "business day" is a day other than a Legal Holiday.
SECTION 12.08. No Recourse Against Others.
All liability described in the Securities of any director, officer, employee or stockholder, as such, of the Company is waived and released.
The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement.
The laws of the State of New York, without regard to principles of conflicts of law, shall govern this Indenture and the Securities.
SECTION 12.11. No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or a subsidiary. Any such indenture, loan or debt agreement may not be used to interpret this Indenture.
All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successors.
In case any provision in this Indenture or in the Securities shall be valid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and a Holder shall have no claim therefor against any party hereto.
SECTION 12.14. Table of Contents, Headings, etc.
The Table of Contents, Cross-Reference Table and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written.
By: /s/ Donald R. Loback
By: /s/ Russell T. Whitley
6 7/8% CONVERTIBLE SUBORDINATED NOTE DUE 2002
CONTINENTAL HOMES HOLDING CORP., a Delaware corporation (herein called the "Company"), for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars on November 1, 2002, and to pay interest thereon as provided on the reverse hereof, until the principal hereof is paid or duly provided for.
Interest Payment Dates: May 1 and November 1
Record Dates: April 15 and October 15
The provisions on the back of this certificate are incorporated as if set forth on the face hereof.
IN WITNESS WHEREOF, CONTINENTAL HOMES HOLDING CORP. has caused this instrument to be duly signed under its corporate seal.
[SEAL] CONTINENTAL HOMES HOLDING CORP.
This is one of the Securities referred to in the within-mentioned Indenture.
Manufacturers and Traders Trust Company,
6 7/8% CONVERTIBLE SUBORDINATED NOTE DUE 2002
1. Interest. Continental Homes Holding Corp., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Security at the rate per annum shown above. The Company will pay interest semi-annually on May 1 and November 1 of each year, commencing May 1, 1996. Interest on the Securities will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance of the Securities set forth on the face of this Security. Interest will be computed on the basis of a 360-day year of twelve 30-day months.
2. Method of Payment. The Company will pay interest on the Securities (except defaulted interest) to the persons who are registered Holders of Securities at the close of business on the record date set forth on the face of this Security next preceding the applicable interest payment date. Holders must surrender Securities to a Paying Agent to collect principal payments. The Company will pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company must pay principal, premium, if any, and interest by check payable in such money. It may mail an interest check to a Holder's registered address.
3. Paying Agent, Registrar, Conversion Agent. Initially, Manufacturers and Traders Trust Company (the "Trustee") will act as Paying Agent, Registrar and Conversion Agent. The Company may change any Paying Agent, Registrar, Conversion Agent or co-registrar without notice. The Company may act in any such capacity.
4. Indenture. The Company issued the Securities under an Indenture dated as of November 1, 1995 (the "Indenture") between the Company and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code {{ 77aaa-77bbbb) (the "Act"), as in effect on the date of the Indenture. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the Act for a statement of such terms. The Securities are general unsecured subordinated obligations of the Company limited to $86,250,000 aggregate principal amount (except for Securities issued in substitution for destroyed, mutilated, lost or stolen Securities). Terms used herein which are defined in the Indenture have the meanings assigned to them in the Indenture.
5. Optional Redemption. The Securities may be redeemed on at least 15 and not more than 60 days' notice at the option of the Company on or after November 1, 1998, in whole at any time or in part from time to time, at the redemption prices (expressed as a percentage of principal amount) set forth below for the 12-month period beginning November 1 of the following years, in each case together with accrued and unpaid interest to the redemption date:
6. Notice of Redemption. Notice of redemption will be mailed at least 15 days but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. On and after the redemption date, interest ceases to accrue on Securities or portions of them called for redemption.
7. Change in Control. In the event of a Change in Control (as hereinafter defined) with respect to the Company, then each Holder of the Securities shall have the right, at the Holder's option, to require the Company to repurchase such Holder's Securities including any portion thereof which is $1,000 or any integral multiple thereof on the date (the "Repurchase Date") that is 45 days after the date of the Repurchase Right Notice at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to the Repurchase Date (the "Repurchase Price").
On or before the 30th day after the occurrence of a Change in Control, the Company is obligated to give notice of the occurrence of such Change in Control, and of the date before which a Holder must notify the Company of such Holder's intention to exercise the redemption option, the procedure which such Holder must follow to exercise such right. To exercise the redemption option, the Holder of a Security must deliver on or before the 30th day after the date of the Repurchase Right Notice, written notice to the Company of the Holder's exercise of such option together with the Security or Securities with respect to which the option is being exercised, duly endorsed for transfer. Exercise of the redemption option by the Holder of a Security will be irrevocable, except that a Holder who submits such Security will retain the right to convert such Security into Common Stock until the close of business on the second business day prior to the Repurchase Date. If the Repurchase Date falls between any interest payment record date and the next succeeding interest payment date, Securities must be accompanied by payment of an amount equal to the interest thereon which the registered Holder is to receive on such interest payment date.
If any repurchase pursuant to the foregoing provisions constitutes an "issuer tender offer" as defined in Rule 13e-4 under the Exchange Act, the Company will comply with the requirements of Rule 13e-4, Rule 14e-1 and any other tender offer rules under the Exchange Act which then may be applicable, including the filing of an Issuer Tender Offer Statement on Schedule 13E-4 with the SEC and the furnishing of certain information contained therein to the Holders.
A "Change in Control" of the Company shall be deemed to have occurred at such time as any person, together with its affiliates or associates, other than the Management Group (as defined in the Indenture) is or becomes the beneficial owner, directly or indirectly, through a purchase, merger or other acquisition transaction, of shares of capital stock of the Company entitling such person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote in elections of directors, provided that a Change in Control shall not be deemed to have occurred if either (i) the last sale price of the Common Stock for any five trading days during the ten trading days immediately preceding the Change in Control is at least equal to 105% of the Conversion Price (as defined in the Indenture) in effect on the day of the Change in Control or (ii) all of the consideration (excluding cash payments for fractional shares) in the transaction or transactions constituting the Change in Control consists of shares of common stock traded on a national securities exchange or through NASDAQ or another comparable quotation system.
8. Conversion. A Holder of a Security may convert it into Common Stock of the Company at any time before the close of business on November 1, 2002, or, if the Security is called for redemption, the Holder may convert it at any time before the close of business on the second business day before the date fixed for redemption. The initial conversion rate is 42.105 shares of Common Stock per $1,000 principal amount of the Securities, subject to adjustment under certain circumstances. The Company will deliver a check in lieu of any fractional share. On conversion no payment or adjustment for interest accrued on the Securities will be made nor for dividends on the Common Stock issued on conversion. If any Security is converted between the record date for the payment of interest and the next succeeding interest payment date, such Security must be accompanied by funds equal to the interest payable on such succeeding interest payment date on the principal amount so converted (unless such Security shall have been called for redemption, in which case no such payment shall be required). A Security converted on an interest payment date need not be accompanied by any payment, and the interest on the principal amount of the Security being converted will be paid on such interest payment date to the registered holder of such Security on the immediately preceding record date.
To convert a Security a Holder must (1) complete and sign the conversion notice on the back of the Security, (2) surrender the Security to a Conversion Agent, (3) furnish appropriate endorsements and transfer documents if required by the Registrar or Conversion Agent and (4) pay any transfer or similar tax if required. A Holder may convert a portion of a Security if the portion is $1,000 or a whole multiple of $1,000.
9. Subordination. The Securities are subordinated in right of payment, in the manner and to the extent set forth in the Indenture, to the prior payment in full of all Senior Indebtedness (as defined in the Indenture). Each Holder by accepting a Security agrees to such subordination and authorizes the Trustee to give it effect.
10. Denominations, Transfer, Exchange. The Securities are in registered form without coupons in denominations of $1,000 and whole multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents. No service charge shall be made for any such registration or transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. The Registrar need not exchange or register the transfer of any Security selected for redemption in whole or in part. Also, it need not exchange or register the transfer of any Securities for a period of 15 days before a selection of Securities to be redeemed.
11. Persons Deemed Owners. The registered Holder of a Security may be treated as its owner for all purposes.
12. Merger or Consolidation. The Company may not consolidate with, or merge into, or directly or indirectly transfer or lease all or substantially all of its assets to, another person unless: the person is a corporation; such corporation assumes by supplemental indenture all the obligations of the Company under the Securities and the Indenture; and giving effect to the transaction, no Default or Event of Default (as defined in the Indenture) shall exist.
13. Amendments and Waivers. Subject to certain exceptions, the Indenture or the Securities may be amended with the consent of the Holders of at least a majority in principal amount of the Securities outstanding; and any existing default may be waived with the consent of the Holders of a majority in principal amount of the Securities. Without the consent of any Securityholder, the Indenture or the Securities may be amended to cure any ambiguity, omission, defect or inconsistency or to provide for uncertificated Securities in addition to certificated Securities, to comply with Sections 5.01 and 10.17 of the Indenture or to make any change that does not materially adversely affect the rights of any Securityholder.
14. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Securities; default in payment of principal on the Securities when due; failure by the Company for 60 days after notice to it to comply with any of its other agreements in the Indenture or the Securities; acceleration prior to maturity of other indebtedness in excess of an aggregate of $10,000,000 which is not rescinded or annulled within 30 days after notice; the rendering of a final judgment or judgments against the Company in excess of $10,000,000, which is not discharged, satisfied or stayed within a period of 60 days after notice; and certain events of bankruptcy or insolvency. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Securities may declare all the Securities to be due and payable immediately. The Holders of a majority in principal amount of the Securities by notice to the Trustee may waive a Default and its consequences. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in principal amount of the Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee.
15. Trustee Dealings with Company. Manufacturers and Traders Trust Company, the Trustee under the Indenture, or any banking institution serving as successor Trustee thereunder, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not Trustee.
16. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. The waiver and releases are part of the consideration for the issue of the Securities.
17. Authentication. This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent.
18. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenant by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act).
THE COMPANY WILL FURNISH TO ANY SECURITYHOLDER UPON WRITTEN REQUEST AND WITHOUT CHARGE A COPY OF THE INDENTURE. REQUESTS MAY BE MADE TO: Continental Homes Holding Corp., 7001 N. Scottsdale Road, Suite 2050, Scottsdale, Arizona 85253, Attention: Corporate Secretary.
To assign this Security, fill To convert this Security in the form below: into Common Stock of the Company, check the box:
I or we assign and transfer _____
To convert only part of (Insert Assignee's Soc. amount (must be in Sec. or Tax I.D. No.) multiples of $1,000):
__________________________ If you want the stock fill in the form below:
(Print or type assignee's Soc. Sec. or Tax I.D. name, address and zip code) no.)
on the books of the substitute another (Print or type other to act for him. person's name, address
the other side of this
(All signatures must be guaranteed by a member of a national securities exchange or of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company located in the United States)
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security repurchased by the Company pursuant to Section 4.08 of the Indenture, check the box:
If you want to elect to have only part of this Security repurchased by the Company pursuant to Section 4.08 of the Indenture, state the amount:
(in an integral multiple of $1,000)
(Sign exactly as your name(s) appear(s) on the other side of
by a member of a national securities exchange or of the Securities Dealers, Inc. or by a commercial bank or trust company located in the United States) | 10-Q | EX-4.1 | 1996-01-12T00:00:00 | 1996-01-12T16:40:21 |
0000950130-96-000092 | 0000950130-96-000092_0001.txt | <DESCRIPTION>AMENDMENT NO. 3 TO DISTRIBUTION AGREEMENT
AMENDMENT NO. 3 TO THE DISTRIBUTION AGREEMENT
This Amendment dated as of the __th day of January, 1996, is entered into by and among COMPASS CAPITAL FUNDS, a Massachusetts business trust (the "Company"), Provident Distributors, Inc. ("PDI"), a Delaware corporation ("PDI") and Compass Distributor, Inc., a wholly-owned subsidiary of PDI ("CDI").
WHEREAS, the Company and PDI have entered into a Distribution Agreement dated as of January 31, 1994, and amended as of September 23, 1994 and October 18, 1994 (the "Distribution Agreement"), pursuant to which the Company appointed PDI to act as distributor to the Company;
WHEREAS, the parties hereto desire to amend the Distribution Agreement
WHEREAS, except to the extent amended hereby, the Distribution Agreement, as previously amended, shall remain unchanged and in full force and effect, and is hereby ratified and confirmed in all respects as amended hereby.
NOW, THEREFORE, the parties hereby, intending to be legally bound, hereby agree as follows:
1. Paragraph (f) of Section 2 (relating to the delivery of documents) is amended to read in its entirety as follows:
"(f) The Company's Amended and Restated Distribution and Service Plan relating to the Company's respective Share classes."
2. Paragraph 3A is amended to read in its entirety as follows:
"3A. Payments Relating to Distribution Plans. Payments by the Company relating to any distribution plan within the meaning of Rule 12b-1 under the 1940 Act (a "Plan") adopted by the Company's Board of Trustees may be payable to the Distributor or its assignees, all in accordance with the terms and conditions of such Plan."
3. Paragraph 3B is amended to read in its entirety as follows:
"3B. Payments of Sales Charges. Any front-end sales charges or deferred sales charges payable in connection with purchases of Series A Investor Class Shares, Series B Investor Class Shares and Series C Investor Class Shares, respectively, shall be payable to the Distributor or its assignees, all in accordance with the Company's registration statement."
4. CDI is hereby substituted for PDI as a party to the Distribution Agreement. All references to the "Distributor" in the Agreement shall be deemed to refer to CDI for all periods beginning on or after the date hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date and year first written above. | 485BPOS | EX-6.D | 1996-01-12T00:00:00 | 1996-01-11T17:57:27 |
0000950115-96-000012 | 0000950115-96-000012_0000.txt | AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 1996
THE SECURITIES ACT OF 1933
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
441 NORTH 5TH STREET, SUITE 102 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MESIROV GELMAN JAFFE CRAMER & JAMIESON 1735 MARKET STREET, 38TH FLOOR (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / /
If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY FORM S-2 FILED AS PART OF REGISTRATION STATEMENT
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JANUARY 11, 1996
All of the 2,500,000 shares of Common Stock of ICC Technologies, Inc. (the 'Company') offered hereby are being sold by the Company. The Common Stock is traded on the Nasdaq Small Cap Market under the symbol 'ICGN'; however, the Company has applied for the listing of its Common Stock on the Nasdaq National Market as of the effective date of this offering. On January 10, 1996, the reported last sale price of the Common Stock, as reported by Nasdaq, was $10.75. See 'Price Range of Common Stock.'
THE COMMON STOCK OFFERED HEREBY IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THE COMPANY HAS EXPERIENCED LOSSES SINCE INCEPTION. SEE 'RISK FACTORS' COMMENCING ON PAGE 8 OF THIS PROSPECTUS.
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) See 'Underwriting' for a description of certain indemnification and other arrangements with the several Underwriters.
(2) Before deducting estimated aggregate expenses for the offering of $395,000 payable by the Company.
(3) The Company has granted to the Underwriters an option, exercisable for 45 days from the date of this Prospectus, to purchase up to an additional 375,000 shares of Common Stock solely to cover over-allotments. If this option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See 'Underwriting.'
The shares of Common Stock are offered by the several Underwriters named herein, subject to prior sale, when, as and if delivered to and accepted by them and subject to certain other conditions, including the Underwriters' right to reject orders in whole or in part. It is expected that delivery of the certificates for the shares of Common Stock will be made against payment therefor at the offices of Janney Montgomery Scott Inc. in Philadelphia, Pennsylvania on or about , 1996.
JANNEY MONTGOMERY SCOTT INC. GERARD KLAUER MATTISON & CO., LLC
The date of this Prospectus is , 1996
IT'S NOT THE HEAT, IT'S THE HUMIDITY
The most effective way to deal with heat and humidity is to manage them independently. Conventional refrigerant-based air conditioning equipment removes moisture primarily as a by-product of the cooling process, sometimes requiring cooling air below desired levels which wastes energy. Englehard/ICC's systems employ innovative desiccant and honeycomb rotor technology to control humidity independently of temperature.
The removal of humidity from outside air is often a significant challenge for air conditioning systems. The following chart illustrates the number of hours per month that the outdoor humidity and temperature exceed indoor air temperature of 75 degrees Fahrenheit and 50 percent relative humidity in six major cities around the world.
[Graph Described in Appendix A, No. 1]
[Graph Described in Appendix A, No. 1]
[Graph Described in Appendix A, No. 1]
[Graph Described in Appendix A, No. 1]
[Graph Described in Appendix A, No. 1]
[Graph Described in Appendix A, No. 1]
Engineering Weather Data, Departments of Airforce Army and Navy -- July 1978
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT
[PICTURE DESCRIBED IN APPENDIX A, NO. 2]
1. Recirculated or up to 100% fresh air is drawn into the unit by a fan and pushed through a slowly turning desiccant rotor.
2. The desiccant rotor removes the majority of moisture from the air and in the process warms the air.
3. The warm, dry air is driven through a heat exchange rotor that cools the airstream.
4. Post-cooling options to further lower the process air temperature include an evaporative cooler (which partially rehumidifies the air without using any refrigerants) or a cooling coil. A hot water coil for winter heat is standard in the DESI/AIR(Registered) and Desert Cool(Trademark) systems.
5. Outside air or building exhaust air is drawn into the regeneration airstream.
6. An evaporative cooler saturates the regeneration airstream with water, significantly lowering its temperature.
7. The cooled air is drawn through the heat exchange rotor, cooling (regenerating) the heat exchange rotor and warming the regeneration air.
8. The regeneration airstream is further heated by a heating coil and is drawn through the desiccant rotor to dry (regenerate) it.
9. A fan exhausts the regeneration airstream to the outside atmosphere.
10. Boiler in natural gas models.
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, proxy statements and other information with the Securities and Exchange Commission (the 'Commission'). Such 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 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional Offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York 10048. 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.
This Prospectus constitutes part of a registration statement on Form S-2 (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 the exhibits thereto, in accordance with the rules and regulations of the Commission. For further information concerning the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits filed therewith, which may be inspected without charge at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of which may be obtained from the Commission at prescribed rates.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant to the Exchange Act are incorporated by reference into this Prospectus: (i) the Company's Annual Report on Form 10-K for the Year ended December 31, 1994, which incorporates by reference certain portions of its definitive Proxy Statement dated April 26, 1995 distributed to the Company's stockholders in connection with the annual meeting of stockholders held on June 1, 1995; (ii) the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1995; (iii) the Company's Quarterly Report on Form 10-Q/A for the Quarter ended March 31, 1995; (iv) the Company's Quarterly Report on Form 10-Q/A2 for the Quarter ended March 31, 1995; (v) the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1995; (vi) the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1995; and (vii) the Company's Current Report on Form 8-K/A dated January 26, 1995 amending its Current Report on Form 8-K dated December 6, 1994.
Any statement contained in a document 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 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, including any beneficial owner, to whom this Prospectus is delivered, on the oral or written request of such person, a copy (without exhibits, unless such exhibits are specifically incorporated by reference into the information that this Prospectus incorporates) of any and all information that has been incorporated by reference in this Prospectus. Written or telephone requests for such information should be directed to Manfred Hanuschek, Chief Financial Officer and Treasurer, ICC Technologies, Inc., 441 North 5th Street, Philadelphia, Pennsylvania 19123, telephone: (215) 625-0700.
The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and the notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted herein: (i) ICC Technologies, Inc., a Delaware corporation, and its wholly-owned subsidiary, ICC Desiccant Technologies, Inc., a Delaware corporation, are collectively referred to herein as the 'Company'; and (ii) all information in this Prospectus gives effect to the Preferred Stock Transactions (as hereinafter defined) and assumes no exercise of the Underwriters' over-allotment option. Investors should carefully consider the information set forth under the heading 'Risk Factors.'
The Company, through its joint venture 'Engelhard/ICC' (the 'Partnership') with Engelhard Corporation ('Engelhard'), designs, manufactures and markets innovative climate control systems to supplement or replace conventional air conditioning systems. The Partnership's climate control systems are based on proprietary desiccant technology initially developed by the Company, licensed honeycomb rotor technology and Engelhard's patented titanium silicate desiccant, called ETS(Trademark). The Partnership's climate control systems are designed to address indoor air quality, energy, and environmental concerns and regulations currently affecting the air conditioning market. The Partnership currently markets its systems to certain targeted applications within the commercial air conditioning market in North America and Asia-Pacific. Of the approximately $6 billion market for commercial air conditioning equipment in North America and Asia-Pacific in 1994, the Company estimates that annual sales to these targeted applications were approximately $2 billion. The worldwide commercial air conditioning market is expected to grow to approximately $13 billion by the year 2000, and the Company expects the Partnership's systems to compete in a broader segment of this market as awareness and acceptance of the Partnership's systems grow and their initial cost declines.
Desiccant-based systems dehumidify air before cooling, making it easier and more energy efficient to cool. A desiccant is a material that removes moisture from air. The Partnership's systems circulate fresh or recirculated air through a honeycomb rotor treated with ETS(Trademark) which removes much of the moisture and in the process warms the air. The air then passes through a heat exchange honeycomb rotor to cool the warm, dry air. The air can be cooled further by partially rehumidifying it with an evaporative cooler or with a smaller cooling coil than would be required by conventional air conditioning systems. On the other side of the unit, recirculated air is used to cool the heat exchange rotor and remove the moisture captured by the desiccant rotor. The Company believes that the Partnership's indoor climate control systems provide the following features and benefits:
o More Effective Control of Humidity -- The Partnership's systems are more effective at controlling humidity than conventional, refrigerant-based air conditioning systems which control humidity primarily as a by-product of the cooling process when moisture condenses on the cooling coil. As a result, in conditions where significant humidity reduction is desired, conventional air conditioning systems must often cool air below desired levels. Drier air is generally more comfortable for a building's occupants and is more efficient to cool. Humidity control is also important in a variety of commercial applications, such as supermarkets, and in certain manufacturing processes.
o Improved Indoor Air Quality -- Ventilation standards recommended by the American Society of Heating, Refrigeration and Air Conditioning Engineers ('ASHRAE') and incorporated into many state and local building codes throughout the country for new building construction now require that as much as 200-300% more fresh air be circulated into buildings compared to prior ventilation standards to reduce indoor air pollutants associated with 'Sick Building Syndrome.' The Partnership's climate control systems are designed to process the humidity introduced by increased ventilation and, accordingly, enable a building to meet or exceed these
standards. In addition, lower humidity levels reduce airborne bacteria, mold, mildew and fungi, another major source of indoor air quality problems.
o Energy Efficient and Cost Effective -- Less humid air requires less energy to cool than more humid air. By dehumidifying air before cooling, the Partnership's systems, even with a post-cooling option, consume less energy and are more cost effective to operate than conventional air conditioning systems. As a supplement to conventional air conditioning, by first dehumidifying the air, the Partnership's systems are designed to improve the efficiency of existing conventional air conditioning.
o Versatile and Reliable -- The Partnership's systems are available in natural gas, electric, steam or waste heat models and in several sizes which process from 2,000 to 25,000 cubic feet of air per minute. The ability to choose from a variety of energy sources allows customers to select the most cost-effective energy source in their area at the time of purchase. The systems are also expected to require less maintenance than conventional equipment because of simplicity of design and fewer moving parts.
o Environmentally Safer -- Conventional air conditioning systems utilize refrigerants such as chlorofluorocarbons ('CFCs'), hydrochlorofluorocarbons ('HCFCs') and hydro- fluorocarbons ('HFCs'), which damage stratospheric ozone or contribute to global warming. Because the Partnership's systems dehumidify the air before it is cooled by a post-cooling option in the system or in conjunction with a conventional air conditioning system, the cooling coil and compressor included as a post-cooling option in the non-electric models are smaller, and in the electric models generally are smaller, than would otherwise be required in a conventional air conditioning system, thereby utilizing less refrigerant.
o Year-round Performance -- The Partnership's natural gas systems provide year-round indoor climate control. In hot, humid weather they supply cool, dry air. In cool, 'clammy' weather they supply warm, dry air. In cold weather the natural gas powered systems supply heat. The Partnership is currently developing heating capability for its electric powered systems.
The Company believes that the Partnership's climate control systems are more efficient and economical to operate than other desiccant-based climate control systems. The Partnership's honeycomb rotor technology, combined with Engelhard's patented ETS(Trademark), more efficiently removes and then releases moisture at lower temperatures than other desiccant-based systems.
The Partnership's strategy is to target specific applications within the commercial air conditioning market in which humidity control, indoor air quality and energy consumption are important health issues or a significant cost of business. The Partnership has marketed its systems to supermarket chains, schools, fast food restaurants, health care facilities, hotels, manufacturers, department stores, theaters, and federal, state and local governments. To expand its business in the United States, the Partnership plans to increase its sales force, seek to acquire an existing air conditioning business, and may establish joint ventures or license its technology with one or more major air conditioning companies. Internationally, the Partnership's strategy is to continue to expand in the rapidly growing and humid countries of Asia-Pacific and other similar regions of the world where its systems offer the greatest advantages. Chung-Hsin Electric and Machinery Manufacturing Corporation ('Chung-Hsin') in Taiwan, Samsung Corporation ('Samsung') in South Korea and Nichimen Engine Sales Company ('Nichimen') in Japan have agreements or relationships with the Partnership to manufacture or sell the Partnership's components or systems. The Partnership plans to enter into joint ventures or licensing arrangements with one or more additional companies internationally.
Through November 30, 1995, the Partnership and, prior to its formation, the Company have sold 175 systems worldwide, including 93 systems which incorporate both honeycomb rotors and ETS(Trademark). In the United States, customers include the Shop Rite, Grand Union and Genuardi's supermarket chains, JCPenney and Liz Claiborne. Internationally sales have been made in association with Chung-Hsin in Taiwan, Samsung in South Korea and Nichimen in Japan. The Partnership's natural gas systems have been awarded the 'Blue Star' certification for safety and quality by the American Gas Association
Laboratory. The systems are marketed and sold under the names 'DESI/AIR(Registered),' 'Desert Cool(Trademark)' and 'Desert Breeze(Trademark).' The DESI/AIR(Registered) and Desert Cool(Trademark) systems are available in natural gas, steam or waste heat models. The Desert Breeze(Trademark) systems operate on electricity and utilize conventional compressors.
In connection with the formation of the Partnership, the Company granted Engelhard options to acquire up to all of the Company's interest in the Partnership, subject to acceleration upon default, at the rate of 25% per year starting on December 31, 1997, based on a price equal to 95% of the fair market value of the Partnership as determined by an investment banking firm selected by the Company and Engelhard.
The executive offices of the Company and the Partnership are located at 441 North Fifth Street, Suite 102, Philadelphia, Pennsylvania 19123. The Company's telephone number is (215) 625-0700.
(1) Gives effect to the Preferred Stock Transactions pursuant to which an aggregate of 3,764,384 shares of Common Stock are to be issued. See 'Preferred Stock Transactions.' Does not include outstanding options as of November 30, 1995 to purchase 2,901,885 shares of Common Stock pursuant to the Company's stock option plans and outstanding warrants as of November 30, 1995 to purchase 1,465,000 shares of Common Stock.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) The Company had no obligation or commitment to provide additional financing to the Partnership during the period ended September 30, 1994 and the Company's share of losses was not recognized.
(2) Adjusted to reflect the sale by the Company of 2,500,000 shares of Common Stock offered hereby at an assumed offering price of $11 per share and the application of the net proceeds therefrom, and pro forma adjustments to reflect the Preferred Stock Transactions and the repayment of a note payable to a stockholder.
An investment in the shares of Common Stock offered hereby involves a high degree of risk. In evaluating a purchase of shares, prospective investors should consider carefully the following risk factors, in addition to the other information set forth elsewhere in, and incorporated by reference into, this Prospectus.
Management and Control of the Partnership. The Company and Engelhard each own a 50% interest in the Partnership. The Partnership is managed by a management committee ('Management Committee') comprised of two members, one selected by each of the Company and Engelhard. Currently, the Management Committee is comprised of Irwin L. Gross, Chairman and President of the Company, and Robert J. Schaffhauser, Vice President-Technology and Corporate Development of Engelhard. Accordingly, the Company does not control the Partnership and its affairs and there is no assurance that the Company and Engelhard will agree on the business strategy, operations or financing of the Partnership, which could have an adverse effect on the Partnership's business. In addition, there is no assurance that the net proceeds received by the Company from the sale of the Common Stock offered hereby will be expended in the manner set forth under 'Use of Proceeds.' Moreover, if Engelhard exercises a sufficient portion of its option to acquire the Company's interest in the Partnership, or otherwise increases its ownership, such that it owns more than 70% of the Partnership, Engelhard will have the right to expand the Management Committee to three members and to designate the third member of the Management Committee, thereby effectively controlling the business of the Partnership. See 'Business -- The
Mr. Gross may encounter conflicts of interest in connection with his responsibilities as Chief Executive Officer and a member of the Management Committee of the Partnership and as Chairman and President of the Company. It is expected that Mr. Gross will attempt to resolve any such conflict of interest in a manner consistent with his fiduciary duties to both the Partnership and the Company.
History of Losses. Since its inception, the Company has suffered recurring losses accumulating to approximately $31.4 million through September 30, 1995, including the Company's reported share of losses sustained by the Partnership through that date. From its formation through September 30, 1995, the Partnership has incurred losses totalling approximately $12.4 million. While the Company believes that the business strategy adopted by the Company and the Partnership has potential for profits and returns on investments in the future, there can be no assurance that the Partnership or the Company will operate profitability in the near future, if ever. The reports of the independent accountants on the Company's and Partnership's financial statements for the fiscal year ended December 31, 1994 include explanatory paragraphs which refer to conditions that raise substantial doubt about the Company's and Partnership's ability to continue as a going concern. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the financial statements of the Company and the Partnership and notes thereto included elsewhere herein.
Working Capital and Other Financing Requirements. At present, the Company has no operations or source of funds other than borrowings or proceeds from the issuance of equity securities. To date, the Partnership has incurred losses and, therefore, not only has the Partnership been unable to generate sufficient cash from operations to fund the Company's working capital requirements but it also has required capital investments by the Company. If the Partnership were to become profitable, the Company expects that all of such cash would be retained to support and grow the Partnership's business for the foreseeable future. The Company historically has met its financing needs primarily through the sale of its capital stock. While the Company believes that it currently has sufficient resources to support its operations for the foreseeable future, no assurance can be given that it will not be required to obtain additional financing in the future. If such additional financing were required, there can be no assurance that additional financing will be available on acceptable terms or at all. See 'Management's Discussion and Analysis of Financial Condition and Results of
To date, the Partnership has incurred losses and has been unable to generate sufficient cash from operations to fund its operations or expand its business. Consequently, the Partnership has relied on the
Company and Engelhard to fund its operations and expand its business. While the Company believes that the net proceeds from the sale of the Common Stock offered hereby will be sufficient to fund the Company's 50% share of the working capital and capital investment requirements of the Partnership for the twelve-month period following the date of the offering, no assurance can be given in that regard, particularly if the Partnership were to acquire an air conditioning company. Further, even if the net proceeds from this offering are sufficient for such activities, it is anticipated that the Partnership will require additional financing in the future, and there is no assurance that such additional financing will be available to the Partnership on acceptable terms or that the Company or Engelhard would be willing or able to provide such financing. While neither the Company nor Engelhard is required to provide additional financing to the Partnership under the terms of the Partnership Agreement, in the event additional financing is required by the Partnership and the Company is unwilling or unable to provide its share of such additional financing, additional funding by Engelhard might have a dilutive effect on the Company's percentage ownership of the Partnership. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.'
Market Acceptance of the Partnership's Products. While the Company believes there is a significant market for the Partnership's desiccant-based climate control systems, through November 30, 1995, the Partnership had sold only 93 units which incorporate the Partnership's honeycomb rotors and Engelhard's ETS(Trademark) desiccant. The Partnership's systems are an emerging technology in the air conditioning business, with uncertain demand and market acceptance. The Company believes that the Partnership's systems are innovative, efficient, cost effective supplements or alternatives to conventional air conditioning systems in many applications and that no other desiccant cooling systems operate as effectively or economically. Nevertheless, the Partnership has only recently begun significant marketing activities relating to the commercialization of its climate control systems and will need to expend considerable efforts and resources to create awareness and acceptance of such systems. There can be no assurance that the Partnership will be able to create sufficient market acceptance or that the Partnership's products can be sold at the prices anticipated. See 'Business -- Strategy.'
Partnership Buy-Out Option. In connection with the formation of the Partnership, the Company granted Engelhard options to acquire up to all of the Company's interest in the Partnership at the rate of 25% of such interest per year starting on December 31, 1997, with each option exercisable based upon a price equal to 95% of the fair market value of the Partnership as determined by an investment banking firm selected by the Company and Engelhard. Upon the occurrence of an event of default by the Company under the Partnership Agreement (including bankruptcy of the Company or violation of or failure by the Company to comply with any material term or condition of the Partnership Agreement which is not cured within a 45-day period), Engelhard's options can be accelerated. There can be no assurance whether Engelhard will or will not exercise any or all of its options to purchase the Company's interest in the Partnership or that the valuation assigned the Company's interest will be sufficient to generate an acceptable return to investors. See 'Business -- The Partnership.'
Dependence on Proprietary Technology. The Partnership's ability to compete effectively with other manufacturers of climate control systems is dependent upon, among other factors, a combination of (i) the Partnership's proprietary desiccant system designs, (ii) Engelhard's patented desiccant ETS(Trademark), which is sold to the Partnership pursuant to a Supply Agreement (the 'Engelhard Supply Agreement') and is exclusively licensed to the Partnership for use in climate control applications pursuant to a Technology License Agreement (the 'Engelhard License Agreement'), and (iii) the proprietary process used to manufacture the small cell, honeycomb substrate material for the Partnership's rotors, as to which the Partnership has a perpetual license from Ciba-Geigy Corporation ('Ciba-Geigy'). The Partnership has three United States patents covering certain aspects of its desiccant technology and has filed additional United States and foreign patent applications. In addition to its patent rights, the Partnership generally enters into confidentiality agreements and licensing agreements with its partners, employees, distributors and customers and attempts to limit access to proprietary information and equipment. There can be no assurance that the steps taken by the Partnership in this regard will be adequate to deter misappropriation of its proprietary technology and manufacturing processes or that independent development of similar technology or processes will not occur. Further, patents are presumed valid, but the validity of any patent may be challenged and there is no way to accurately predict the outcome of litigation challenging the validity of a patent. In addition, although the Company believes that the Partnership's owned and licensed technology and manufacturing processes do not infringe any existing patents or other proprietary rights, there can be no assurance that other parties will not assert infringement claims against the Partnership or the licensors of its licensed technology. The failure to receive additional patents, to defend its existing patents or licensed technology or to defend against infringement claims asserted by others, or the independent development of similar or competing proprietary technology and processes would likely have a material adverse effect on the Partnership's, and therefore the Company's, results of operations and financial condition. See 'Business -- Patents and
Management of Growth. The Partnership has experienced, and expects to continue to experience, rapid growth that has placed, and will continue to place, a significant strain on its management, operational and financial resources. The Partnership's ability to manage its growth effectively will require it to expand and continue to improve its operations and information systems, and to attract, train, motivate and manage its employees effectively. In particular, the Partnership plans to expand its manufacturing facilities to meet the anticipated demand for its products and to enter new markets in Asia-Pacific and other similar regions of the world. The Partnership's success will depend on the Partnership's ability to expand its operations, enter new markets and retain and motivate its employees and there can be no assurance that the Partnership will implement such changes successfully. The Partnership's failure to manage such growth effectively would have a material adverse effect on the Partnership's and the Company's businesses and results of operations. See 'Use of Proceeds'; 'Business -- Strategy'; and 'Business -- Manufacturing.'
Need for Additional Production Capacity. Although the Partnership's facilities are adequate to meet its current level of sales, the Company expects that by the end of the first half of 1996 the Partnership will have to increase its capacity to meet anticipated demand. There can be no assurance that the Partnership will be able to increase its production capacity in a timely or cost-effective manner. Failure to do so would have a material adverse effect on the Partnership's and the Company's businesses and results of operations. See
Unproven Reliability of Products. To date, all of the systems sold by the Partnership which incorporate the Partnership's honeycomb rotors and Engelhard's ETS(Trademark) desiccant, have been in service for less than 24 months. While the Company believes that product reliability to date has been commercially acceptable and provides a reasonable basis for estimating future reliability, there can be no assurance that the reliability of the Partnership's products will remain satisfactory in the future. See 'Business -- Products.'
Acquisition and Alliance Strategy. The Company believes that acquiring, or entering into alliances with, other businesses will be an important element of the Partnership's strategy for achieving growth. There can be no assurance that suitable acquisition or alliance candidates will be identified, or if identified, that they will enter into joint venture, license or merger arrangements acceptable to the Partnership and the Company. Furthermore, there can be no assurance that financing for any such transactions will be available on satisfactory terms or at all, or that the Partnership will be able to accomplish its strategic objectives as a result of any such transaction. See
Dependence on Key Personnel. The Company is highly dependent on the Company's Chairman and President, Irwin L. Gross. Mr. Gross has an employment agreement with the Partnership, but does not have an employment agreement with the Company. The loss of Mr. Gross could have a material adverse effect on the Partnership's and the Company's businesses. Neither the Company nor the Partnership has key-man life insurance on Mr. Gross. See 'Management.'
Competition. There are a number of other companies in the air conditioning industry that have significantly greater resources and experience than the Partnership in designing, manufacturing and marketing air conditioning equipment. While the Company believes that the Partnership has developed proprietary products and has established limited market acceptance for its products, there can be no assurance that other companies do not currently market or will not develop competing products that have advantages over the Partnership's products in either price or performance.
Dilution. The purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution of $9.69 in pro forma book value per share of Common Stock after the offering at an assumed public offering price of $11.00 per share. See 'Dilution.'
No Cash Dividends. The Company has not declared any cash dividends on its Common Stock and does not expect to declare any cash dividends in the foreseeable future. Payment of future dividends will be at the discretion of the Board of Directors and will depend, among other things, on the earnings, capital requirements and financial condition of the Company and the Partnership. No assurance can be given that the Company's results of operations or its interest in the Partnership will ever permit the payment of cash dividends. In addition, future borrowings or issuances of Preferred Stock may prohibit or restrict the Company's ability to pay or declare dividends. The Company currently has a note payable to a stockholder and Preferred Stock outstanding which prohibit or restrict the Company's ability to pay dividends; however, upon completion of this offering, the note is to be repaid and pursuant to the Preferred Stock Transactions, the Preferred Stock is to be redeemed or converted into shares of Common Stock. See 'Dividend Policy' and 'Preferred Stock Transactions.'
Control by Principal Stockholders. As of November 30, 1995, all officers and directors of the Company as a group owned outstanding shares of Common Stock and Preferred Stock which, on a pro forma basis after giving effect to the Preferred Stock Transactions and as adjusted to give effect to the sale of the Common Stock offered hereby, would equal 4,454,657 shares of Common Stock, representing 21.3% of the Common Stock to be outstanding after the offering. In addition, such officers and directors as a group held options and warrants to purchase an aggregate of 3,101,611 shares of Common Stock. Assuming all such options and warrants were exercised, and no other options or warrants were exercised, as of November 30, 1995, all officers and directors of the Company as a group on a pro forma basis after giving effect to the Preferred Stock Transactions and as adjusted to give effect to the sale of the Common Stock offered hereby, would own 31.5% of the Common Stock, including approximately 15.2% by Irwin L. Gross, the Company's Chairman and President. Consequently, Mr. Gross and the other officers and directors can and will be able to continue to exercise significant influence over the Company and its affairs. See 'Principal
Shares Eligible for Future Sale. As of November 30, 1995, after giving effect to the Preferred Stock Transactions, there would have been 4,371,682 shares of Common Stock outstanding which constituted 'restricted securities,' as that term is defined under Rule 144 promulgated under the Securities Act, substantially all of which may be sold at any time, subject to the restrictions of Rule 144. In addition, as of November 30, 1995, there were outstanding options to purchase 2,901,885 shares of Common Stock under its stock option plans, of which options to purchase 1,262,085 shares of Common Stock were currently exercisable. An additional 1,910,942 shares of Common Stock were reserved for issuance under such plans. All of the shares underlying options under such plans are covered by effective registration statements. As of such date, the Company also had outstanding warrants to purchase 1,465,000 shares of Common Stock, of which warrants to purchase 540,000 shares of Common Stock were currently exercisable. Of the outstanding warrants, 450,000 underlying shares of Common Stock are registered pursuant to an effective registration statement and the balance of 1,015,000 shares of Common Stock have certain registration rights. Possible or actual sales made under Rule 144, or pursuant to registration or other exemptions from registration under the Securities Act, of the aforementioned shares of Common Stock may have an adverse effect upon the market price of the Common Stock. Of the shares of the Common Stock referred to above, an aggregate of 7,931,268 shares of Common Stock held, after giving effect to the Preferred Stock Transactions, or which may be acquired upon exercise of outstanding options and warrants by the officers, directors and certain stockholders of the Company, are subject to 'lock-up' agreements for a period of 180 days from the date of this Prospectus. See 'Shares Eligible for
The net proceeds to the Company from the sale of the Common Stock offered hereby are estimated (assuming a public offering price of $11.00 per share) to be approximately $25.2 million ($29.0 million if the Underwriters' over-allotment option is exercised in full) after deduction of underwriting discounts and commissions and estimated offering expenses. The Company plans to use the net proceeds from the offering (i) to fund its half of the estimated total financing requirements of the Partnership, as follows (the following amounts represent the Company's share of the expenditures): (a) approximately $6.0 million to finance the expansion of the Partnership's rotor manufacturing capacity; (b) approximately $3.0 million to finance a new manufacturing facility to replace the Partnership's Philadelphia facility; (c) approximately $5.0 million to fund the Partnership's joint venture and other licensing activities internationally; and (d) to finance a possible acquisition of an existing air conditioning company by the Partnership and to fund the working capital requirements of the Partnership, (ii) to redeem certain of its Preferred Stock for approximately $1,328,000, which includes payment (as of November 30, 1995) of approximately $347,000 of accrued dividends, and to pay a $150,000 note plus accrued interest payable to a stockholder, and (iii) the balance to fund the Company's working capital requirements. Pending the use of the net proceeds from the sale of the Common Stock offered hereby, the Company will invest such proceeds in short-term government securities or money market funds. Although the Company and Engelhard have agreed in principle for the Partnership to make the expenditures referred to above, as of the date hereof, the Management Committee which governs the Partnership has not authorized formally any of the foregoing expenditures, and there is no assurance that the proceeds will be expended in the manner set forth above. Moreover, although the Partnership has engaged in discussions with possible acquisition candidates, as of the date hereof no agreements have been reached and no assurance can be given that any such acquisition will occur. However, in the event the Partnership were to acquire an air conditioning company, the Company would probably use a substantial portion of the net proceeds of this offering to finance such an acquisition by the Partnership. The use of the net proceeds by the Company is subject to certain restrictions described under 'Management -- Expansion of Board; Approval of Certain Transactions.' See also 'Risk Factors'; 'Preferred Stock Transactions';
PRICE RANGE OF COMMON STOCK
The Company has applied for the listing of its Common Stock on the Nasdaq National Market under the symbol ICGN as of the effective date of this offering. Prior to this offering, the Common Stock has traded on the Nasdaq Small Cap Market. Based on reports provided by Nasdaq, the price range of high and low bid prices for the Common Stock for the periods indicated are as follows:
The above quotations reported by Nasdaq represent prices between dealers and do not include retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. On January 10, 1996, the last reported sale price for the Common Stock, as reported by Nasdaq, was $10.75 per share. On January 10, 1996, there were 1,388 holders of record of the Common Stock.
Other than an in-kind warrant dividend declared by the Board of Directors in June 1990, the Company has never paid a dividend on the Common Stock and it is unlikely that any dividends will be paid in the foreseeable future. The payment of cash dividends on the Common Stock will depend on, among other things, the earnings, capital requirements and financial condition of the Company and the Partnership, and general business conditions. In addition, future borrowings or issuances of Preferred Stock may prohibit or restrict the Company's ability to pay or declare dividends. The Company currently has a note payable to a stockholder and Preferred Stock outstanding which prohibit or restrict the Company's ability to pay dividends; however, upon completion of the offering, the note is to be repaid and pursuant to the Preferred Stock Transactions, the Preferred Stock is to be redeemed or converted into shares of Common Stock.
The Company currently has five classes of Preferred Stock outstanding. Upon consummation of the sale of the shares offered hereby, the Series G and H Convertible Preferred Stock will be automatically converted into 2,859,696 and 750,000 shares of Common Stock, respectively. In addition, upon such conversion, the Company will pay accrued dividends on the Series G Convertible Preferred Stock in cash ($59,467 as of November 30, 1995), and the accrued dividends on the Series H Convertible Preferred Stock are payable, at the option of the holder, in Common Stock at the rate of $4.00 per share. Accordingly, pursuant to the holder's request, the Company will issue approximately 154,688 shares of Common Stock with respect to the accrued dividends on the Series H Convertible Preferred Stock ($618,750 at November 30, 1995). Moreover, upon the consummation of the offering, the holders of Series I Preferred Stock will require the Company to redeem the Series I Preferred Stock for $500,000, plus accrued dividends ($185,833 as of November 30, 1995). In addition, upon consummation of the offering, the Company will redeem the Series F Preferred Stock for $256,270 plus accrued dividends ($22,937 as of November 30, 1995) and its Series J Preferred Stock for $225,000 plus accrued dividends ($78,563 as of November 30, 1995). These transactions will be completed upon the consummation of the offering and are referred to as the 'Preferred Stock Transactions.'
As of September 30, 1995, the net tangible book value of the Company was $3,503,000 or $.24 per share of Common Stock. Net tangible book value per share represents total tangible assets, less total liabilities, divided by the number of shares of Common Stock outstanding. After the pro forma adjustments to give effect to the Preferred Stock Transactions and as adjusted to give effect to the receipt by the Company of the estimated proceeds from the sale of the 2,500,000 shares of Common Stock offered hereby, at an assumed public offering price of $11.00 per share and after deducting the estimated underwriting discounts and commissions and estimated offering expenses, the pro forma as adjusted net tangible book value of the Company as of September 30, 1995 would have been $27,404,000 or $1.31 per share. This represents an immediate increase in net tangible book value of $1.07 per share to the existing stockholders of the Company and an immediate dilution of $9.69 per share to new stockholders purchasing the shares of Common Stock offered hereby. The following table illustrates this per share dilution:
The following table reflects the capitalization of the Company as of September 30, 1995, and the pro forma as adjusted capitalization to give effect to the Preferred Stock Transactions as of such date and sale of the 2,500,000 shares of Common Stock offered hereby at an assumed public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. See 'Use of Proceeds' and 'Preferred Stock Transactions.'
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The following selected consolidated financial data of the Company at and for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 have been derived from the Company's financial statements, which have been audited by Coopers & Lybrand L.L.P. (whose reports thereon include an explanatory paragraph which refer to conditions that raise substantial doubt about the Company's ability to continue as a going concern). The selected consolidated financial data for the nine month periods ended September 30, 1995 and 1994 and as of September 30, 1995 have been derived from the unaudited consolidated financial statements of the Company. The unaudited interim financial data include all adjustments, consisting of normal recurring accruals, which the Company considers necessary for a fair presentation of the results of operations for those periods. The data should be read in conjunction with the Company's consolidated financial statements and the notes thereto and with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' included elsewhere in this Prospectus.
(1) The Company had no obligation or commitment to provide additional financing to the Partnership during the period ended September 30, 1994 and the Company's share of losses was not recognized.
(2) Adjusted to reflect the sale by the Company of 2,500,000 shares of Common Stock offered hereby at an assumed offering price of $11 per share and the application of the net proceeds therefrom and pro forma adjustments to reflect the Preferred Stock Transactions and the repayment of a note payable to a stockholder. See 'Use of Proceeds' and 'Preferred Stock Transactions.'
SELECTED FINANCIAL DATA OF THE PARTNERSHIP
The following selected financial data of the Partnership at and for the period ended December 31, 1994 have been derived from the Partnership's financial statements, which have been audited by Coopers & Lybrand L.L.P. (whose report thereon includes an explanatory paragraph which refers to conditions that raise substantial doubt about the Partnership's ability to continue as a going concern). The selected financial data for the periods ended September 30, 1995 and 1994 and as of September 30, 1995 have been derived from the unaudited financial statements of the Partnership. The unaudited interim financial data include all adjustments, consisting of normal recurring accruals, which the Partnership considers necessary for a fair presentation of the results of operations for those periods. The data should be read in conjunction with the Partnership's financial statements and the notes thereto and with 'Management's Discussion and Analysis of Financial Condition and Results of Operations' included elsewhere in this Prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company, through the Partnership, designs, manufactures and markets innovative climate control systems to supplement or replace conventional air conditioning systems. The Partnership's climate control systems are based on proprietary desiccant technology initially developed by the Company, a licensed honeycomb rotor technology and Engelhard's patented titanium silicate desiccant, ETS(Trademark).
Pursuant to the formation of the Partnership on February 7, 1994, the Company transferred its assets related to its desiccant climate control business, subject to certain liabilities, to the Partnership in exchange for a 50% interest in the Partnership through its wholly-owned subsidiary, ICC Desiccant Technologies, Inc. Engelhard, in exchange for a 50% interest in the Partnership, contributed capital to the Partnership, entered into the Engelhard Supply Agreement to sell ETS(Trademark) to the Partnership and entered into the Engelhard License Agreement granting the Partnership an exclusive royalty-free license to use ETS(Trademark) in the Partnership's business, including heating, ventilation and air conditioning. The desiccant climate control business conducted by the Company prior to the formation of the Partnership is now being conducted by the Partnership, and the Company has become principally a holding company. Further, substantially all of the employees of the Company have become employees of the Partnership and the leases for the space occupied by, and certain other obligations of, the Company have been assumed by the Partnership.
Since the formation of the Partnership, the Company's sole activities have related to its participation in the management of the Partnership and the sale of the Company's remaining cogeneration assets. The Company is not permitted to engage directly or indirectly in any activities which would conflict with the Partnership's business as long as the Partnership is in effect, but the Company is not precluded from engaging in other activities. The Company currently does not have any plans to engage in other activities and, therefore, is not expected to generate any significant revenues, although it will continue to incur general and administrative expenses.
The Company accounts for its 50% interest in the Partnership under the equity method of accounting for investments. At February 7, 1994, the date of formation of the Partnership ('Formation'), the Company's investment in the Partnership was approximately $0. The Company had no obligation or commitment to provide additional financing to the Partnership and losses of the Partnership were not recognized through the period ended September 30, 1994. During the fourth quarter of 1994, the Company and Engelhard each loaned the Partnership $4,000,000 to acquire a manufacturing facility in Miami, Florida. As a result, and because the Company expects to continue to fund the Partnership's activities, the Company has and will continue to recognize its share of the losses of the Partnership.
The Partnership's revenues for the three month period ended December 31, 1995 are expected to be approximately $1,700,000, compared to revenues of approximately $2,000,000 for the three month period ended September 30, 1995. The decrease in revenues is attributable to a reduction in substrate sales to Ciba-Geigy, primarily as a result of a temporary work stoppage at a large customer of Ciba-Geigy. The decrease was partially offset by increased revenues attributable to climate control equipment sales. It is anticipated that the Partnership's net loss for the three month period ended December 31, 1995 could be larger than its net loss for the three month period ended September 30, 1995, pending the final closing of the Partnership's books which is expected to occur on or about January 31, 1996. The Company will recognize 50% of the Partnership's net loss as its equity interest in net loss of the Partnership.
Three Months Ended September 30, 1995 and 1994.
The Partnership's revenue for the three months ended September 30, 1995 increased $1,630,000 to $2,010,000 from $380,000 for the same period in 1994. The increase in revenue is primarily attributable to revenue of $1,504,000 from the fabrication of substrate for Ciba-Geigy pursuant to a supply agreement and an increase of $127,000 in equipment sales. The Partnership recorded a gross loss of $274,000 for the three months ended September 30, 1995 compared to a gross profit of $52,000 for the same period in 1994 due primarily to increases in manufacturing costs of equipment in anticipation of future growth without a corresponding increase in equipment sales.
The Partnership's operating expenses increased $599,000 to $2,248,000 for the three months ended September 30, 1995 compared to $1,649,000 for the same period in 1994 due to higher marketing and general and administrative costs. Marketing expenses increased $203,000 as a result of increased marketing efforts and increased sales and marketing personnel. General and administrative expenses increased $381,000 primarily due to the addition of general and administrative personnel and the amortization of intangibles incurred in connection with the acquisition of the Miami plant from Ciba-Geigy in December 1994. As a result of the gross loss and increased operating expenses, the loss from operations increased $925,000 to $2,522,000 for the three months ended September 30, 1995.
The Partnership's net loss increased $1,069,000 to $2,641,000 for the three months ended September 30, 1995 from $1,572,000 for the prior period due to the loss from operations and an increase in net interest expense of $144,000 from additional short-term borrowings for the three months ended September 30, 1995.
The Company did not generate any revenues from its cogeneration business for the three months ended September 30, 1995 and 1994. The Company's revenues have been limited to sales of cogeneration spare parts since the formation of the Partnership.
The Company's general and administrative expenses decreased $103,000 to $343,000 for the three month period ended September 30, 1995 compared to $446,000 for the same period in 1994 primarily as a result of a decrease in professional fees. The three month period ended September 30, 1995 includes consulting expenses of $25,000 in connection with a consulting arrangement with the placement agent in the private placement of 300,000 shares of Common Stock in March 1995.
The Company's net loss for the three months ended September 30, 1995 increased $1,200,000 to $1,595,000 compared to a net loss of $395,000 for the same period in 1994. This increase in loss was attributable to the Company's 50% share of the Partnership's loss of $1,320,000 for the three months ended September 30, 1995 as compared to none recognized for the same period in 1994. Net loss per share of Common Stock increased to $.12 for the three month periods ended September 30, 1995 from $.04 for the same period in 1994.
Nine Months Ended September 30, 1995 and 1994.
The Partnership's revenue for the nine months ended September 30, 1995 increased $6,175,000 to $7,172,000 from $997,000 for the period from Formation to September 30, 1994 due to the fabrication of substrate for Ciba-Geigy pursuant to a supply agreement, increased equipment sales and licensing fees. The increase was attributable to revenue of $4,797,000 from the fabrication of substrate of Ciba-Geigy and the increase of $875,000 in equipment sales and $500,000 in licensing fees. The Partnership recorded a gross loss of $4,000 for the nine months ended September 30, 1995 compared to a gross profit of $120,000 for the period from Formation to September 30, 1994. The gross loss was due primarily to increases in manufacturing costs of equipment in anticipation of future growth without a corresponding increase in equipment sales, which was partially offset by the licensing fees.
The Partnership's operating expenses increased $2,536,000 to $6,201,000 in the nine months ended September 30, 1995 compared to $3,665,000 for the period from Formation to September 30, 1994 due to higher marketing, research and development, and general and administrative costs. Marketing expenses increased $1,151,000 as a result of increased marketing efforts and increased sales and marketing personnel. Research and development expenses increased $357,000 due to an increase in the number of research personnel and increased testing of equipment by independent laboratories. Engineering costs decreased $56,000 in this period. General and administrative expenses increased $1,084,000 primarily due to the addition of general and administrative personnel and amortization of intangibles incurred in connection with the Miami plant acquired in December 1994. The loss from operations for the nine months ended September 30, 1995 increased $2,660,000 to $6,205,000 compared to $3,545,000 for the period from Formation to September 30, 1994.
The Partnership's net loss increased $3,345,000 to $6,787,000 for the nine months ended September 30, 1995 from $3,442,000 due to the loss from operations and an increase in net interest expense of $684,000 from additional borrowings.
The Company generated nominal revenues of $7,000 for the nine months ended September 30, 1995 which were attributable to the sale of cogeneration spare parts compared to revenues of $88,000 for the same period in 1994 which were attributable to sales of desiccant climate control systems prior to the formation of the Partnership on February 7, 1994.
The Company's expenses relating to marketing, engineering and development decreased or were eliminated in 1995 as compared to 1994 primarily as a result of the transfer of substantially all operations to the Partnership on February 7, 1994. The Company's general and administrative expenses increased $94,000 to $1,027,000 for the nine months ended September 30, 1995 compared to $933,000 for the same period in 1994 as a result of increased payroll expenses and other administrative costs offset by a reduction in professional fees. The Company accrued an expense of $30,000 for the nine months ended September 30, 1995 for services rendered in 1993 by an investor relations firm. Pursuant to an agreement with such firm, the obligation was satisfied by the issuance of 20,000 shares of Common Stock. Consulting expenses of $25,000 were recognized in the nine months ended September 30, 1995 related to the March 1995 private placement of 300,000 shares of Common Stock.
The Company's net loss for the nine months ended September 30, 1995 increased $2,986,000 to $4,157,000 from $1,171,000 for the same period in 1994. This increase in loss was attributable to the Company's 50% interest in the Partnership's loss of $3,394,000 for the nine months ended September 30, 1995 as compared to none recognized for the same period in 1994. Net loss per share of Common Stock increased $.22 to $.34 for the nine month period ended September 30, 1995 from $.12 for the same period in 1994.
Years Ended December 31, 1994 and 1993.
On February 7, 1994, the Company transferred its desiccant climate control business in exchange for a 50% interest in the Partnership. The Company transferred substantially all of its assets, subject to certain liabilities, and employees to the Partnership, which also agreed to assume certain obligations of the Company. As a result, the Company ceased to generate revenues and expenses from its desiccant climate control business. The Partnership generated revenues of $1,620,000 for the period from Formation to December 31, 1994 primarily from sales or desiccant climate control systems and reported a gross profit of $29,000 for the same period. The Partnership incurred marketing, engineering, research and development, and general and administrative expenses of $2,061,000, $1,233,000, $895,000 and $1,539,000, respectively, for the period from Formation to December 31, 1994, and, as a result, reported an operating loss of $5,700,000 and a net loss of $5,625,000.
The Company's revenues declined $1,113,000 to $88,000 for the year ended December 31, 1994 and cost of goods sold decreased $1,097,000 to $80,000 due to the transfer of its desiccant climate control business to the Partnership. Total operating costs, consisting of marketing, engineering and development costs, and general and administrative expenses, decreased $2,338,000 to $1,734,000 and the loss from operations decreased $2,321,000 to $1,726,000 for the year ended December 31, 1994 also as a result of the Company having transferred its desiccant climate control business to the Partnership.
The Company's net loss increased $333,000 to $4,391,000 for the year ended December 31, 1994, compared to $4,058,000 for the prior year. In the fourth quarter of 1994, the Company loaned the Partnership $4,000,000 to acquire the honeycomb substrate manufacturing facility from Ciba-Geigy and expected to further fund the Partnership's present operations and future expansion.
in the fourth quarter of 1994, the Company recognized its 50% share, or $2,812,000, of the $5,625,000 net loss incurred by the Partnership for the period from Formation to December 31, 1994. Net loss per share of Common Stock decreased $.10 to $.41 for the year ended December 31, 1994 compared to $.51 for the prior year due to the increase in the number of shares of Common Stock outstanding.
Years Ended December 31, 1993 and 1992.
The Company's revenues for the year ended December 31, 1993 were $1,201,000 as compared with $957,000 for the same period of 1992. The revenue increase of $244,000 was due to higher equipment sales of $324,000 in 1993 which was partially offset by a reduction of $80,000 in revenue from energy and maintenance services. Gross profit increased nominally in 1993 compared to 1992.
The Company's operating expenses for the year ended December 31, 1993 increased $1,509,000 to $4,072,000 from $2,563,000 for the year ended December 31, 1992. Marketing expenses increased $225,000 due to the Company's efforts to increase sales. The Company hired additional sales and marketing personnel, expanded advertising, and attended additional trade shows. Engineering expenses increased by $578,000 due primarily to the Company's obligation to fund $1,000,000 of the joint development program with Engelhard, to further develop a desiccant-based climate control system prior to the formation of the Partnership. General and administrative expenses increased by $706,000 primarily from start-up costs of $166,000 related to a new manufacturing facility, a one-time charge of $70,000 for severance expense related to an employment contract with a former officer of the Company, a one-time charge of $215,000 accrued for compensation expense in connection with the issuance of stock for services and increased legal, accounting and corporate expenses of $111,000.
The Company's loss from operations for the year ended December 31, 1993 increased $1,502,000 to $4,047,000 from $2,545,000 for the same period in 1992. The increase in the loss from operations resulted primarily from higher engineering expenses in connection with the joint development program with Engelhard and increased marketing and administrative expenses.
The Company's net loss increased $1,491,000 to $4,058,000 for the year ended December 31, 1993 compared to $2,567,000 for the prior year as a result of the loss from operations. Net loss per share of Common Stock increased $.04 to $.51 for the year ended December 31, 1993 compared to $.47 for the year ended December 31, 1992 due to the increase in net loss.
The Company's and the Partnership's operations have not been significantly affected by inflation.
The Partnership's cash and cash equivalents decreased to $41,000 at September 30, 1995 from $648,000 at December 31, 1994 and $8,633,000 contributed from Engelhard at Formation. The decreases were due to the Partnership's net losses, working capital requirements and capital investments incurred in connection with the expansion of the Partnership's business since Formation, which were partially financed by loans and capital contributions from the Company and Engelhard. The Partnership is expected to require additional financing to support anticipated growth and will be dependent on the Company and Engelhard to provide additional financing to support its current operations and future expansion. There can be no assurance that the Company or Engelhard will be willing, or able, to provide such additional financing.
Net cash used in operating activities by the Partnership was $8,819,000 for the nine months ended September 30, 1995 due to the net loss, before depreciation and amortization, of $5,992,000 and net working capital needs of $2,827,000 primarily to continue to build inventory and for accounts receivable which increased with sales. Capital expenditures of $801,000 were incurred primarily for machinery and equipment. Net cash used in operating activities and capital expenditures were financed with net borrowings of $7,013,000 and capital contributions aggregating $2,000,000 from the Company and Engelhard.
In April 1995, the Partnership obtained financing from the issuance of $8.5 million in industrial development revenue bonds. The proceeds of these bonds were utilized to repay a portion of the loan provided by the general partners and to fund improvements and capital expenditures at the Miami facility. The Company guaranteed 50% of the Partnership's indebtedness associated with the development revenue bonds and established an irrevocable letter of credit for $2,500,000 to support its portion of the guarantee, which is collateralized by a $2,500,000 certificate of deposit. In May 1995, each general partner was repaid $1,500,000 of the $8,000,000 aggregate loan from the Company and Engelhard made in December 1994, of which the remaining amount, $2,500,000 for each general partner, was converted into an investment in the Partnership. In August 1995, a capital contribution of $1,000,000 to the Partnership was made by each partner. In addition, the Partnership borrowed $2,750,000 from a bank through a short-term loan. Subsequently, another $1,000,000 capital contribution for the general working capital requirements of the Partnership was made by each partner in October 1995 and again in December 1995.
In August 1995, the Partnership entered into a joint development agreement with AB Air Technologies, Ltd. ('AB Air') in Israel for the development of a residential desiccant-based, all electric climate control system. The Partnership has agreed to share equally in the cost of the development program which is initially estimated to be approximately $250,000. The Company has agreed to finance 60% of AB Air's portion of the program costs pursuant to an interest-bearing loan. As of November 30, 1995, no funds had been loaned to AB Air.
Net cash used in operating activities by the Partnership was $6,571,000 for the period from Formation to December 31, 1994 as a result of the net loss, before depreciation and amortization, of $5,376,000 and net working capital needs of $1,195,000 primarily to build inventory and for accounts receivable which increased with sales. Capital expenditures were $9,361,000 for the period from Formation to December 31, 1994, primarily due to the acquisition of a manufacturing facility for $8,000,000 in December 1994 and capital expenditures of $980,000. The Company and Engelhard financed the Partnership's operating and investing activities in 1994 with the initial capital contribution of $8,633,000 from Engelhard upon the formation of the Partnership and loans of $4,000,000 from each of the Company and Engelhard in December 1994 to acquire the Ciba-Geigy manufacturing facility.
The Company's cash and cash equivalents amounted to $3,855,000, $1,114,000, $1,142,000 and $34,000 at September 30, 1995 and December 31, 1994, 1993 and 1992, respectively. The cash utilized in the Company's operating and investing activities was financed primarily through proceeds from the issuance of Common Stock and exercise of stock options and warrants. Management believes the Partnership will require additional capital contributions during 1996, and the Company plans to use the net proceeds from the offering as set forth under 'Use of Proceeds' in this Prospectus. To the extent Partnership capital contributions in excess of the proceeds of this offering are required, or the Company requires additional funds to continue its operations, the Company would expect to satisfy such requirements by seeking equity financing. The Company's ability to successfully obtain equity financing in the future is dependent in part on market conditions and the performance of the Partnership. There can be no assurance that the Company will be able to obtain equity financing in the future.
Net cash used in operating activities by the Company was $890,000 for the nine months ended September 30, 1995 due to the net loss, before non-cash charges and the Company's 50% share of the net loss of the Partnership, of $728,000 and net working capital needs of $162,000 since the Company transferred its desiccant climate control business to the Partnership in February 1994. The Company was repaid $1,500,000 (and converted $2,500,000 to a capital contribution to the Partnership) of the $4,000,000 loan extended to the Partnership to acquire the Ciba-Geigy manufacturing facility in May 1995. The Company made an additional capital contribution of $1,000,000 to the Partnership in August 1995 and supported a portion of its guarantee of the $8,500,000 industrial development revenue bonds issued by the Partnership with a $2,500,000 irrevocable letter of credit collateralized with a certificate of deposit for a like amount. Net cash used in operating activities and for investments in the Partnership were financed by issuing Common Stock and warrants for net proceeds $5,639,000 for the nine months ended September 30, 1995.
In March 1995, the Company raised net proceeds of $3,010,000 in a private placement of 300,000 shares of Common Stock at $11 per share. The Company granted warrants to purchase 375,000 shares of Common Stock at $9 per share to the finder in connection with the private placement. During the nine months ended September 30, 1995, the Company received proceeds of approximately from the exercise of stock options and warrants to purchase approximately 1,059,000 shares of Common Stock.
Net cash used in operating activities by the Company was $1,373,000 for the year ended December 31, 1994 due to the net loss, before non-cash charges and the Company's 50% share of the net loss of the Partnership, of $1,239,000 and net working capital needs of $134,000 since the Company transferred its desiccant climate control business to the Partnership in February 1994. The Company and Engelhard each extended a $4,000,000 loan to the Partnership to acquire the Ciba-Geigy in December 1994. Net cash used in operating activities and for investments in the Partnership were financed by issuing Common Stock and warrants for net proceeds of $5,139,000 and from borrowings of $400,000 from Engelhard.
In June 1994, the Company sold 1,100,000 shares of Common Stock at $3.56 per share for net proceeds of $3,489,000, and two directors each sold 150,000 shares of Common Stock at the same price for aggregate cash proceeds to each of $534,000. Pursuant to an agreement between the Company and the two directors, the Company agreed to pay all commissions and expenses incurred in connection with the offering. For financial advisory services related to the offering, the Company granted to an individual, who subsequently became a director, warrants to purchase 215,000 shares of Common Stock, which have exercise prices ranging from of $3.25 to $4.75 per share and expire in 1999. During 1994, the Company received $1,543,000 in cash for 732,000 shares of Common Stock upon the exercise of stock options. Also during 1994, the Company received net proceeds of $286,000 upon the exercise of warrants to acquire 187,000 shares of Common Stock granted to placement agents in connection with the March and April 1993 private placements referred to below.
Net cash used in operating activities by the Company was $3,675,000 for the year ended December 31, 1993 due to the net loss, before non-cash charges, of $3,575,000 and net working capital needs of $100,000. Capital expenditures for the year were $300,000 for equipment. Net cash used in operating activities and for capital expenditures were financed by issuing Common Stock and warrants for net proceeds of $4,643,000 and from borrowings of $500,000 from Engelhard.
In March and April 1993, the Company sold 374,000 shares of Common Stock at $1.50 per share for net proceeds of approximately $459,000. In July 1993, the Company registered under the Securities Act, 1,060,000 shares of Common Stock of which 950,000 shares were issued upon the exercise of outstanding warrants and 100,000 shares were issued to an equipment vendor in settlement of approximately $388,000 in accounts payable and 10,000 shares to a former officer of the Company as severance pay. As of December 31, 1993, the Company had received net proceeds of $2,088,000 for 950,000 shares of Common Stock purchased upon the exercise of outstanding warrants.
Net cash used in operating activities by the Company was $1,427,000 for the year ended December 31, 1992 due to the net loss, before non-cash charges, of $2,199,000, which was offset by a reduction in net working capital requirements of $772,000. Capital expenditures for the year were not material. Net cash used in operating activities and for capital expenditures were financed by issuing Common Stock and warrants and preferred stock for net proceeds of $1,276,000 and from borrowings of $60,000 from certain stockholders.
In March 1992, the Company sold to the Company's Chairman and two other board members 500 shares of the Series I Preferred Stock for $500,000. The investors also received nonqualified stock options to purchase 400,000 shares of Common Stock for $4.813 per share, exercisable beginning in March 1993. The exercise price of these options was subsequently reduced to $2.25 per share by the Board of Directors in December, 1992. In June 1992, the Company sold to an investor group led by the Company's Chairman, 225 shares of Series J Preferred Stock for $225,000. The investors also received nonqualified stock options to purchase 128,574 shares of Common Stock at $1.75 per share, exercisable beginning in June 1993. Also in June 1992, the Company sold to two private investors 228,572 shares of Common Stock for total purchase price of $400,000.
The independent accountants' report on the audit of the Company's 1994 financial statements includes an explanatory paragraph regarding substantial doubt about the Company's ability to continue as a going concern. The Company's financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in business. The Company has incurred cumulative losses since inception amounting to approximately $31 million through September 30, 1995. In order to continue operations, the Company has had to raise additional capital to offset cash consumed in operations and support of the Partnership. The Company's continuation as a going concern is dependent upon its ability to: (i) generate sufficient cash flows to meet its obligations on a timely basis; (ii) obtain additional financing or refinancing as may be required; and (iii) ultimately, attain profitable operations and positive cash flow from its operations and its investment in the Partnership. The independent accountants' report on the audit of the Partnership's 1994 financial statements also includes an explanatory paragraph regarding substantial doubt about the Partnership's ability to continue as a going concern. The Partnership's continuation as a going concern will remain dependent upon its ability to: (i) generate sufficient cash flows to meet its obligations on a timely basis; (ii) obtain additional financing or refinancing as may be required; and (iii) ultimately, attain profitable operations and positive cash flow from operations.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation plans. It encourages entities to adopt that method in place of the intrinsic value method currently in place under the provisions of Opinion No. 25 of the Accounting Principles Board (APB). Under the fair value method accounting, all arrangements under which employees receive shares of stock or other equity instruments or under which employers incur liabilities to employees in amounts based on the price of its stock result in the measurement of compensation cost at the grant date of the award which is recognized over the service period, usually the vesting period. Under the intrinsic value method, compensation cost is measured by the excess of the quoted market price of the stock, if any, over the amount the employee must pay to acquire the stock. For example, granting immediately exercisable stock options to an employee at an exercise price equal to the quoted market price of the stock results in the recognition of compensation expense at the date of grant under the fair value method of SFAS No. 123; under the intrinsic value method of APB No. 25, no compensation expense is recognized. However, SFAS No. 123 allows the Company to elect to continue its current method of accounting under APB No. 25 for employee stock-based compensation arrangements. The Company expects to continue its current method of accounting under APB No. 25 for employee stock-based compensation arrangements. If the Company continues its current method of accounting, pro forma disclosures of net income and earnings per share must be disclosed, as if the Company had adopted the recognition provisions of SFAS No. 123.
Although the Company is permitted to continue accounting for employee stock-based compensation arrangements under APB No. 25, SFAS No. 123 requires the Company to utilize the fair value method of accounting for transactions involving stock options or other equity instruments issued to nonemployees as consideration for goods or services. Presently, those transactions are accounted for by the Company under the intrinsic value principles of APB No. 25. The use of intrinsic value versus fair value did not have a material effect on any period presented.
The accounting and disclosure requirements of SFAS No. 123 are effective for the Company in 1996. The Company has not yet determined the impact of SFAS No. 123.
The Company, through the Partnership with Engelhard, designs, manufactures and markets innovative climate control systems to supplement or replace conventional air conditioning systems. The Partnership's climate control systems are based on proprietary desiccant technology initially developed by the Company, licensed honeycomb rotor technology and Engelhard's patented titanium silicate desiccant, ETS(Trademark). The Partnership's climate control systems are designed to address indoor air quality, energy and environmental concerns and regulations currently affecting the air conditioning market. The Partnership currently markets its systems to certain targeted applications within the commercial air conditioning market in North America and Asia-Pacific. The Company estimates that these targeted applications had annual sales of approximately $2 billion of the approximately $6 billion combined North-American and Asian-Pacific commercial air conditioning markets in 1994.
The Company believes that the Partnership's climate control systems more effectively control humidity, improve indoor air quality, reduce energy consumption, address certain environmental concerns and provide customers a choice from a variety of energy sources such as natural gas, steam, waste heat or electricity. Through November 30, 1995, the Partnership and, prior to formation of the Partnership, the Company have sold 175 systems worldwide, including 93 systems which incorporate both honeycomb rotors and ETS(Trademark), to customers in the United States such as the Shop Rite, Grand Union and Genuardi's supermarket chains, JCPenney and Liz Claiborne, and internationally, through Chung-Hsin in Taiwan, Samsung in South Korea and Nichimen in Japan.
The Company was incorporated in 1984 under the name 'International Cogeneration Corporation.' Initially, the Company designed, manufactured and sold cogeneration equipment. The Partnership's proprietary desiccant cooling design was initially developed by the Company as an extension of its cogeneration business. In 1990, the Company changed its strategy and began to design, manufacture and market climate control equipment based upon desiccant technology, at which time the Company also changed its name to 'ICC Technologies, Inc.' The Company has since discontinued its cogeneration business.
In May 1992, the Company entered into a joint development agreement with Engelhard in order to design a desiccant-based climate control system utilizing ETS(Trademark). The Company and Engelhard formed the Partnership in February 1994, which replaced the joint development agreement and succeeded to the desiccant-based climate control business which had been conducted by the Company. In connection with the formation of the Partnership, the Company granted Engelhard an option to acquire the Company's interest in the Partnership in installments commencing on December 31, 1997. See 'Business -- The
Since December 1994, the Partnership has (i) acquired from Ciba-Geigy the honeycomb substrate manufacturing facility in Miami, Florida, (ii) entered into a five year license agreement with Chung-Hsin, Taiwan's largest air conditioning manufacturer, for Chung-Hsin to manufacture and sell the Partnership's climate control systems on an exclusive basis in Taiwan and on a non-exclusive basis in mainland China, (iii) received the 'Blue Star' certification for safety and quality for its natural gas operated systems from The American Gas Association Laboratory and (iv) hired a Vice President of Operations, Vice President of Marketing and North American Sales and Vice President of Market Development, and a new Chief Operating Officer. In addition, in 1995 the Partnership entered into a field demonstration agreement with Carrier Corporation ('Carrier'), pursuant to which Carrier is testing and collecting data from multiple units throughout the United States.
The worldwide annual market for residential and commercial air conditioning systems was approximately $26 billion in 1994 and is expected to grow to approximately $39 billion by the year 2000, according to a recent study by DRI/McGraw-Hill (the 'DRI Study'). The Partnership has specifically targeted certain applications within the commercial air conditioning market in North
America and Asia-Pacific. Of the approximately $6 billion market for commercial air conditioning equipment in North America and Asia-Pacific in 1994, the Company estimates that the market for these targeted applications was approximately $2 billion. According to the DRI Study, the worldwide commercial air conditioning market is expected to grow to approximately $13 billion by the year 2000, and the Company expects the Partnership's desiccant-based systems to compete in a broader segment of this market as awareness and acceptance of the Partnership's systems grow and their initial cost declines. The Partnership has also entered into two international joint ventures to develop desiccant-based residential climate control systems, but no such system has yet been developed and the Partnership cannot reasonably predict if and when any such system will be developed. See 'Business -- Sales and Marketing.'
According to the DRI Study, the Asian-Pacific commercial air conditioning market was approximately $3.5 billion in 1994 and is expected to increase to approximately $5.7 billion by the year 2000. Many of the Asian-Pacific countries are located in humid climates where the Partnership's climate control systems are most effective. The Asian-Pacific market is dominated by Japan, which predominantly utilizes natural gas powered air conditioning systems. As in Japan, many countries throughout Asia-Pacific are experiencing shortages of electricity, creating a demand for air conditioning systems powered by alternative energy sources.
The North American commercial air conditioning market was approximately $2.8 billion in 1994, according to the DRI Study, and is expected to increase to approximately $3.7 billion by the year 2000. Air conditioning systems in North America predominately utilize electric powered systems. The Partnership's strategy is to continue to target commercial applications in which humidity control, indoor air quality and energy consumption are important health issues or a significant cost of business. Indoor air quality has become an important issue currently affecting the air conditioning industry in the United States. Fungal and microbial growth in damp duct work and the build-up of pollutants from furniture, appliances and other equipment in recirculated air can lead to unhealthy indoor environments sometimes identified as 'Sick Building Syndrome.' To combat this problem, in 1989, ASHRAE issued standards to increase the amount of fresh air brought into buildings by as much as 200 to 300% as compared to prior ventilation standards. These standards have been incorporated into many state and local building codes throughout the United States for new construction. See 'Business -- Government Regulation.'
International accords which address various energy and environmental concerns are also having an impact on air conditioning markets throughout the world. Under the 1987 Montreal Protocol, as amended, approximately 130 signatory countries have agreed to halt all production of ozone-destroying CFCs commencing in 1996. As a result, the Company believes there is an increased demand for new equipment to replace CFC-based air conditioning equipment. See 'Business --
Comfort is directly affected by both temperature and humidity. People are generally more comfortable in less humid environments. Lower humidity allows water to evaporate from the skin, causing a cooling effect. Conventional air conditioning systems reduce indoor temperature and humidity by cooling air. Humidity control is principally a by-product of the cooling process when moisture condenses on the cooling coil. In conditions where significant humidity reduction is desired, conventional air conditioning systems must often cool indoor air below desired levels, thereby consuming additional energy. Desiccant systems, however, remove humidity independently of cooling without overcooling the air, thereby generally consuming less energy than conventional air conditioning.
Systems which utilize desiccant technology have been in existence for more than 50 years. A desiccant is a generic term for any drying agent that removes moisture from the air. Prior desiccant-based equipment met limited success and market acceptance outside of industrial drying applications because of less effective desiccants and rotors, higher maintenance costs, inefficient designs, initial and operating costs. The Company believes that the Partnership's climate control system design, which incorporates Engelhard's ETS(Trademark) desiccant and a small cell, honeycomb substrate material used in the manufacture of the Partnership's desiccant and heat exchange rotors, has principally overcome these problems and in many applications is an energy efficient and environmentally safer supplement or alternative to conventional air conditioning systems.
ETS(Trademark) is a white crystalline powder, classified as a molecular sieve. Molecular sieves are capable of differentiating chemicals on a molecule-by-molecule basis and, therefore, can be designed to remove single compounds, such as water, from liquids and gases. ETS(Trademark) is unique in its capabilities to release moisture at lower regeneration temperatures, thereby requiring less energy than other desiccants. The heat necessary to remove the moisture can be provided by almost any source of heat capable of generating temperatures of at least 140degreesF. As a result, the Partnership's systems can use a wider variety of heat sources, including waste heat, than other desiccant-based systems.
The Partnership's systems utilize two wheel-shaped rotors with honeycomb passages. The honeycomb substrate material used to make the rotors is manufactured through a variation in Ciba-Geigy's proprietary process for manufacturing lightweight structural honeycomb core utilized in aircraft construction. This substrate material offers lighter weight, superior airflow and more efficient heat and moisture transfer than the corrugated rotors used by the Partnership's competitors. The Company believes that the Partnership's honeycomb rotors are unique and would be difficult and costly for competitors to duplicate.
The first rotor in the Partnership's two rotor systems is coated with ETS(Trademark) and the second serves as a heat exchange rotor. Recirculated air, or up to 100% fresh air, is first dehumidified by passing it through a slowly rotating rotor treated with ETS(Trademark) that adsorbs airborne moisture, and thereby raises the temperature in proportion to the reduction in humidity. As the desiccant rotor rotates to the other side of the unit, heated air is blown through the desiccant rotor which releases the moisture from the ETS(Trademark), regenerating the desiccant rotor for further dehumidification. The warm, dehumidified air is next cooled by passing it through a similar rotor which has not been coated with ETS(Trademark). Depending upon climatic conditions, the temperature of the process air is generally reduced to a temperature up to 10% lower than outside air temperature. The heat exchange rotor is cooled by an evaporative cooler on the other side of the unit. The moderate temperature, dry air can be cooled further by partially rehumidifying the air through an evaporative cooler, which does not use any refrigerants, or a smaller cooling coil than would be required by a conventional air conditioning system. The process air is then delivered to the building by the normal system of fans and ducts. To date, approximately 25% of the units sold by the Partnership have included cooling coils and three units have been sold with evaporative coolers as post-cooling options.
The basic operation of the Partnership's gas or waste heat powered climate control systems is depicted below:
[ GRAPHIC DESCRIBED IN APPENDIX A, NO. 3 ]
A - Recirculated or up to 100% fresh air is drawn into the unit by a fan and pushed through a slowly turning desiccant rotor.
B - The desiccant rotor removes the majority of moisture from the air and in the process warms the air.
C - The warm, dry air is driven through a heat exchange rotor that cools the airstream.
D - Post-cooling options to further lower the process air temperature include an evaporative cooler (which partially rehumidifies the air without using any refrigerants) or a cooling coil. A hot water coil for winter heat is standard in the DESI/AIR(Registered) and Desert Cool(Trademark) systems.
E - Outside air or building exhaust air is drawn into the regeneration airstream.
F - An evaporative cooler saturates the regeneration airstream with water, significantly lowering its temperature.
G - The cooled air is drawn through the heat exchange rotor, cooling (regenerating) the heat exchange rotor and warming the regeneration air.
H - The regeneration airstream is further heated by a heating coil and is drawn through the desiccant rotor to dry (regenerate) it.
I - A fan exhausts the regeneration airstream to the outside atmosphere.
The Company believes that the Partnership's systems provide the following features and benefits:
o More Effective Control of Humidity -- The Partnership's systems are more effective at controlling humidity than conventional, refrigerant-based air conditioning systems which control humidity primarily as a by-product of the cooling process when moisture condenses on the cooling coil. As a result, in conditions where significant humidity reduction is desired, conventional air conditioning systems must often cool air below desired levels. Drier air is generally more comfortable for a building's occupants and is more efficient to cool. Humidity control is also important in a variety of commercial applications, such as supermarkets, and in certain manufacturing processes.
o Improved Indoor Air Quality -- Ventilation standards recommended by ASHRAE and incorporated into many state and local building codes throughout the country for new building construction now require that as much as 200 - 300% more fresh air be circulated into buildings compared to prior ventilation standards to reduce indoor air pollutants associated with 'Sick Building Syndrome.' The Partnership's climate control systems are designed to process the humidity introduced by increased ventilation and, accordingly, enable a building to meet or exceed these standards. In addition, lower humidity levels reduce airborne bacteria, mold, mildew and fungi, another major source of indoor air quality problems.
o Energy Efficient and Cost Effective -- Less humid air requires less energy to cool than more humid air. By dehumidifying air before cooling, the Partnership's systems, even with a post-cooling option, consume less energy and are more cost effective to operate than conventional air conditioning systems. As a supplement to conventional air conditioning, by first dehumidifying the air, the Partnership's systems are designed to improve the efficiency of existing conventional air conditioning.
o Versatile and Reliable -- The Partnership's systems are available in natural gas, electric, steam or waste heat models and in several sizes which process from 2,000 to 25,000 cubic feet of air per minute. The ability to choose from a variety of energy sources allows customers to select the most cost-effective energy source in their area at the time of purchase. The systems are also expected to require less maintenance than conventional equipment because of simplicity of design and fewer moving parts.
o Environmentally Safer -- Conventional air conditioning systems utilize refrigerants, such as CFCs, HCFCs and HFCs, which damage stratospheric ozone or contribute to global warming. Because the Partnership's systems dehumidify the air before it is cooled by a post-cooling option in the system or in conjunction with a conventional air conditioning system, the cooling coil and compressor included as a post-cooling option in the non-electric models are smaller, and in the electric models generally are smaller, than would otherwise be required in a conventional air conditioning system, thereby utilizing less refrigerant.
o Year-round Performance -- The Partnership's natural gas systems provide year-round indoor climate control. In hot, humid weather they supply cool, dry air. In cool, 'clammy' weather they supply warm, dry air. In cold weather the natural gas powered systems supply heat. The Partnership is currently developing heating capability for its electric powered systems.
The Partnership's strategy is to target specific applications within the commercial air conditioning market in which humidity control, indoor air quality and energy consumption are important health issues or a significant cost of business. Although the Partnership currently markets its systems primarily as a supplement to conventional air conditioning systems, the Company believes that as market awareness and acceptance grows and the initial cost of its systems declines, the Partnership will market its climate control systems as a replacement for conventional air conditioning systems in a broader segment of commercial applications. The Partnership is also attempting to develop a residential unit with certain of its international joint venture partners but currently does not have a residential unit to offer for sale. The Company believes that market awareness and acceptance for the Partnership's systems may develop more rapidly in the Asian-Pacific market and other similar regions of the world with high humidity and where the demand for energy is increasing faster than supply. More specifically, the Partnership is pursuing the following strategies:
o Establish Strategic Relationships with Domestic and International Manufacturers and Distributors of Air Conditioning Equipment -- The Partnership has developed strategic relationships with three major corporations in Asia-Pacific and is in discussions with a number of domestic and international manufacturers and distributors of air conditioning equipment. The Partnership plans to enter into additional licenses or joint venture arrangements. Taiwan's largest air conditioning manufacturer, Chung Hsin, has licensed the Partnership's desiccant-based technology and is attempting to develop a residential unit. The Partnership has strategic marketing relationships with Samsung in South Korea and Nichimen in Japan. Japan and South Korea are the first and sixth largest air conditioning markets, respectively. The Partnership is also working with AB Air in Israel to develop a residential unit, and to establish local manufacturing and distribution for the Partnership's current systems. In addition, Carrier is in the process of field-testing a number of the Partnership's systems in the United States. The Partnership believes that the reputation and resources of its licensees and joint venture partners will accelerate market acceptance and awareness for its products.
o Acquisition of an Air Conditioning Manufacturer -- The Company believes that the acquisition of an air conditioning manufacturer is important to the Partnership's overall strategy of developing market awareness of its products, increasing production and distribution capabilities and offering its customers a more complete solution to their climate control needs. Currently, there are no firm commitments or agreements to acquire an air conditioning manufacturer and there can be no assurance that any agreements will be executed or any acquisition will be consummated.
o Reduction of Manufacturing Costs -- The Partnership significantly reduced the cost of its rotors, a major cost component of its systems, when it acquired Ciba-Geigy's Miami manufacturing facility and expects to further reduce manufacturing and material costs through production line innovations and substitute materials.
o Target Specific Commercial Applications -- The Partnership's strategy is to continue to market its climate control systems to users in which humidity control, indoor air quality and energy consumption are important health issues or a significant cost of business. The primary applications targeted by the Partnership and the benefits that its systems can provide include:
The Partnership currently manufactures and sells three types of desiccant-based climate control systems, the 'DESI/AIR(Registered),' 'Desert Cool(Trademark)' and 'Desert Breeze(Trademark),' which differ based upon function and energy source. All of the systems now incorporate the Partnership's proprietary honeycomb rotors and Engelhard's ETS(Trademark). The Partnership's systems are currently being marketed as energy efficient supplements to enhance the performance of, or partially replace, existing conventional air conditioning systems. The DESI/AIR(Registered) and Desert Cool(Trademark) systems typically operate on natural gas, but are also available in steam or waste heat operated models, and also have gas heating capabilities. Consistent with general industry practices, the Partnership warrants its systems for one year from the date of installation and warrants its desiccant and heat exchange rotors for an additional four years. No significant warranty claims have been experienced by the Partnership or the Company to date.
The DESI/AIR(Registered) system is larger, customized and more heavy duty than the Partnership's other systems. These units can displace from 25 to 250 tons of conventional cooling with the flexibility of utilizing any combination of circulated or fresh air. The DESI/AIR(Registered) system was first sold in June 1989, and has received general acceptance in the supermarket industry. The Partnership and, prior to the Partnership's formation, the Company have sold 108 DESI/AIR(Registered) units through November 30, 1995. The list price for a DESI/AIR(Registered) system varies from approximately $73,000 for the Partnership's smallest unit that can displace up to 25 to 40 tons of conventional cooling, to $159,000 for the largest unit which displaces up to 250 tons of conventional cooling, with the number of units required for each application depending on the size and configuration of the building.
The Desert Cool(Trademark) system is designed to cool small commercial applications with the flexibility of utilizing any combination of circulated or fresh air and can displace as much as 25 tons of conventional cooling. The Desert Cool(Trademark) system was successfully field-demonstrated by the Partnership in 1994 in conjunction with certain members of the natural gas industry and was introduced commercially in January 1995. Through November 30, 1995, 61 Desert Cool(Trademark) units have been sold. The list price for a Desert Cool(Trademark) unit that displaces up to 25 tons of conventional cooling is approximately $16,000. The Desert Cool(Trademark) line will be expanded in 1996 to include a unit which can displace as much as 50 tons of conventional air conditioning at a list price of approximately $39,000.
The Desert Breeze(Trademark) system, the first all-electric desiccant-based climate control system, was first shipped in July 1995. The Partnership has sold six Desert Breeze(Trademark) units through November 30, 1995. An all-electric model is important to compete in those markets where electricity is the only or most practical source of energy. Currently, the majority of air conditioning powered. The Desert Breeze(Trademark) system is designed to cool small commercial applications with the flexibility of utilizing either circulated or fresh air. The list price for a Desert Breeze(Trademark) unit that can displace up to 25 tons of conventional cooling is approximately $15,000. The Desert Breeze(Trademark) line will be expanded in 1996 to include a unit that can displace as much as 35 tons of conventional air conditioning at a list price of approximately $20,000. Unlike the Partnership's natural gas systems, the electric units combine desiccant technology with conventional coils and compressors which provide heat to regenerate the desiccant rotors and partially cool the process air. An additional conventional coil may be added to provide further post-cooling as in the natural gas units. The system can use smaller compressors with HCFC refrigerant than conventional air conditioning equipment, reducing the amount of refrigerant required and power usage and peak kilowatt demand. The system is also currently designed to allow for use of HFC refrigerant, which is a less efficient alternative to HCFC refrigerant. The Partnership is currently developing heating capability in the Desert Breeze(Trademark) system.
Currently, the Partnership markets its systems to specific applications in the commercial air conditioning market in which its systems offer the greatest advantages compared to conventional air conditioning systems. To date, the Partnership has marketed its systems primarily as a supplement to, or partial replacement of, conventional air conditioning systems. Since the Partnership's products utilize an emerging technology, potential customers carefully evaluate and, in most cases, purchase the Partnership's systems for testing before committing to further purchases. The Partnership sells its systems principally to end users either directly or through independent manufacturers representatives who purchase units at a discount or receive a commission. The Partnership has developed separate plans and departments for domestic and international sales and marketing.
United States. The Partnership employs a direct sales staff of five sales people and approximately 36 independent manufacturers representatives to market its systems in the United States. The direct sales staff markets the systems to supermarket chains and national retailers, and oversees the manufacturers representatives. The Partnership's manufacturers representatives market to regional customers and to national accounts which are not assigned to the direct sales staff. At present, a majority of the manufacturers representatives are located in the southern and eastern regions of the country. The Partnership plans to increase its sales staff and manufacturers representative network throughout the country.
In September 1995, the Partnership entered into a field demonstration agreement with Carrier pursuant to which Carrier is monitoring and evaluating the performance of eleven Desert Cool(Trademark) and Desert Breeze(Registered) units in commercial use throughout the United States. All monitoring equipment costs which are not paid for by third parties such as local utility companies or the U.S. Department of Energy, will be shared equally by the Partnership and Carrier. Carrier has not committed to purchase or distribute any of the Partnership's systems.
Gas and electric utilities have supported the Partnership's efforts to create market awareness and acceptance for the Partnership's systems. The Gas Research Institute has funded and endorsed independent testing to validate the performance of ETS(Trademark) in the Partnership's natural gas systems and is currently funding the testing of the Partnership's rotors used in such systems for validation. In addition, gas utilities sponsored the initial test sites for the Desert Cool(Trademark) system, and have formed a consortium, under the auspices of the American Gas Cooling Center to promote the Partnership's natural gas systems. The consortium, with 77 utilities currently participating, provides financial incentives and sponsors training programs for engineers and building owners. In 1995, the Desert Cool(Trademark) system became the first desiccant-based unit ever to receive the 'Blue Star' certification for safety and quality from the American Gas Association.
Similarly, several electric companies and research organizations are promoting the Desert Breeze(Trademark) system. Southern Company, a major electric company in the southeastern United States, assisted in the development of the Desert Breeze(Trademark) system, and five electric utilities are participating in various projects that promote the Desert Breeze(Trademark) system. The Company has also received financial support from the Electric Power Research Institute for field testing, and marketing support from the Edison Electric Institute, two electric industry sponsored organizations.
As part of the federal government's program to evaluate two-wheel desiccant-based air conditioning systems for possible inclusion in future federal government building specifications, the federal government has purchased two units to test and evaluate in field demonstrations, including an initial unit in 1994 at a government-owned Burger King in Aberdeen, Maryland and a follow-up unit in 1995 in an operating suite in a government-owned hospital in Tampa, Florida. The Company anticipates that the federal government will purchase additional units for testing in 1996.
International. International sales and marketing efforts have focused on the high humidity, rapidly developing regions of the Asian-Pacific market. In this region, manufacturing and industrial companies are generally interested in the Partnership's systems to improve workers' comfort by lowering humidity. As of November 30, 1995, the Partnership has manufactured and sold a total of 34 units assembled in the Partnership's Philadelphia manufacturing facility to customers in Japan, South Korea and Taiwan through its licensing and distribution agreements or relationships described below. The Partnership plans to continue to market, sell and, in certain situations, assemble its climate control systems through licensing arrangements or joint ventures with other major companies in Asia-Pacific.
In March 1995, the Partnership entered into a license agreement with Chung-Hsin, Taiwan's largest air conditioning manufacturer, pursuant to which Chung-Hsin has been granted an exclusive license to manufacture and sell the Partnership's gas and electric systems in Taiwan for a period of up to five years based on achieving certain sales targets, and a non-exclusive license to manufacture and sell such systems in mainland China. In consideration for such license, Chung-Hsin paid the Partnership an initial fee of $500,000 and is required to pay a royalty of 2.5% of Chung-Hsin's sales of all desiccant-based climate control systems utilizing the Partnership's technology which are manufactured and sold by Chung-Hsin. Chung-Hsin and the Partnership are also currently attempting to develop a desiccant-based residential window unit. Pursuant to a supply agreement, Chung-Hsin is required to purchase its desiccant and heat-exchange rotors from the Partnership at 105% of their base price. The Partnership also has the option to purchase systems manufactured by Chung-Hsin for resale in other Asian-Pacific countries.
Nichimen, a Japanese trading company with $58 billion in annual sales in 1994, has been appointed a non-exclusive distributor of the Partnership's systems in Japan. Nichimen has established relationships with Osaka Gas, Tokyo Gas and Toho Gas and is in the process of establishing a national distribution network for the Partnership's systems. Through November 30, 1995, 15 units have been sold through Nichimen. In August 1995, Osaka Gas of Japan completed its initial evaluation and testing of the Partnership's Desert Cool(Trademark) and DESI/AIR(Registered) systems. In November 1995, Osaka Gas began marketing the Partnership's natural gas systems and will monitor the performance of installed systems during 1996. As of December 15, 1995, one Desert Cool(Trademark) unit had been sold through Osaka Gas. No assurance can be given as to whether any additional natural gas systems will be sold through Osaka Gas. Osaka Gas is the second largest seller of natural gas in Japan and as part of its marketing program promotes and sells natural gas operated equipment to promote the use of natural gas.
In July 1995, the Partnership entered into a memorandum of understanding with Samsung to sell its systems in South Korea which terminated on December 15, 1995. Through November 30, 1995, 15 units have been sold through Samsung in South Korea. The Partnership is presently negotiating a formal distribution agreement with Samsung for the sale of the Partnership's systems in South Korea. There can be no assurance that a formal distribution agreement will be executed.
In August 1995, the Partnership entered into a joint development agreement with AB Air in Israel for the development of a residential desiccant-based, all electric climate control system. The Partnership has agreed to share equally in the cost of the development program which is initially estimated to be approximately $250,000. The Company has agreed to finance 60% of AB Air's portion of the program costs pursuant to an interest-bearing loan. In addition, AB Air has been granted the exclusive right to manufacture and sell desiccant-based climate control systems incorporating the Partnership's technology in Israel, Turkey, Greece, Cyprus and Egypt. In lieu of a royalty for license, AB Air has agreed to pay to the Partnership a mark-up of 10% over the base price of the desiccant and heat-exchange rotors which the Partnership is supplying to AB Air. Through November 30, 1995, six of the Partnership's rotors have been incorporated into systems manufactured and sold by AB Air.
Backlog. As of November 30, 1995, the Partnership's backlog of firm purchase orders for climate control equipment was approximately $1,600,000 compared to a backlog of $450,000 as of November 30, 1994. The Partnership typically ships its systems within 8-10 weeks of receiving an order.
At its Miami facility, the Partnership manufactures all of its proprietary honeycomb desiccant and heat-exchange rotors and coats the desiccant rotors with ETS(Trademark). The Partnership also manufactures certain other parts and assembles, tests and ships completed systems from its leased manufacturing facility in Philadelphia, Pennsylvania. The Partnership plans to expand the capacity of its rotor manufacturing facility and move to a larger facility in Philadelphia to support anticipated growth. See 'Business -- Properties.'
In December 1994, the Partnership acquired for $8 million in cash, the real property and substantially all of the assets of Ciba-Geigy's manufacturing facility in Miami, from which the Partnership had been purchasing the honeycomb substrate currently used in producing the Partnership's desiccant and heat-exchange rotors. The Partnership sought to manufacture its own substrate and rotors to lower production costs, further improve the rotors and expand production capacity to meet potential market demand. In addition, the acquisition gives the Partnership more control of a critical technology and manufacturing process for its current products. The Partnership acquired a perpetual, exclusive technology license for the proprietary process to manufacture such small cell, honeycomb substrate for use in air cooling, conditioning and dehumidification applications, and certain other fluid applications. The Partnership also assumed the lease of a 24,000 square foot storage space and a parking lot adjacent to the Miami manufacturing facility. In connection with the acquisition of the Miami facility, the Partnership entered into a five-year requirements contract to continue to supply Ciba-Geigy with the honeycomb substrate material for the aerospace industry. The Partnership is required to make available to Ciba-Geigy in each year of the contract certain percentages of the Miami facility's production capacity, ranging from 85% in 1995 to 30% in 2000. The contract is subject to early termination by Ciba-Geigy at any time after 18 months, upon six months' notice.
As described above, the Partnership has entered into several licensing arrangements with respect to manufacturing or marketing its products. The Partnership may also license, or otherwise permit, other companies in the United States or internationally to manufacture its systems but the Partnership expects to continue to remain the exclusive manufacturer of the desiccant and heat exchange rotors for such licensees.
Except as described below, the Partnership generally uses standard parts and components in the manufacture of its systems and obtains such parts and components from various independent suppliers. The Company believes the Partnership is not highly dependent on any specific supplier and could obtain similar components from other suppliers, except for the substrate material used in its rotors and ETS(Trademark).
The Partnership purchases a proprietary strong, lightweight material from a single supplier which is used as the base material in manufacturing the honeycomb substrate for the Partnership's desiccant and heat-exchange rotors. While this material is critical in the manufacture of the rotors and the Partnership does not have a contractual agreement with such supplier, the Company believes that the Partnership can obtain all of its requirements for such material from such supplier for the foreseeable future.
ETS(Trademark) is a patented desiccant material manufactured exclusively by Engelhard. Pursuant to the Engelhard Supply Agreement, the Partnership has agreed to purchase exclusively from Engelhard all of the ETS(Trademark) or any improved desiccant material developed by Engelhard that the Partnership may require in connection with the conduct of the Partnership's business. In turn, Engelhard has agreed to sell to the Partnership its total requirements for ETS(Trademark) or any improved desiccant material developed by Engelhard. The price for ETS(Trademark) is adjusted as of January 1 of each year during the term of the Engelhard Supply Agreement, which initially expires December 31, 1997, but may be extended by either party for additional two-year periods up to December 31, 2003. The Engelhard Supply Agreement does not include specific purchase prices but does contain a 'competitive offer' provision, whereby the Partnership is able to purchase from third parties similar desiccant products that are equal to or better than the products sold by Engelhard should they become available, at a price that is lower than the price established for ETS(Trademark) or any improved desiccant material sold by Engelhard under the Engelhard Supply Agreement, provided, however, that (i) Engelhard has the right to meet such 'competitive offer' in all material respects and (ii) any such third party offer must be able to meet the Partnership's requirements for such desiccants in all material respects in order to be considered a 'competitive
The Company and Engelhard formed the Partnership in February 1994 to pursue the desiccant air conditioning business which previously had been conducted by the Company. In exchange for a 50% interest in the Partnership, the Company transferred to the Partnership substantially all of its assets relating to its desiccant-based air conditioning business, subject to certain liabilities. Engelhard, in exchange for a 50% interest in the Partnership, (i) contributed $8,600,000 in capital to the Partnership, (ii) entered into the Engelhard Supply Agreement and the Engelhard License Agreement for ETS(Trademark) and (iii) agreed to provide credit support to the Partnership in the amount of $3,000,000. In addition, Engelhard extinguished a $900,000 obligation due to it by the Company.
Pursuant to the Partnership Agreement, the Partnership is managed by a Management Committee comprised of two members, one selected by each of the Company and Engelhard. At present, such committee is comprised of Irwin L. Gross, Chairman and President of the Company, and Robert J. Schaffhauser, Vice President-Technology and Corporate Development of Engelhard. Mr. Gross is also the Chief Executive Officer of the Partnership and has an employment agreement with the Partnership that expires in 1999.
In accordance with the Partnership Agreement, the Company has granted Engelhard options to acquire up to all of the Company's interest in the Partnership at the rate of 25% of such interest per year, with each such 25% option exercisable on December 31 of each year commencing in 1997 and extending through and including 2000 (each an 'Exercise Date'), based on a price equal to 95% of the fair market value of the Partnership as of the Exercise Date in each year in which an option is exercisable, determined by an investment banking firm selected by the Company and Engelhard. Each 25% option is exercisable for a limited period of time after the respective Exercise Date. Upon the occurrence of an event of default by the Company under the Partnership Agreement (including bankruptcy of the Company or failure by the Company to comply with, or a violation of, any material term or condition of the Partnership Agreement which is not cured within a 45-day period), Engelhard may accelerate the option. In addition, Engelhard's purchase options are cumulative and any option unexercised as of the end of the Exercise Period may be exercised as of any future Exercise Period, provided that all previously unexercised options must be exercised and all options automatically expire if Engelhard does not elect to exercise both of its first two options. There can be no assurances as to whether Engelhard will or will not exercise any or all of its options to purchase the Company's interest in the Partnership. In the event that Engelhard's interest in the Partnership increases to more than 70%, Engelhard will be entitled to designate an additional member to the Management Committee and thereby will control the management of the Partnership.
The Partnership entered into a Royalty Agreement as of February 7, 1994 with James Coellner and Dean Calton, engineers and employees of the Partnership and former employees of the Company.
Pursuant to the Royalty Agreement, in exchange for their patents and trade secrets, Messrs. Coellner and Calton are each entitled to receive royalty payments from the Partnership equal to 0.5% of the Partnership's net revenues received from sales of separate components, royalties and one-time payments for licensed technology and sales of desiccant cooling and air treatment systems to the extent such revenues result from the utilization of technology developed by such individual. The royalty payments do not commence until the first year in which the net revenues of the Partnership exceed $15 million. The maximum amount of combined royalty payments to be made under the Royalty Agreement shall not exceed $5 million in the aggregate and $300,000 for any one year. No royalty is payable for any year in which the Partnership had no net income (or would have had no net income after giving effect to such payments) or if, after giving effect to such royalty payments, the Partnership had no net income on a cumulative basis since its inception; provided that to the extent any royalty payments otherwise payable are not required to be made due to such restrictions, such payments shall be carried forward and made with respect to the next subsequent year or years in which the aforementioned restrictions are satisfied. The Royalty Agreement terminates on December 31, 2010 or, with respect to either employee, the termination of employment of such individual, voluntarily or for cause, prior to February 7, 1999.
The Partnership's ability to compete effectively with other manufacturers of climate control equipment is dependent upon, among other things, a combination of (i) the Partnership's proprietary desiccant system design, (ii) Engelhard's patented ETS(Trademark) and (iii) Ciba-Geigy's proprietary process licensed to the Partnership and utilized in manufacturing the small cell, honeycomb substrate material used to make the Partnership's rotors. The Partnership has been issued three United States patents covering certain of its desiccant technology. Several U.S. and foreign patent applications are pending which are directed to the products manufactured and sold by the Partnership and additional patent filings are expected to be made in the future. See 'Risk Factors -- Dependence on Proprietary Technology.'
The Company was granted a U.S. patent expiring in 2010, which it assigned to the Partnership, related to using a microprocessor to control the desiccant cooling systems in order to increase the energy efficiency or effectiveness of the desiccant cooling process. Similar patents have also been issued to the Partnership in several European countries.
The Partnership was granted a U.S. patent expiring in 2013, related to the use of an electric heat pump in conjunction with a desiccant climate control system which can use recirculated air for dehumidification, dehumidification with cooling and heating.
The Partnership was also granted a U.S. patent which expires in 2013 directed to creating humidity gradients within a supermarket. A low humidity, relatively warm temperature area is created in the frozen food section of the supermarket, and a higher humidity, warm temperature area is created near the produce section of the supermarket. This is accomplished by combining a conventional air conditioning system with a desiccant unit. Creating a low humidity area in the frozen food section of the supermarket significantly improves the efficiency of refrigerated cases and a higher humidity area in the produce section helps to preserve the fresh produce.
Under the Engelhard License Agreement, Engelhard granted the Partnership an exclusive, royalty-free license during the existence of the Partnership to use Engelhard's proprietary technology relating to ETS(Trademark) for use in the Partnership's business, including heating, ventilation and air conditioning applications. The license also includes any new technology conceived by Engelhard's employees or representatives after execution of the Engelhard License Agreement, which is developed for use by the Partnership in connection with the Partnership's business. In turn, the Partnership has agreed not to license or grant any rights in technology owned by the Partnership to any person or entity, except that the Partnership will grant Engelhard or the Company, upon request, a non-exclusive license to make, utilize and sell Partnership technology in any business other than the Partnership's business at reasonable royalty rate to be negotiated at the time of the grant of such license. See 'Business -- Supplies and Materials.'
In connection with the acquisition of Ciba-Geigy's manufacturing facility in Miami, the Partnership acquired an exclusive, perpetual technology license to use Ciba-Geigy's proprietary process in air cooling, conditioning and dehumidifying applications, which is currently necessary to manufacture the small cell, honeycomb substrate material used in manufacturing the Partnership's proprietary desiccant and heat exchange rotors. See 'Business -- Manufacturing.'
The Partnership owns the registered trademark for 'DESI/AIR(Registered)' and has filed trademark applications for 'Desert Cool(Trademark)' and 'Desert Breeze(Trademark)' in the United States for heating, ventilation and air conditioning systems. Several foreign trademark applications for 'DESI/AIR(Registered)' and 'Desert Breeze(Trademark)' are pending.
The Partnership's engineering, research and development activities focus on designing systems for specific applications such as supermarkets, as well as improving the performance and efficiency and lowering the costs of its climate control systems. As of November 30, 1995, the Partnership had 17 employees engaged in engineering, research and development. The Partnership's engineering, research and development expenses for 1994 and the nine months ended September 30, 1995 were approximately $2,100,000 and $1,600,000, respectively.
The Partnership competes against other manufacturers of conventional and desiccant-based air conditioning systems primarily on the basis of capabilities, performance, reliability, price and operating efficiencies. The Partnership competes with numerous other manufacturers in the conventional heating, ventilation and air conditioning equipment industry, including Trane Company, York International Corporation, Carrier and others that have significantly more resources and experience in designing, manufacturing and marketing of air conditioning systems than does the Partnership. The Company believes the Partnership's systems provide the following advantages over conventional air conditioning systems: more effectively control humidity; improve indoor air quality; reduce energy consumption; offer energy versatility; and reduce the amount of refrigerants required. The Partnership also competes with several companies selling desiccant-based climate control systems, including Munters Corporation and Semco Incorporated. However, the Company believes its systems perform better and are more economical to operate than competing desiccant-based systems due to its honeycomb rotors and Engelhard's ETS(Trademark).
Effective February 7, 1994, substantially all of the employees of the Company became employees of the Partnership. The Company employed five full-time persons and the Partnership employed 176 full-time persons as of November 30, 1995, none of whom are represented by unions.
In recent years, increasing concern about damage to the earth's ozone layer caused by ozone depleting substances has resulted in significant legislation governing the production of products containing CFCs. Under the Montreal Protocol on Substances that Deplete the Ozone Layer, as amended in 1992 (the 'Montreal Protocol'), the approximately 130 signatory countries have agreed to cease all production and consumption of CFCs, some of which are utilized in air conditioning and refrigeration equipment, by the end of 1995. The Montreal Protocol has been implemented in the United States through the Clean Air Act and the regulations promulgated thereunder by the Environmental Protection Agency (the 'EPA'). The production and use of refrigerants containing CFCs are subject to extensive and changing federal and state laws and substantial regulation under these laws by federal, state and local government agencies. In addition to the United States, Japan, mainland China, Israel and Thailand are among the signatories to the Montreal Protocol. The manner in which other countries implement the Montreal Protocol could differ from the approach taken in the United States.
As a result of the regulation of CFCs, the air conditioning and refrigeration industries are turning to substitute substances such as HCFCs, HFCs and light hydrocarbons. HCFCs have 1 to 10% of the ozone-depleting potential of CFCs. However, the production of HCFCs for use in new equipment is currently scheduled to be phased out as of the year 2020 and the production of HCFCs for the servicing of existing equipment is currently scheduled to be phased out as of the year 2030 in the United States and other signatory countries pursuant to the Montreal Protocol. As discussed below, pursuant to the 1992 Rio Accord, reduction of the use of HFCs is also being considered because of their substantial global warming potential.
The Framework Convention on Climate Change (the '1992 Rio Accord') and related conferences and agreements focused on the link between economic development and environmental protection. Under the Rio Accord, approximately 180 signatory countries have agreed to establish a process by which they can monitor and control the emission of 'greenhouse gases,' defined as gaseous constituents of the atmosphere that absorb and re-emit infrared radiation, which include HFCs. Parties to the 1992 Rio Accord must provide national inventories of 'sources' (which release greenhouse gases, aerosols or precursors thereof into the atmosphere) and 'sinks' (which remove greenhouse gases, aerosols or precursors thereof from the atmosphere), and regular reports on policies and measures which limit the emissions by sources and enhance the removal by sinks of gases not controlled by the Montreal Protocol. No given level or specific date for the control of greenhouse gas emissions have been explicitly provided, although the United States government submitted a plan to the Rio Standing Committee on its proposal for achieving this goal by the year 2000 and Articles 2(a) and (b) of the 1992 Rio Accord indicated there was an initial goal of returning to 1990 levels of greenhouse gas emissions by the year 2000.
The Clean Air Act now requires the recycling and recovery of all refrigerants used in residential and commercial air conditioning and refrigeration systems. As a result, there are increasing costs involved in the manufacturing, handling and servicing of refrigerant-based equipment. In the Partnership's systems, the cooling coils and compressors included as a post-cooling option in non-electric models are smaller, and in electric models generally are smaller, than would otherwise be required in a conventional air conditioning system, and therefore require less refrigerants.
The indoor air quality standards in the United States, as set forth by ASHRAE Standard 62-1989 Ventilation for Acceptable Indoor Air Quality, now require that up to 200-300% more fresh air be introduced into buildings as compared to prior regulations. The purpose of such standards is to specify minimum ventilation levels and indoor air quality levels in order to minimize the potential for adverse health effects typically associated with 'Sick Building Syndrome.' According to a recent study by the National Conference of States on Building Codes and Standards, Inc. (the 'NCSBCS Study'), there are 30 states which have incorporated the ASHRAE 62-1989 ventilation standards in one form or another as mandatory building code requirements into their respective building codes (including energy and mechanical codes) for new construction of certain and, in some cases, all types of buildings. Of such states, 18 states require mandatory compliance with ASHRAE 62-1989 by all local jurisdictions and an additional seven states require all local jurisdictions which elect to adopt a building code to comply, at a minimum, with ASHRAE 62-1989. According to the NCSBCS Study, there are ten other states which, while not adopting ASHRAE 62-1989 into their building codes, have referenced ASHRAE 62-1989 as a recognized industry standard. Of the remaining 10 states, five states have adopted building codes with ventilation requirements similar to those of ASHRAE 62-1989 and several major cities in the remaining five states either reference ASHRAE 62-1989 as an industry standard or set similar ventilation requirements according to the NCSBCS Study. In addition, the Company believes that due to liability concerns and customer demands, it is an increasingly standard engineering practice throughout the country to incorporate the ASHRAE ventilation standards in new commercial building construction even when not required by applicable building codes, and the Company believes that the Partnership's business prospects are enhanced because the Partnership's climate control systems currently enable buildings to meet or exceed such standards.
The principal executive offices of both the Company and the Partnership are located at 441 North 5th Street, Suite 102, Philadelphia, Pennsylvania 19123. The Partnership currently has approximately 15,000 square feet of office space under a month-to-month lease at this location. The Company occupies office space within the Partnership's offices and is charged for such space proportionately. The Partnership's lease requires a monthly rental payment of approximately $10,000 plus utility and tax costs, of which the Company's share is approximately $1,000 per month, plus its proportionate share of utility and tax costs.
The Partnership assembles its systems at a 55,000 square foot manufacturing facility located in Philadelphia, Pennsylvania leased by the Partnership through March 31, 1998. Additionally, the Partnership rents various storage facilities under short-term leases to serve as depots for parts and supplies.
The Partnership currently produces the small cell, honeycomb substrate material and the desiccant and heat-exchange rotors in its 75,000 square feet manufacturing facility in Miami, Florida and leases a 24,000 square foot storage facility and parking lot adjacent to the manufacturing facility.
Although the Partnership's facilities are adequate to meet its current level of sales, the Company expects that by the end of the first half of 1996 the Partnership will have to increase its capacity to meet anticipated demand. The Company expects that a portion of the proceeds of this offering will be used to increase the Partnership's production capacity. See 'Risk Factors -- Need for Additional Production Capacity' and 'Use of Proceeds.'
Neither the Company nor the Partnership is a party to any material lawsuits.
The following table sets forth certain information concerning the executive officers and directors of the Company.
(1) Member of Equity Plan Committee
(2) Member of Nominating Committee (3) Member of Compensation Committee (4) Member of Audit Committee (5) Member of Stock Option Committee
The executive officers of the Company are elected by, and serve at the discretion of, the Board of Directors. The following information with respect to the directors and executive officers of the Company has been furnished by such persons.
Irwin L. Gross is a founder of the Company and has been the Chairman of the Company and a director since the Company's inception in May 1984. Mr. Gross has served as the President of the Company since February 1994 and also held such position from the Company's inception through July 1991. In addition, Mr. Gross has served as the Chief Executive Officer of the Partnership since its formation in February 1994 and is one of two members of the Management Committee of the Partnership. Mr. Gross also serves as the Chairman of the Board of Directors of EA Industries, Inc. (formerly called Electronic Associates, Inc.), a publicly-held company engaged in the contract manufacturing of electronic products and systems. Mr. Gross has a Bachelor of Science degree in Accounting from Temple University and a Juris Doctor degree from Villanova University.
William A. Wilson has been the Vice Chairman of the Company since February 1994 and a director of the Company since July 1991, and served as Treasurer of the Company from February 1994 to December 1994. Mr. Wilson also served as President and Chief Executive Officer of the Company from July 1991 to February 1994 when he retired from such positions. Prior to joining the Company, Mr. Wilson held a series of senior management positions with United Technologies Corporation from 1980 to 1991, including most recently as Senior Vice President of its Commercial/Industrial Group and prior thereto as President and Chief Executive Officer of Carrier, President of European Operations for Otis Elevator Company, President of Latin American Operations for Otis Elevator Company, and Vice President of Otis Elevator Company responsible for manufacturing planning. Mr. Wilson has a Bachelor of Science degree in Mechanical Engineering from Drexel University.
Albert Resnick has been a director of the Company since July 1991 and was appointed the Secretary of the Company in February 1994. From 1953 until his retirement in July 1991, Mr. Resnick was a Vice President of G.B. Goldman Paper Company, a paper distribution company located in Philadelphia, Pennsylvania. At G.B. Goldman, he was responsible for purchasing, marketing and advertising. Mr. Resnick has a Bachelor of Science degree in Economics from the Wharton School of the University of Pennsylvania.
Stephen Schachman has served as a director of the Company since August 1984. Mr. Schachman has been a Managing Director and a member of the Board of Directors of Public Affairs Management, Inc., a consulting company in political affairs, since April 1993. Mr. Schachman served as President and Chief Executive Officer of Enercom, Ltd., a consulting company in the energy and communications fields, from April 1991 to January 1993. From January 1992 to February 1995, Mr. Schachman served in various capacities at Penn Fuel Inc., having served most recently as Executive Vice President. From September 1988 to April 1991, Mr. Schachman practiced law with the law firm of Dilworth, Paxson, Kalish and Kauffman. Mr. Schachman has also served as President of Philadelphia Gas Works and was a director of the American Gas Association. Mr. Schachman currently serves on the Board of Elizabethtown Gas Company. Mr. Schachman has a Bachelor of Science degree in Economics from the Wharton School of the University of Pennsylvania and a Juris Doctor degree from Georgetown University Law Center.
Andrew L. Shapiro has served as a director of the Company since May 1990. He has been President of Andy's Janitorial Service Co., Inc. since 1973 and Afford-A-Maid, Inc. since 1988. Mr. Shapiro has also been President of Shapiro Communications, Inc., a provider of special mobile radio services in the Boston area, since 1987. Mr. Shapiro also serves as a director of Associated Builders and Contractors, a national trade association of builders. Mr. Shapiro has a Bachelor of Arts degree in Education from Glassboro State College.
Mark S. Hauser has served as a director of the Company since December 1994. He is a founder and has been a Managing Director of Hauser, Richards & Co. since March 1991 and of Tamarix Capital Corporation since June 1994, investment and merchant banking firms. Prior to founding Hauser, Richards & Co. in March 1991, Mr. Hauser was a Managing Director at Ocean Capital Corporation, a private international investment banking firm from January 1986 to March 1991. Mr. Hauser has been an Advisory Director of Direct Language Communications since November 1993 and Vice Chairman of the Board of Directors of The Holmes Protection Group, Inc. since September 1994. Mr. Hauser also serves as a director of EA Industries, Inc., a publicly-held company engaged in the contract manufacturing of electronic products and systems. Mr. Hauser has economics and law degrees from Sydney University and a Master of Law degree from the London School of Economics and Political Science.
Manfred Hanuschek has been the Chief Financial Officer of the Company since October 1994 and Treasurer since December 1994. From 1983 to October 1994, he was employed by Coopers & Lybrand, certified public accountants, most recently as Senior Audit Manager. Mr. Hanuschek is a Certificated Public Accountant, licensed in the Commonwealth of Pennsylvania. Mr. Hanuschek has a Bachelor of Science degree in Accounting from Pennsylvania State University and is a member of the American and Pennsylvania Institutes of Certified Public Accountants.
EXPANSION OF BOARD; APPROVAL OF CERTAIN TRANSACTIONS
The Company has undertaken that within 60 days of the date of this Prospectus, it will appoint two additional nonemployee members to the Board of Directors who are reasonably satisfactory to the Representatives (as hereinafter defined). In addition, the Company has undertaken that for a period of three years from the date of this Prospectus, the Company will use its best efforts to nominate and recommend to the Company's stockholders for approval such directors or two other directors who are reasonably satisfactory to the Representatives (the 'Independent Directors'). Moreover, the Company has undertaken that it will amend its Bylaws to provide that for a period of three years from the date of this Prospectus, any use of the proceeds of this offering other than as set forth under 'Use of Proceeds' shall be approved by a majority of the nonemployee directors of the Company, including at least one of the Independent Directors. In addition, during such three-year period, the Company will obtain similar approval before it (i) raises any capital pursuant to the issuance of equity securities or securities convertible into or exchangeable for equity securities of the Company for any purpose other than to make a contribution to the Partnership substantially similar to investments to be made by Engelhard (other than with respect to stock options covered by plans which have been approved by the Company's stockholders) or (ii) raises any capital for any purpose through the issuance to any officer, director or 5% or greater stockholder of the Company of equity securities or other securities convertible into or exchangeable for equity securities of the Company (other than with respect to stock options covered by plans which have been approved by the Company's stockholders). During such three-year period, at least one of the Independent Directors will be a member of the Compensation, Audit and Stock Option Committees of the Board of Directors.
As a condition to the formation of the Partnership pursuant to the joint venture asset transfer agreement, Mr. Gross entered into a five year employment agreement with the Partnership, dated February 7, 1994, pursuant to which Mr. Gross is employed as the Chief Executive Officer of the Partnership and is required to devote a majority of his business time to the business of the Partnership, at an annual salary of $155,000, subject to certain adjustments. Mr. Gross also received an annual salary in 1994 of $105,735 from the Company for his services as its Chairman of the Board and President, although he does not have a written employment agreement with the Company. In June 1995, the Company increased Mr. Gross's salary to $150,000 per annum.
Prior to the formation of the Partnership, the Company entered into an employment agreement with William A. Wilson, the former President and Chief Executive Officer and a director of the Company, that was to expire on December 31, 1996. Under the terms of the agreement, Mr. Wilson received an annual salary of $150,000 and options vesting over five years to purchase 500,000 shares of Common Stock at an exercise price of $2.60 per share. The agreement also stipulated that Mr. Wilson would receive one year of salary plus benefits if he were terminated from employment without cause during the term of the agreement. Effective February 28, 1994, Mr. Wilson resigned as President and Chief Executive Officer of the Company, was appointed Vice Chairman of the Board and
Treasurer, and he became a part-time employee of the Company. Under the terms of the amended employment agreement, Mr. Wilson receives an annual salary of $50,000 and the options to purchase 200,000 shares of Common Stock which had not yet vested, vest over a four year period commencing in February 1994, subject to his continued employment with the Company and subject to acceleration upon the occurrence of certain extraordinary corporate events, such as a merger, sale or change in control of the Company.
The Company has adopted an Incentive Stock Option Plan ('ISOP') and a Nonqualified Stock Option Plan ('NQSOP') for directors, officers and key employees of the Company and others. Under these plans, options may be granted for the purchase of up to an aggregate of 6,850,000 shares of Common Stock. The number of options to be granted and the exercise prices are determined by the Stock Option Committee of the Board of Directors in accordance with the terms of the plans. Under the ISOP, the option price cannot be less than 100% of the fair market value of the Common Stock on the date of the grant. Options under the ISOP generally are exercisable for three to five years based on a vesting schedule from the grant date. Under the NQSOP, the option price as determined by the Stock Option Committee may be greater or less than the fair market value of the Common Stock as of the date of the grant, and the options are generally exercisable for three to five years subsequent to the grant date. At November 30, 1995, options to purchase an additional 1,560,942 shares of Common Stock may be granted under the plans.
During 1994, the Company adopted an Equity Plan for Directors (the 'Formula Plan') pursuant to which nonemployee Eligible Directors (defined below) receive automatic option grants whose vesting are dependent on the market price of the Common Stock. The Company does not intend to issue options to its nonemployee directors other than pursuant to the Formula Plan. Under the Formula Plan, each director who was an Eligible Director on adoption of the Plan was automatically granted an option to purchase 50,000 shares of Common Stock and, thereafter, each person who becomes an Eligible Director is automatically granted an option to purchase 50,000 shares of Common Stock on the date such person first becomes an Eligible Director. Each Eligible Director is automatically granted an option to purchase an additional 50,000 shares of Common Stock on each fifth anniversary of the initial grant for such director. An 'Eligible Director' is a director who is not, and has not been during the twelve months preceding a grant date, an officer or employee of the Company. The exercise price for the options granted under the Formula Plan is the fair market value of a share of Common Stock on date of the grant. Options to purchase 500,000 shares of Common Stock may be granted under the Formula Plan. As of November 30, 1995, options to purchase 350,000 additional shares of Common Stock were available for grant under the Formula Plan.
Grants under the Formula Plan provide for vesting in five equal annual installments commencing on the first anniversary of the date of grant, have a term of ten years (subject to earlier termination under specified conditions) and provide for accelerated vesting in the event of death or a change in control of the Company. A 'change in control' means the consummation of any merger or consolidation involving the Company, any sale of substantially all of the Company's assets or other transaction or related transactions as a result of which a single person or several persons acting in concert own a majority of the Common Stock (except for certain transactions that do not involve a change in the holders of a majority of the outstanding Common Stock).
During 1994, the Company granted nonqualified stock options under the NQSOP to the following officers and directors: (i) on July 1, 1994, the Company granted options to purchase 500,000 shares of Common Stock to Mr. Gross and options to purchase 50,000 shares to each of Messrs. Resnick and Wilson, in each case at an exercise price of $5.60 per share; (ii) on July 7, 1994, the Company granted to Messrs. Gross and Resnick options to purchase 175,000 shares and 200,000 shares of Common Stock, respectively, at an exercise price of $5.50 per share; and (iii) on October 4, 1994, the Company granted to Mr. Hanuschek options to purchase 50,000 shares of Common Stock, at an exercise price of $9.125 per share. The vesting of the options referred to in clause (i) of this paragraph and all options granted under the Formula Plan are contingent upon the satisfaction of certain performance criteria relating to the future market price (higher than the market price on the date of grant) of the Common Stock.
Under the ISOP, the Company has granted to certain employees who were neither officers nor directors options to purchase 406,200 shares of Common Stock through November 30, 1995, of which options to purchase 226,400 shares of Common Stock are currently exercisable.
Under the Formula Plan, Messrs. Schachman and Shapiro were granted on July 1, 1994 options to purchase 50,000 shares of Common Stock at an exercise price of $5.60 per share, and Mr. Hauser was granted on December 15, 1994 an option to purchase 50,000 shares of Common Stock at an exercise price of $8.125 per share.
Commencing June 1, 1995, each non-employee director receives an annual retainer of $7,500 plus $500 for each Board meeting and each committee meeting attended, together with reimbursement for expenses incurred in connection with such meetings.
The following table sets forth certain information, as of November 30, 1995, regarding the beneficial ownership of the Common Stock by (i) each person who is known to the Company to be the beneficial owner of 5% or more of the Common Stock, (ii) each director and executive officer of the Company, and (iii) all executive officers and directors as a group. Unless otherwise indicated, the stockholders listed possess sole voting and investment power with respect to the shares indicated as owned by them.
(1) Addresses are included for beneficial owners of 5% or more of the Common Stock. Beneficial ownership has been determined pursuant to Rule 13d-3 of the Exchange Act. Mr. Shapiro's business address is 1273 North Church Road, Suite 107, Moorestown, New Jersey 08057. The business address for each of the other 5% stockholders is the address of the Company at 441 North 5th Street, Philadelphia, PA 19123. (2) Amounts indicated reflect the Preferred Stock Transactions, including the conversion of the Series G and H Convertible Preferred Stock and the issuance of Common Stock as payment for the accrued dividends on the Series H Convertible Preferred Stock, and the issuance of 2,500,000 shares of Common Stock in connection with this offering.
(3) Includes 478,181 shares of Common Stock and 108 shares (30.9%) of Series G Convertible Preferred Stock currently convertible into 882,420 shares of Common Stock, currently exercisable options to purchase 217,753 shares of Common Stock, and currently exercisable warrants to purchase 300,000 shares of Common Stock. Also includes 20,000 shares of Common Stock and 92 shares (26.3%) of Series G Convertible Preferred Stock, currently convertible into 751,692 shares of Common Stock, held of record by a trust for the benefit of the children of Mr. Gross, with respect to which Mr. Gross exercises shared voting and investment power.
(4) Includes 27,828 shares of Common Stock, 75 shares (21.4%) of Series G Convertible Preferred Stock currently convertible into 612,792 shares of Common Stock, 1,500 shares (100%) of Series H Convertible Preferred Stock currently convertible into 750,000 shares of Common Stock, and currently exercisable options to purchase 211,000 shares of Common Stock.
(5) Includes 154,688 shares of Common Stock issued as payment for the accrued dividends on the Series H Convertible Preferred Stock, so that after giving effect to the Preferred Stock Transactions, Mr. Resnick would have beneficially owned 1,756,308 shares of Common Stock as of September 30, 1995.
(6) Includes 154,264 shares of Common Stock, 75 shares (21.4%) of Series G Convertible Preferred Stock currently convertible into 612,792 shares of Common Stock, and currently exercisable options to purchase 202,858 shares of Common Stock. (7) Includes 10,000 shares of Common Stock and currently exercisable options to purchase 50,000 shares of Common Stock. (8) Consists of shares of Common Stock which may be acquired pursuant to currently exercisable options. (9) Consists of currently exercisable options and warrants to purchase Common Stock.
(10) Includes (i) 690,273 shares of Common Stock, (ii) 350 shares of Series G Convertible Preferred Stock currently convertible into 2,859,696 shares of Common Stock, (iii) 1,500 shares of Series H Convertible Preferred Stock currently convertible into 750,000 shares of Common Stock, and (iv) currently exercisable options and warrants to purchase 1,191,611 shares of Common Stock.
In April 1993, the Company loaned Irwin L. Gross, Chairman and President, $70,000 pursuant to a promissory note which provides that such amount is payable on demand together with interest at an annual rate of 10%. As of September 30, 1995, the unpaid balance of the loan was $28,667. The loan was reduced to the present balance by the offsetting of deferred salary on December 31, 1993.
On June 17, 1994, the Company, Mr. Gross and Albert Resnick, a director of the Company, completed a private placement of a total of 1,400,000 shares of Common Stock, of which 1,100,000 shares were sold by the Company and 150,000 shares were sold by each of Messrs. Gross and Resnick. Pursuant to an agreement between the Company and Messrs. Gross and Resnick, the Company paid all expenses incurred in connection with the offering, including placement agent selling commissions of $64,732 with respect to the shares sold by Messrs. Gross and Resnick.
During 1993 and 1994, the Company paid fees to companies affiliated with Mark S. Hauser, a director of the Company, for financial advisory services, and reimbursed such companies for certain expenses. The fees paid consisted of approximately $125,000 in cash and the granting of immediately exercisable warrants to purchase 340,000 shares of Common Stock at exercise prices of $3.25 for 50,000 shares, $3.56 for 90,000 shares and $4.75 for 200,000 shares, exercisable until May 23, 1999.
Concurrent with the completion of the offering as part of the Preferred Stock Transactions: (i) the 350 shares outstanding of Series G Convertible Preferred Stock, beneficially owned by Messrs. Gross, Resnick and Shapiro will be converted into 2,859,696 shares of Common Stock and the accrued dividends of approximately $59,000 as of November 30, 1995 will be paid; (ii) the 1,500 shares outstanding of the Series H Convertible Preferred Stock owned by Mr. Resnick will be converted into 750,000 shares of Common Stock; (iii) the accrued Series H Convertible Preferred Stock dividends of approximately $619,000 as of November 30, 1995 will be paid in the form of Common Stock at the rate of $4.00 per share; (iv) the 135 shares outstanding of the Series F Preferred Stock owned by Mr. Gross and Resnick will be redeemed for approximately $256,000 and the accrued dividends of approximately $23,000 as of November 30, 1995 will be paid; (v) the 500 shares outstanding of the Series I Preferred Stock owned by Messrs. Gross, Resnick and Shapiro will be redeemed for $500,000 and the accrued dividends of approximately $186,000 as of November 30, 1995 will be paid; and (vi) the 225 shares outstanding of the Series J Preferred Stock owned by Messrs. Gross, Resnick and Shapiro will be redeemed for $225,000, and the accrued dividends of approximately $79,000 as of November 30, 1995 will be paid.
The Company is authorized to issue 50,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred Stock, par value $.01 per share. As of November 30, 1995, there were outstanding 14,710,540 shares of Common Stock, 135 shares of Series F Preferred Stock, 350 shares of Series G Convertible Preferred Stock (which are currently convertible into 2,859,696 shares of Common Stock), 1,500 shares of Series H Convertible Preferred Stock (which are currently convertible into 750,000 shares of Common Stock), 500 shares of Series I Preferred Stock and 225 shares of Series J Preferred Stock. In addition, as of such date there were outstanding warrants to purchase 1,465,000 shares of Common Stock and options to purchase 2,901,885 shares of Common Stock, plus an additional 1,910,942 shares of Common Stock reserved for issuance under the Company's stock option plans.
Upon completion of the offering pursuant to the Preferred Stock Transactions, all the outstanding series of Preferred Stock will be converted or redeemed for 3,609,696 shares of Common Stock and approximately $981,000 in cash. In addition, accrued and unpaid dividends will be declared and paid in cash, except with respect to the Series H Convertible Preferred Stock. The unpaid dividends on the Series H Convertible Preferred Stock will be paid in shares of Common Stock. Accordingly, after the sale of the shares offered hereby and the Preferred Stock Transactions, there will be 20,974,926 shares of Common Stock outstanding and no shares of Preferred Stock outstanding.
COMMON STOCK. Each share of Common Stock is entitled to one vote on each matter submitted to the stockholders without cumulative voting rights in the election of directors. The shares of Common Stock have no preemptive rights. In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of any Preferred Stock then outstanding. Subject to preferences that may be applicable to any outstanding Preferred Stock, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. Except for an in-kind warrant dividend paid in June 1990, the Company has not declared any dividends on the Common Stock and does not expect to declare dividends in the foreseeable future on the Common Stock. Payment of future dividends rests with the discretion of the Board of Directors and will depend, among other things, on the earnings, capital requirements and financial condition of the Company and the Partnership. See 'Dividend Policy.' All outstanding shares of Common Stock are fully paid and non-assessable, and the shares of Common Stock offered hereby, when issued, will be fully paid and non-assessable.
PREFERRED STOCK. The Company's Certificate of Incorporation authorizes the Board of Directors to designate and issue from time to time one or more classes or series of Preferred Stock, without approval of the stockholders. The Board of Directors may fix and determine the relative designations, powers, preferences, rights and dividends of any class or series of Preferred Stock. The issuance of Preferred Stock, while providing flexibility in connection with possible financings, acquisitions and other corporate transactions, could, among other things, adversely affect the voting power of the holders of Common Stock and, under certain circumstances, make it more difficult for a third party to gain control of the Company.
TRANSFER AGENT. The transfer agent for the Common Stock of the Company is American Stock Transfer & Trust Company, 40 Wall Street, New York, NY 10005.
SHARES ELIGIBLE FOR FUTURE SALE
As of November 30, 1995, there were 14,644,315 shares of Common Stock outstanding. The 2,500,000 shares of Common Stock offered hereby and 14,037,017 of the shares of Common Stock currently outstanding are freely transferrable without restriction or further registration under the Securities Act, except that any such shares owned by 'affiliates' of the Company, as that term is defined in Rule 144 under the Securities Act, may generally only be sold in compliance with Rule 144 as described below, but without regard to the holding period. The remaining shares of Common Stock are 'restricted securities' within the meaning of Rule 144 and may not be sold in the absence of a registration under the Securities Act unless an exemption from registration is available, including an exemption contained in Rule 144. The Company, its executive officers and directors and certain stockholders of the Company (holding, as of November 30, 1995 and after giving effect to the Preferred Stock Transactions, an aggregate of 4,454,657 shares of Common Stock, together with options and warrants to purchase 3,476,611 shares of Common Stock) have agreed with the Underwriters not to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of the Representatives of the Underwriters.
In addition, as of November 30, 1995, there were outstanding warrants to purchase 1,465,000 shares of Common Stock, of which warrants to purchase 540,000 shares are currently exercisable, and options to purchase 2,901,885 shares of Common Stock, of which options to purchase 1,262,085 shares are currently exercisable. Of the outstanding warrants, 450,000 underlying shares of Common Stock are registered pursuant to an effective registration statement and the balance of 1,015,000 shares of Common Stock have certain registration rights. Under the Company's stock option plans, options to purchase an additional 1,910,942 shares of Common Stock may be granted. All of the shares underlying the options are covered by effective Registration Statements. In addition, there are outstanding shares of Preferred Stock that are currently convertible into an aggregate of 3,609,696 shares of Common Stock. All of such shares are eligible for sale under Rule 144. An additional
154,688 shares to be issued in lieu of dividends on certain shares of Preferred Stock will be subject to the Rule 144 holding period requirements.
In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) including an officer, director or controlling stockholder ('affiliate'), who has beneficially owned shares for at least two years (including, in the case of a non-affiliate holder, any period of ownership of preceding non-affiliate holders) is entitled to sell, within any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding such sale, subject to the filing of a Form 144 with respect to such sale and certain other limitations and restrictions. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least three years, would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above.
The Company is unable to estimate the amount, timing or nature of future sales of outstanding shares of Common Stock. Sales of substantial amounts of the Common Stock in the public market or the availability of shares for sale may have an adverse effect on the market price thereof.
The Underwriters named below, acting through their representatives, Janney Montgomery Scott Inc. and Gerard Klauer Mattison & Co., LLC (the 'Representatives'), have severally agreed, subject to the terms and conditions of the Underwriting Agreement by and among the Company and the Underwriters (the 'Underwriting Agreement'), to purchase from the Company and the Company has agreed to sell to the Underwriters, the number of shares of Common Stock set forth opposite their respective names below, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus.
Gerard Klauer Mattison & Co., LLC................................
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, and that the Underwriters will purchase the total number of shares of Common Stock shown above if any of such shares are purchased. The Underwriting Agreement provides that, in the event of a default by an Underwriter, in certain circumstances the purchase commitments of non-defaulting Underwriters may be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public initially at the offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $___ per share, and the Underwriters may allow, and such dealers may reallow, a concession not in excess of $______ per share to certain other dealers. After the public offering, the public offering price and concession and discount to dealers may be changed by the Representatives.
The Company has granted the Underwriters an over-allotment option, exercisable for 45 days after the date of this Prospectus, to purchase up to an aggregate of 375,000 additional shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. Such option may be exercised only to cover over-allotments in the sale of the shares of Common Stock offered hereby. To the extent such option is exercised, each Underwriter will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such Underwriter's initial commitment as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against, or to contribute to losses arising out of, certain liabilities in connection with this offering, including liabilities under the Securities Act.
The Company and its directors and executive officers and certain other stockholders have agreed not to sell, contract to sell or otherwise dispose of any shares of Common Stock for a period of 180 days from the date of this Prospectus without the prior written consent of the Representatives.
Pursuant to a prior agreement with Gerard Klauer Mattison & Co., LLC ("GKM"), the Company paid GKM a fee of $231,000 in September 1995 in connection with a $3,300,000 private placement of Common Stock and is obligated to pay GKM an additional fee equal to 7% of the proceeds received by the Company in the event any of the warrants to purchase 375,000 shares of Common Stock exercisable at $9.00 per share issued in the private placement are exercised. In addition, the Company has retained GKM for a period through January 1998, to act as the Company's exclusive financial advisor with respect to any transfer of the Company's interest in the Partnership to Engelhard, its affiliates, successors or assignees, or any other person designated by Engelhard. In connection with any services performed under such engagement, the Company will pay GKM customary and normal investment banking fees for transactions of such type and size, as well as GKM's reasonable out-of-pocket expenses.
In connection with the offering, certain Underwriters and selling group members (if any) who are qualifying registered market makers on Nasdaq may engage in passive market making transactions in the Common Stock on Nasdaq in accordance with Rule 10b-6A under the Exchange Act during the two business day period before commencement of sales in the offering. The passive market making transactions must comply with applicable price and volume limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for the security. If all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market making average daily trading volume in the Common Stock during a reference period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time.
The distribution of the Common Stock in Canada is being made only on a private placement basis exempt from the requirement that the Company prepare and file a prospectus with the securities regulatory authorities in each province where trades of the Common Stock are effected. Accordingly, any resale of the Common Stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the Common Stock.
Each purchaser of Common Stock in Canada who receives a purchase confirmation will be deemed to represent to the Company and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such Common Stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent and (iii) such purchaser has reviewed the text above under 'Resale
RIGHTS OF ACTION AND ENFORCEMENT
The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by section 32 of the Regulation under the Securities Act (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws.
All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Ontario purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada.
The validity of the Common Stock offered hereby is being passed upon for the Company by Mesirov Gelman Jaffe Cramer & Jamieson, Philadelphia, Pennsylvania. Certain legal matters are being passed upon for the Underwriters by Cozen and O'Connor, Philadelphia, Pennsylvania.
The consolidated balance sheets as of December 31, 1994 and 1993 and the consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows of the Company for each of the three years in the period ended December 31, 1994, included and incorporated by reference in this Prospectus, have been audited by Coopers & Lybrand L.L.P. (whose report dated March 24, 1995 includes an explanatory paragraph which refers to conditions that raise substantial doubt about the Company's ability to continue as a going concern) and have been included herein in reliance upon the authority of that firm as experts in accounting and auditing.
The balance sheet as of December 31, 1994 and the statements of operations, changes in partners' capital and cash flows for the period February 7, 1994 (date of formation) to December 31, 1994, of the Partnership, included and incorporated by reference in this Prospectus have been audited by Coopers & Lybrand L.L.P. (whose report dated March 24, 1995 includes an explanatory paragraph which refers to conditions that raise substantial doubt about the Partnership's ability to continue as a going concern) and have been included herein in reliance upon the authority of that firm as experts in accounting and auditing.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND CONTROLLING PERSONS
The Company's Certificate of Incorporation contains a provision which limits the personal liability of directors to the Company or the stockholders for monetary damages for breach of fiduciary duty. The Certificate of Incorporation provides that a director of the Company shall not be personally liable for a breach of fiduciary duty as a director except for liabilities (i) for any breach of the director's duty of loyalty, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for an unlawful dividend payment or an unlawful repurchase of stock, or (iv) for any transaction from which the director derived an improper personal benefit.
The Company's Certificate of Incorporation also provides that the Company will indemnify and pay legal expenses and damages incurred by officers and directors in any legal action arising from their actions as agents of the Company as long as the officer or director had acted in good faith in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action, had no reasonable cause to believe his conduct was unlawful.
Nothing in these provisions eliminates a director's fiduciary duty to act with care or precludes a stockholder from pursuing injunctive or other equitable remedies.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and therefore is unenforceable.
INDEX TO FINANCIAL STATEMENTS, CONTINUED
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. 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 reflected herein. For further information, refer to the financial statements and footnotes thereto for the year ended December 31, 1994 included elsewhere herein. Results of operations for the nine months ended September 30, 1995 are not necessarily indicative of results of operations expected for the full year.
2. BUSINESS AND GOING CONCERN CONSIDERATIONS:
ICC Technologies, Inc. ('ICC' or the 'Company') is a Delaware corporation. On February 7, 1994, pursuant to the terms and conditions of a Joint Venture Asset Transfer Agreement ('Transfer Agreement'), by and among ICC, its newly formed wholly-owned subsidiary, ICC Desiccant Technologies, Inc. ('I Partner'), and Engelhard Corporation ('Engelhard') and its newly formed wholly-owned subsidiary, Engelhard DT, Inc. ('E Partner'), ICC and Engelhard, through their respective subsidiaries, formed a Pennsylvania general partnership named 'Engelhard/ICC' (the 'Partnership'). In exchange for a 50% interest in the Partnership, ICC transferred to the Partnership through its wholly-owned subsidiary, I Partner, substantially all of its assets, with the exception of cash and certain other assets not related to the desiccant air conditioning business, subject to certain liabilities, and Engelhard, in exchange for a 50% interest in the Partnership, (a) contributed to the Partnership through its wholly-owned subsidiary, E Partner, approximately $8,600,000 in cash, (b) entered into a Supply Agreement pursuant to which it agreed to supply desiccants to the Partnership, (c) entered into a Technology License Agreement pursuant to which Engelhard and the Partnership licensed to each other certain technology rights, and (d) agreed to provide credit support to the Partnership in the amount of $3,000,000.
The Partnership was formed to engage in the business of designing, manufacturing and marketing climate control systems to supplement or replace conventional air conditioning systems ('Partnership Business'), and succeed to the desiccant air conditioning business conducted by ICC prior to the formation of the Partnership and the activities of ICC and Engelhard under the Joint Development Agreement dated May 26, 1992. As a result of the consummation of the Transfer Agreement, ICC has become principally a holding company, owning a 50% interest in the Partnership through ICC's wholly-owned subsidiary, I Partner, which is a co-general partner of the Partnership. Although ICC is not permitted to engage directly or indirectly in any activities that would conflict with the Partnership Business as long as the Partnership is in effect, ICC is not precluded from engaging in other activities.
Prior to consummation of the Transfer Agreement, ICC was engaged in the business of designing, manufacturing and marketing desiccant cooling systems for climate control for commercial buildings. The Partnership has and the Company expects the Partnership to continue to conduct such business and to market its products to such potential users.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS AND GOING CONCERN CONSIDERATIONS: -- (CONTINUED)
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Revenues and the Company's share of results of operations of Engelhard/ICC have been insufficient to cover costs of operations for the nine months ended September 30, 1995. The Company has incurred cumulative losses since inception of $31,379,232 through September 30, 1995. In order to continue operations, the Company has had to raise additional capital to offset cash consumed in operations and support of the Partnership. Until the Partnership generates positive cash flows from operations, it will be primarily dependent upon its partners to provide any required working capital. The Company's continuation as a going concern is dependent on its ability to: (i) generate sufficient cash flows to meet its obligations on a timely basis; (ii) obtain additional financing as may be required; and (iii) ultimately attain profitable operations and positive cash flows from operations and its investment in the Partnership. The accompanying financial statements do not include any adjustments that may result from the Company's inability to continue as a going concern.
Management intends to raise additional capital as required to continue operations and to support the Partnership; however, there can be no assurance that the Company will be able to raise additional capital. See Note 4, Stock Transactions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT IN ENGELHARD/ICC PARTNERSHIP:
The following are the summarized unaudited financial results of the Partnership:
The Company's investment in the Partnership is owned by its wholly-owned subsidiary, I-Partner, whose principal asset is the Partnership investment. The investment in the Partnership is accounted for under the equity method of accounting. On February 7, 1994, date of formation, the Company's investment in the Partnership was approximately $0. The investment remained at $0 through September 30, 1994 because the Company had no obligation to provide additional financial support to the Partnership. In December 1994, each general partner provided additional financing in the amount of $4,000,000 to the Partnership ('General Partners' Bridge Loan') in connection with the acquisition of the real property and substantially all other assets of an existing manufacturing facility located in Miami, Florida. The General Partners' Bridge Loan resulted in the Company increasing its investment in the Partnership as well as recording its proportionate share of previously unrecognized accumulated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT IN ENGELHARD/ICC PARTNERSHIP: -- (CONTINUED) losses at that time. In May 1995, $1,500,000 of the bridge loan was repaid to each general partner. The remaining $2,500,000 for each general partner was converted into an investment in the Partnership.
In April 1995, the Partnership obtained financing from the issuance of $8,500,000 of industrial development revenue bonds. The proceeds of these bonds were used to repay $3,000,000 of the General Partners' Bridge Loan, $1,500,000 to each general partner, and provide for improvements and capital equipment at the Miami facility. As of September 30, 1995, $1,060,865 of proceeds were held in escrow and will be released upon the Partnership's incurring qualified expenditures.
In May 1995, the Company guaranteed 50% of the Partnership's indebtedness associated with the industrial development revenue bonds. The Company has established an irrevocable letter of credit for $2,500,000 to support its portion of the guarantee. The Company's letter of credit is collateralized by a certificate of deposit in the amount of $2,500,000.
The general partners are guarantors of the Partnership's long-term debt which totals approximately, $8,700,000 as of September 30, 1995.
Subsequent to September 30, 1995, each general partner contributed an additional $2,000,000 to the Partnership.
The Company's proportionate share of losses in the Partnership are $1,320,262 and $3,393,750 for the three and nine months ended September 30, 1995. The Partnership has incurred cumulative losses of approximately $12,400,000 since inception. The Company's share of the cumulative losses have resulted in recognition of losses in excess of the Company's investment in and advances to the Partnership of $2,904,809, which has been reflected as a liability in the September 30, 1995 balance sheet.
Receivables from the Partnership were $157,543 at September 30, 1995. Interest income earned by the Company in connection with the General Partners' Bridge Loan amounted to approximately $164,000 for the nine months ended September 30, 1995. The Partnership charged the Company approximately $24,000 and $64,000 for the three and nine months ended September 30, 1995, respectively, for various administrative office support services which were provided.
On March 31, 1995, pursuant to a private placement, the Company issued 300,000 shares of Common Stock for gross proceeds of $3,300,000. At closing, cash of $1,100,000 was received along with a $2,200,000 promissory note. In August 1995, the promissory note was paid. The Company issued warrants to purchase 375,000 shares of Common Stock at $9 per share to the placement agents in connection with the private placement.
The Company received proceeds of approximately $932,000 from the exercise of stock options to purchase approximately 476,000 shares of Common Stock granted under its option plans for the three months ended September 30, 1995. The Company received proceeds of approximately $1,683,000 from the exercise of options to purchase approximately 794,000 shares of Common Stock granted under its option plans for the nine months ended September 30, 1995.
The Company received proceeds of approximately $946,000 from the exercise of warrants to purchase approximately 265,000 shares of Common Stock for the nine month period ended September 30, 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. STOCK TRANSACTIONS: -- (CONTINUED)
The shares of Series G and H Convertible Preferred Stock may be converted into Common Stock at the demand of the holder of such shares. The conversion rates are 8170.56 shares of Common Stock for each Series G share and 500 shares of Common Stock for each Series H share.
In April 1995, the Series F Preferred Stock and Series G Convertible Preferred Stock began to accrue a cash dividend at a rate equal to 15% of their respective accrued liquidation preference. Cumulative undeclared and unpaid dividends as of September 30, 1995 for the Preferred Stock amounted to approximately $908,000. The Company may pay the redemption of Series F Preferred Stock in shares of Common Stock. In August 1995, the 6,750 shares of Series F Preferred Stock were redeemed by the issuance of 925,000 shares of Common Stock.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 establishes a fair value based method of accounting for stock-based compensation plans. It encourages entities to adopt that method in place of the intrinsic value method currently in place under the provisions of Opinion No. 25 of the Accounting Principles Board (APB). Under the fair value method of accounting, all arrangements under which employees receive shares of stock or other equity instruments or under which employers incur liabilities to employees in amounts based on the price of its stock result in the measurement of compensation cost at the grant date of the award which is recognized over the service period, usually the vesting period. Under the intrinsic value method, compensation cost is measured by the excess of the quoted market price of the stock, if any, over the amount the employee must pay to acquire the stock. For example, granting immediately exercisable stock options to an employee at an exercise price equal to the quoted market price of the stock results in the recognition of compensation expense at the date of grant under the fair value method of SFAS No. 123; under the intrinsic value method of APB No. 25, no compensation expense is recognized. However, SFAS No. 123 allows the Company to elect to continue its current method of accounting under APB No. 25 for employee stock-based compensation arrangements. The Company expects to continue its current method of accounting under APB No. 25 for employee stock-based compensation arrangements. If the Company continues its current method of accounting, pro forma disclosures of net income and earnings per share must be disclosed, as if the Company had adopted the recognition provisions of SFAS No. 123.
Although the Company is permitted to continue accounting for employee stock-based compensation arrangements under APB No. 25, SFAS No. 123 requires the Company to utilize the fair value method of accounting for transactions involving stock options or other equity instruments issued to nonemployees as consideration for goods or services. Presently, those transactions are accounted for by the Company under the intrinsic value principles of APB No. 25. The use of intrinsic value versus fair value did not have a material effect on any period presented.
The accounting and disclosure requirements of SFAS No. 123 are effective for the Company in 1996. The Company has not yet determined the impact of SFAS No. 123.
To The Stockholders of ICC Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of ICC Technologies, Inc. as of December 31, 1994 and 1993 and the related consolidated statements of operations, changes in stockholders' equity 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 consolidated financial position of ICC Technologies, Inc. as of December 31, 1994 and 1993 and the consolidated 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.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company incurred losses accumulating to $27,222,346 through December 31, 1994. This factor, among others, raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND GOING CONCERN CONSIDERATIONS:
ICC Technologies, Inc. (the 'Company' or 'ICC') is a Delaware corporation. On February 7, 1994, the Company and Engelhard Corporation, through their respective subsidiaries, formed a Pennsylvania General Partnership named 'Engelhard/ICC' (the 'Partnership'). In exchange for a 50% interest in the Partnership, the Company transferred to the Partnership substantially all of its assets, with the exception of cash and certain other assets not related to the desiccant air conditioning business, subject to certain liabilities; Engelhard Corporation, in exchange for a 50% interest in the Partnership, (a) contributed to the Partnership approximately $8,600,000, (b) entered into a Supply Agreement pursuant to which it agreed to supply desiccants to the Partnership, (c) entered into a Technology License Agreement pursuant to which Engelhard Corporation and the Partnership licensed to each other certain technology rights, and (d) agreed to provide credit support to the Partnership in the amount of $3,000,000. In addition, Engelhard Corporation extinguished a $900,000 obligation due to it by the Company.
The Partnership was formed on February 7, 1994 to engage in the business of designing, manufacturing and marketing climate control systems to supplement or replace conventional air conditioning systems ('Partnership Business'). The desiccant air conditioning business conducted by the Company prior to the formation of the Partnership is now being conducted by the Partnership. As a result, the Company has become principally a holding company, owning a 50% interest in the Partnership. Although the Company is not permitted to engage directly or indirectly in any activities which would conflict with the Partnership Business as long as the Partnership is in effect, the Company is not precluded from engaging in other activities. The Company will continue to sell its remaining cogeneration inventory. Although the Company is exploring the possibility of pursuing other ventures, to date it has not entered into any agreements or commitments to engage in any other activities.
Prior to the formation of the Partnership, the Company was engaged, in the business of designing, manufacturing and marketing environmentally beneficial and energy efficient, desiccant cooling systems for climate control for commercial buildings. The Company's desiccant cooling products were marketed to chain operators of supermarkets, department stores, and to manufacturers, schools, healthcare facilities, federal, state and local governments, and to users of other types of air conditioning and dehumidification products. The Company expects the Partnership to continue such business and to market its products to such potential users.
The Company believes that the desiccant cooling system it has developed and which the Partnership is now further developing, is an innovative and energy efficient technology for providing cooling and heating for commercial facilities which, in its natural gas version, does not employ the chemicals used in conventional air conditioning that cause damage to the stratospheric ozone layer and contribute to global warming.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Revenues have been insufficient to cover costs of operations. The Company has incurred cumulative losses since inception of $27,222,346 and a net loss during 1994 of $4,391,082. In order to continue operations, the Company has had to raise additional capital to offset cash consumed in operating and investing activities. The Company's continuation as a going concern is dependent on its ability to: (i) generate sufficient cash flows to meet its obligations on a timely basis, (ii) obtain additional financing as may be required, and (iii) ultimately attain profitable operations
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. BUSINESS AND GOING CONCERN CONSIDERATIONS: -- (CONTINUED)
from operations and its investment in the Partnership. The accompanying financial statements do not include any adjustments that may result from the Company's inability to continue as a going concern.
In response to the aforementioned conditions, the Company has transferred the net assets of the desiccant air conditioning line of business to the Engelhard/ICC Partnership. Although ICC is not obligated to contribute additional capital to the Partnership, in 1994, it loaned to the Partnership $4,000,000 for the purchase of certain assets and has guaranteed certain obligations of the Partnership. ICC may be requested by Engelhard to provide additional financial support to the Partnership as a condition for Engelhard to provide additional financial support to the Partnership. Until the Partnership generates sufficient cash flows from operations, it will be primarily dependent upon the partners to provide any required working capital. Capital of approximately $8,600,000 to the Partnership has been contributed by Engelhard Corporation which is also obligated to provide a $3,000,000 line of credit to the Partnership. In 1994, Engelhard also loaned $4,000,000 to the Partnership for the purchase of certain assets. Because ICC is a 50% partner, ICC will record its proportionate share of future losses of the Partnership under the equity method of accounting to the extent of any remaining balance of positive investment in and advance to the Partnership or commitment to provide funds to the Partnership in the future.
Management intends to raise additional capital as required to continue operations and to pursue other business activities; however, there can be no assurance that the Company will be able to raise additional capital as required to continue operations or to pursue other activities.
On February 7, 1994 ICC and Engelhard, through their respective subsidiaries, formed a Pennsylvania general partnership named Engelhard/ICC (the 'Partnership'). In exchange for a 50% interest in the Partnership, ICC transferred to the Partnership, through ICC's wholly-owned subsidiary, substantially all of its assets, with the exception of cash and certain other assets not related to the desiccant air conditioning business, subject to certain liabilities. The assets and liabilities were transferred by the Company at historical cost with no gain or loss being recorded by the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. THE PARTNERSHIP: -- (CONTINUED)
Summarized results of operations and balance sheet information of the Partnership as of December 31, 1994 and for the period from formation (February 7, 1994) through December 31, 1994, are as follows:
In December 1994, the Partnership acquired for $8 million in cash, the real property and substantially all other manufacturing assets of an existing manufacturing facility located in Miami, Florida from Ciba-Geigy Corporation ('Ciba'), which currently produces the small cell, honeycomb substrate used to manufacture the desiccant and heat exchange rotors that are an integral part of the Partnership's products. The former Ciba plant produced primarily large cell substrate which the Partnership is prohibited to produce or sell other than to Ciba. The Partnership also acquired, as part of the transaction, an exclusive technology license to use Ciba's proprietary process which is necessary to manufacture such small cell, honeycomb structures. The Company's and the Partnership's management believe that the acquisition gives the Partnership complete control of the critical technologies and manufacturing processes for its current products as well as those in the foreseeable future. Assets acquired consisted of approximately $6.9 million of plant, property and equipment and $1.1 million of intangibles.
To finance the acquisition, the Company and Engelhard each lent to the Partnership $4,000,000. The loans, which are evidenced by promissory notes, mature on December 31, 1995 and bear interest payable monthly at the Prime Rate plus 1%. A portion of the principal amount of each of the loans is intended to be repaid by the Partnership prior to the maturity date upon the receipt of replacement financing which the Partnership is currently seeking and the remainder would be repaid from funds from operations to the extent such funds were available. The Partnership is in the process of obtaining third party replacement financing. There is no assurance that the Partnership will be able to obtain replacement financing prior to the maturity date or that such replacement financing will be sufficient to repay the loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. THE PARTNERSHIP: -- (CONTINUED)
In connection with the formation of the Partnership, the Company granted to Engelhard an option to acquire 100% of the Company's interest in the Partnership at the rate of 25% of such interest per year starting in 1998, at a price equal to 95% of the fair market value of the Partnership as determined by an investment banking firm selected by the Company and Engelhard. The Partnership Agreement provides that under certain circumstances, such option can be accelerated. There can be no assurances that Engelhard will or will not exercise its option to purchase the Company's interest in the Partnership.
The Company's investment in the Partnership is owned by a subsidiary, ICC Desiccant Technologies Inc., whose principal asset is the Partnership investment. The investment in the Partnership is accounted for under the equity method of accounting. In December 1994, the general partners each loaned $4,000,000 to the Partnership. The Company's proportionate share of losses in the Partnership is $2,812,423, which has been recognized and offset against the Company's investment in net assets and loans to Engelhard/ICC as of December 31, 1994.
Receivables from the Partnership were $124,095 at December 31, 1994. Interest income earned from the Partnership amounted to approximately $32,000 in 1994. The Company received $250,000 in connection with the formation of the Partnership for reimbursement of certain expenses incurred in connection with the Joint Development Program efforts which preceded the formation of the Partnership. The Partnership provided approximately $91,000 in various administrative office support services to the Company. The general partners are guarantors of the long-term debt of $175,044.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for the purpose of determining cash flows.
Inventories are valued at the lower of cost (using specific identification) or market.
Property and equipment are stated at cost. Costs of major additions and improvements are capitalized and replacements, maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of the property and equipment and the related accumulated depreciation are removed from the respective accounts, and any resulting gains or losses are reflected in operations.
Depreciation is computed using the straight-line method over the estimated useful lives of three to seven years.
In 1993, the Company implemented Statement of Financial Accounting Standards (SFAS) No. 109, 'Accounting for Income Taxes.' SFAS No. 109 requires that deferred income taxes be computed using the asset and liability method rather than the deferred method previously in effect. Adoption of SFAS No. 109 did not have a material effect on the Company's financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Revenues are recognized when equipment is shipped for equipment sales contracts, when equipment is installed and operating for installation contracts, and when the electric and thermal energy is used by the customer for energy sales contracts. Energy and maintenance service revenue is recognized when services provided are complete. Energy and maintenance service revenues totaled $0, $97,101 and $177,023, for 1994, 1993 and 1992, respectively. Energy and maintenance service cost of goods sold totaled $12,750, $263,833 and $247,363, for 1994, 1993 and 1992, respectively.
Development costs are expensed as incurred. Development costs amounted to approximately $24,000, $1,000,000 and $365,000 in 1994 ,1993, and 1992, respectively.
Net Loss Per Common Share
The net loss per common share is based on the weighted average number of shares of Common Stock outstanding during each year. Stock options, warrants and convertible preferred stock have not been included, since they are antidilutive. Cumulative dividends on the Series H Convertible Preferred Stock, the Series I Preferred Stock, and the Series J Preferred Stock amounting to $227,750, $261,500 and $241,938 for the periods ended December 31, 1994, 1993 and 1992, respectively (see note 9), have been added to the net loss for determining the net loss applicable to common stockholders in computing the net loss per common share for the years ended December 31, 1994 and 1993. The computations of fully diluted loss per share for the years ended December 31, 1994, 1993, and 1992 were antidilutive; therefore, the amounts reported herein for primary and fully diluted loss per share are the same.
The Company invests its cash primarily in deposits with major banks. Ongoing credit evaluations of customers' financial condition are performed and generally no collateral is required. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's expectations.
4. SUPPLEMENTAL CASH FLOWS AND EQUITY DISCLOSURE:
Cash paid during the year for interest was $35,628, $1,415 and $2,169, in 1994, 1993, and 1992, respectively.
Included in the Statement of Cash Flows for 1994 were cash proceeds of $3,488,920 from the issuance of 1,100,000 shares of Common Stock. Also included were cash proceeds of $1,650,031 from the issuance of 919,354 shares of Common Stock upon exercise of stock options and warrants. Excluded from the Statement of Cash Flows in 1994 were the effects of certain non-cash financing transactions related to the conversion of 600 shares of Series G Convertible Preferred Stock into 300,000 shares of Common Stock. Also the Company transferred to the Partnership, upon formation, approximately $60,000 of net liabilities which consisted of approximately: $240,000 in receivables; $490,000 of inventory; $290,000 of property and equipment; $180,000 in other assets; $360,000 in accounts payable and accrued liabilities and $900,000 of notes payable to Engelhard.
Included in the Statement of Cash Flows for 1993 were cash proceeds of $4,643,208 from the issuance of 3,144,598 shares of Common Stock. Excluded from the Statement of Cash Flows in 1993 were the effects of certain non-cash financing transactions related to: the issuance of 4,000 shares of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUPPLEMENTAL CASH FLOWS AND EQUITY DISCLOSURE: -- (CONTINUED)
the Company's Common Stock in settlement of approximately $43,000 of accounts payable to an equipment vendor; the issuance of 100,000 shares of Common Stock to an equipment vendor in settlement of approximately $388,000 of accounts payable and the establishment of a prepaid equipment account of approximately $45,000; the issuance of 7,140 shares of Common Stock to a vendor in settlement of approximately $35,000 of accounts payable; the issuance of 10,000 shares of Common Stock with a fair market value of $30,000 to a former officer and recorded as severance expense; the issuance of incentive stock options to purchase 33,300 shares of Common Stock upon exercise of incentive stock options by an employee borrowing $60,150 from the Company which was repaid in installments through March 1994; the issuance of 408,528 shares of common stock upon the conversion of 50 shares of Series G Convertible Preferred Stock. Also, an employee receivable of approximately $5,000 was offset against the deferred salaries account included in accrued liabilities.
Included in the Statement of Cash Flows for 1992 were cash proceeds of $550,805 from the sale of 373,472 shares of Common Stock. Also included were cash proceeds of $725,000 from the sale of 500 shares of Series I Preferred Stock and 225 shares of Series J Preferred Stock. Excluded from the Statement of Cash Flows in 1992 were the effects of certain non-cash financing transactions related to: the issuance of 18,000 shares of Common Stock upon the conversion of accounts payable of a related party for legal services of approximately $171,000; the issuance of 12,000 shares of Common Stock to an equipment vendor in settlement of approximately $60,000 of accounts payable; and the issuance of 2,300 shares of Common Stock upon the exercise of options for approximately $2,900, the exercise price for which was forgiven and charged to bonus expense. Also, a $15,000 note was issued to a former officer and director in exchange for approximately $8,200 in deferred salary and approximately $6,800 in severance costs.
Purchased parts at December 31, 1994 consist only of cogeneration equipment and related parts that have been recorded at their net realizable value. Purchased parts at December 31, 1993 consist primarily of desiccant dehumidification equipment and related components to be used in the manufacture of the Company's products. Work-in-process represents the costs (including acquisition and installation costs) of the Company's products and system installations currently in progress which are to be completed in the next year. If a loss is indicated on an installation, a provision is made currently for that loss. At December 31, 1994 and 1993, the Company's inventory balance of $16,960 and $533,008, respectively, is net of a reserve for obsolete inventory of approximately $430,000 and $383,000, respectively. For the years ended 1994, 1993, and 1992, the Company made provisions of approximately $95,000, $48,000, and $69,000 respectively, for inventory obsolescence. The increase in inventory obsolescence reserve was included in engineering and development expense in the accompanying Consolidated Statement of Operations. The Company disposed of inventory which was charged directly to engineering and development of approximately $52,000, and $87,000 in 1993, and 1992, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment, net, comprise the following:
The Company retired $79,847 and $139,030 of equipment in the years ended December 31, 1993 and 1992, resulting in a (gain) or loss on retirement of $(225) and $87,683, respectively.
Property and equipment included fully depreciated assets of approximately $66,106 and $145,000 as of December 31, 1994 and 1993, respectively.
Accrued expenses comprise the following:
8. LONG-TERM DEBT AND NOTES PAYABLE TO STOCKHOLDERS:
Long-term debt and notes payable to stockholders comprise the following:
The future minimum payments for the Company consist of the note payable to stockholder of $150,000 due in 1996.
Upon entering into the Joint Venture Asset Transfer Agreement, Engelhard loaned the Company $500,000, which loan was evidenced by a promissory note, dated September 8, 1993. The loan to the Company, together with $500,000 of the Company's own funds, was to be used solely for (i) funding operations of the Company related to its desiccant air conditioning business and (ii) to reimburse Engelhard for all costs, charges and expenses incurred by Engelhard for work conducted by it in accordance with the Joint Development Agreement. No interest was payable on the principal amount of the promissory note.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT AND NOTES PAYABLE TO STOCKHOLDERS: -- (CONTINUED)
In January 1994, Engelhard loaned to the Company an additional $400,000, evidenced by a promissory note dated January 15, 1994. The note has the same terms and conditions as the September 8, 1993 promissory note. On February 7, 1994, pursuant to the Joint Venture Asset Transfer Agreement, the net assets of the Company's desiccant line of business were transferred to the Partnership and the Partnership assumed the indebtedness evidenced by the $500,000 Engelhard loan and the $400,000 Engelhard loan and such indebtedness was converted by Engelhard into a capital contribution of the Partnership.
Two directors of the Company provided working capital demand loans amounting to a total of $60,000 in December 1992. The loans were repaid in April 1993.
Warburg Pincus Capital Company L.P. (WPCC) and RIT Capital Partners plc (RIT) provided working capital loans of $450,000 each prior to 1991 at the prime interest rate plus 2 percent. The prime interest rate as of December 31, 1994, 1993, and 1992, was 8.5%, 6.0%, and 6.0%, respectively. During 1991, WPCC and RIT purchased 300 shares each of Series H Convertible Preferred Stock. The Stock was purchased through the exchange of $600,000 in debt plus accrued interest of approximately $138,000. The remaining loans totalling $300,000 were scheduled to mature in April 1996. On February 4, 1994, the Company paid the Warburg Pincus $150,000 loan plus accrued interest of $35,628.
At December 31, 1994, the Company was not in compliance with a reporting covenant contained in the debt agreement which stated that RIT would receive audited financial statements by February 28 of each year. RIT waived compliance with the covenant through January 1, 1996. The most restrictive covenant of this debt agreement provides that the Company will not pay or declare any dividends until such time as the principal and interest have been paid in full.
Interest expense on all stockholder loans were $14,611, $24,000, and $24,751 in 1994, 1993, and 1992, respectively.
In June 1994, the Company sold 1,100,000 shares of common stock at a purchase price of $3.56 per share for aggregate cash proceeds of $3,916,000, and two directors each sold 150,000 shares, at a purchase price of $3.56 for aggregate cash proceeds to each of $534,000. Pursuant to an agreement between the Company and the two directors, the Company agreed to pay all commissions and expenses incurred in connection with the offering. Accordingly, the net proceeds to the Company, after payment of such commissions and expenses, were $3,488,920. In connection with the offering, the Company issued to an individual, who subsequently became a director, for financial advisory services, warrants for the purchase of 215,000 shares of common stock. Those warrants have an exercise price of $3.25 - $4.75 per share and expire in 1999.
In July 1993, the Company registered under the Securities Act of 1933 up to 1,060,000 shares of common stock of which 950,000 shares were to be issued upon the exercise of outstanding warrants and 110,000 shares were to be issued in exchange for certain obligations: 100,000 shares to an equipment vendor in settlement of approximately $388,000 in accounts payable and 10,000 shares to a former officer of the Company as severance pay. As of December 31, 1993, the Company had received $2,087,500 in cash for 950,000 shares of Common Stock purchased upon the exercise of outstanding warrants. Expenses for this offering for legal, accounting, and printing costs amounted to approximately $112,000. This amount was offset against proceeds, reducing net proceeds from the offering to approximately $1,976,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK TRANSACTIONS: -- (CONTINUED)
The Company received $1,543,009 in cash for 732,354 shares of Common Stock upon the exercise of incentive and nonqualified stock options for the year ended December 31, 1994. Also, the Company received during 1994 net proceeds of $286,222 from the exercise of warrants to acquire 187,000 shares of Common Stock granted to placement agents in connection with the February and March 1993, private placements, referred to below.
In March and April 1993, pursuant to a private placement commenced on March 30, 1993, the Company sold 374,000 shares of Common Stock for gross proceeds of approximately $561,000 and net proceeds, after payment of commissions and expenses of the offering, of approximately $459,000.
In March 1993, pursuant to a private placement commenced in February 1993, the Company sold 1,496,000 shares of Common Stock for gross proceeds of $2,244,000 and net proceeds, after payment of commissions and expenses of the offering, of approximately $1,903,000.
In June 1992, the Company sold to an investor group led by the Chairman of the Board, who is also a stockholder, for $225,000, 225 shares of Series J Preferred Stock. The Series J Preferred Stock bears a 10% dividend which will accrue, but not be payable until declared by the Board of Directors of the Company. The investors also received options to purchase 128,574 shares of Common Stock at $1.75 per share, exercisable for a period of four years beginning June 3, 1993. The Series J Preferred Stock dividend in 1994 was $22,500 and had accumulated to a total of $57,938 at December 31, 1994, all of which has accrued but is not payable until declared.
Also in June 1992, two private investors purchased 228,572 shares of Common Stock for $400,000.
In March 1992, the Company sold to an investor group led by the Chairman of the Board, who is also a stockholder, for $500,000, 500 shares of Series I Preferred Stock. The Series I Preferred Stock bears a 10% dividend which will accrue, but not be payable until declared by the Board of Directors of the Company. The investors also received options to purchase 400,000 shares of Common Stock at $2.25 per share, exercisable for a period of four years beginning March 12, 1993. The Series I Preferred Stock dividend in 1994 was $50,000 and had accumulated to a total of $140,000 at December 31, 1994, all of which has accrued but is not payable until declared.
The Company's Series H Convertible Preferred Stock bears a 9% dividend which will accrue, but not be payable until declared by the Board of Directors of the Company. The Series H Convertible Preferred Stock dividend in 1994 was $155,250 and had accumulated to a total of $659,250 all of which has accrued but is not payable until declared.
The Company's Series G and H Preferred Stock, which have voting rights, are convertible into 2,859,696 and 750,000 shares of Common Stock, respectively.
Conversion of Debt to Equity and Issuance of Equity for Assets or Services
During 1993 and 1992, the Company issued Common Stock to settle various liabilities and to acquire various assets or services (see note 4).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCKS OPTIONS AND WARRANTS:
The Company provides an incentive and a nonqualified stock option plan for directors, officers, and key employees of the Company and others. Under these plans, options may be granted for the purchase of up to 6,850,000 shares of Common Stock. The number of options to be granted and the option prices are determined by the Stock Option Committee of the Board of Directors in accordance with the terms of the plans. Under the terms of the Incentive Stock Option Plan, the option price cannot be less than 100% of the fair market value of the Common Stock on the date of the grant. Incentive stock options are exercisable based on a vesting schedule from the grant date. Under the Nonqualified Stock Option Plan, the option price as determined by the Stock Option Committee may be greater or less than the fair market value of the Common Stock as of the date of the grant, and the options are generally exercisable for three to five years subsequent to the grant date. At December 31, 1994, the Company had 1,750,000 and 5,100,000 shares of Common Stock reserved for the Company's Incentive Stock Option Plan and Nonqualified Stock Option Plan, respectively.
The Company also authorized in 1994 the Equity Plan For Directors. The Equity Plan For Directors is a formula based stock option plan that is dependent upon the performance of the market price of the Common Stock. Under the Equity Plan For Directors, options may be granted for the purchase of up to 500,000 shares of Common Stock to outside directors. Under the terms of the Equity Plan For Directors, the option price cannot be less than 100% of the fair market value of the Common Stock on the date of the grant.
In 1993, three employees, including an officer of the Company, exercised options to purchase 54,600 shares of common stock. The employees borrowed the amount of the exercise price of $82,850 from the Company. At December 31, 1993, $60,150 was outstanding and was included in receivables -- employees. The outstanding amount was repaid in installments through March 14, 1994. Compensation expense of $142,969 was recorded on these transactions in 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCKS OPTIONS AND WARRANTS: -- (CONTINUED) Information with respect to stock options is summarized as follows:
In connection with the settlement of a claim, warrants to purchase 40,000 shares of Common Stock were issued as described in Note 12. In addition to the warrants and Convertible Preferred Stock issued in connection with the transactions described in Note 9, the Company had the following warrants to purchase shares of common Stock outstanding at December 31, 1994, 1993, and 1992, respectively:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 401(K) PROFIT SHARING PLAN:
All full-time employees of the Company and those part-time employees of the Company who complete at least 1,000 hours of service in a given year are eligible to participate in the Company's 401(k) Profit Sharing Plan ('the Plan'). Under the Plan, an employee may elect to contribute on a pre-tax basis to a retirement account from 1% to 20% of the employee's compensation up to the maximum annual contributions permitted by the Internal Revenue Code. Each employee is fully vested at all times with respect to his or her contributions. Within certain limits prescribed by the Plan and applicable law, the Board of Directors may authorize matching contributions and discretionary employer contributions to the Plan. Discretionary employer contributions are allocated, subject to certain limitations, pro-rata to eligible employees who have completed at least 1,000 hours of service for a given year based on their compensation. The Company did not make any matching or discretionary contributions during the years ended December 31, 1994, 1993 or 1992.
The Company does not provide any post-retirement medical benefits.
Net rental expense under operating leases was $20,833, $145,819 and $104,868 for the years ended December 31, 1994, 1993 and 1992, respectively. The Company assigned all of its leases to the Partnership upon its formation and the Partnership assumed the lease obligations.
At December 31, 1994, the Company had an employment contract with one officer. The terms of the contract, which were modified in February, 1994, provide for total annual compensation of $50,000, plus certain other benefits, through December 31, 1996.
In 1994, the Company settled certain litigation brought against it pursuant to which the Company granted a warrant to purchase 40,000 shares of its Common Stock at $2.25 per share.
Employee accounts receivable amounted to $28,667, $90,095 and $9,729, at December 31, 1994, 1993, and 1992, respectively. In December 1993, $59,150 was due from an officer related to the exercise price of stock options. The amount was collected in full in March 1994. In April 1993, the Company loaned $70,000 to its Chairman of the Board, a major stockholder of the Company, pursuant to the terms of a promissory note, which provides that such amount is due and payable on demand together with interest at the rate of 10%. As of December 31, 1994, the balance remaining on the Note was $28,667 plus accrued interest.
14. CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES:
Effective January 1, 1993, the Company adopted SFAS No. 109 'Accounting for Income Taxes.' Primarily due to the Company's history of losses, adoption of SFAS No. 109 did not have any significant effect on its results of operations or financial position. SFAS No. 109 requires the use of the liability method in accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance has been provided on the net deferred tax assets due to the uncertainty of realization. The adoption of SFAS No. 109 was not material to the Company. Prior
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. CHANGE IN METHOD OF ACCOUNTING FOR INCOME TAXES: -- (CONTINUED)
the adoption of SFAS No. 109 the Company utilized the deferred method of accounting for income taxes.
Temporary differences and carryforwards which give rise to deferred tax assets at December 31, 1994 and 1993 are as follows:
The Company has incurred losses since inception. At December 31, 1994, the Company had net operating loss carryforwards of approximately $25 million, which begin to expire in 1999. The availability and use of losses against future taxable income, if any, may be limited by Internal Revenue Code Section 382 as a result of certain changes in ownership that have occurred.
Selected operating statement information for each of the three years in the period ended December 31, 1994 is as follows:
For the years ended December 31, 1994, 1993 and 1992, the Company's reserve for doubtful accounts was approximately $19,000, $35,000 and $20,000, respectively. During 1994, 1993 and 1992, the provision for doubtful accounts was increased by approximately $16,000, $18,000 and $10,000, respectively, which was included in the general and administrative expense in the accompanying Consolidated Statements of Operations. In 1993, accounts receivable deemed uncollectible and charged to the reserve for doubtful accounts amounted to approximately $3,000. In connection with the formation of the Partnership in 1994, $32,000 of the reserve for doubtful accounts was transferred to the Partnership along with the related receivables.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying notes are an integral part of the financial statements.
The accompanying unaudited consolidated financial statements 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. For further information, refer to the Financial Statements and Footnotes thereto for the period February 7, 1994 (date of formation) to December 31, 1994, included elsewhere herein. Results of operations for the three and nine months ended September 30 are not necessarily indicative of results of operations expected for the full year.
Engelhard/ICC (the 'Partnership') is a Pennsylvania general partnership. The Partnership is engaged in the business of designing, manufacturing and marketing climate control systems to supplement or replace conventional air conditioning systems. On February 7, 1994, ICC Technologies, Inc. ('ICC') and Engelhard Corporation ('Engelhard'), through their respective subsidiaries (the 'general partners'), formed the Partnership. The desiccant air conditioning business conducted by ICC prior to the formation of the Partnership is now being conducted by the Partnership.
The general partners both have an equal 50% interest in the Partnership. In exchange for its 50% interest in the Partnership, ICC transferred to the Partnership substantially all of its assets, with the exception of cash and certain other assets not related to the desiccant air conditioning business, subject to certain liabilities; Engelhard, in exchange for a 50% interest in the Partnership, (a) contributed to the Partnership approximately $8,600,000 in cash, (b) entered into a Supply Agreement pursuant to which it agreed to supply desiccants to the Partnership, (c) entered into a Technology License Agreement pursuant to which Engelhard and the Partnership licensed to each other certain technology rights, and (d) agreed to provide credit support to the Partnership in the amount of $3,000,000.
ICC transferred to the Partnership, upon formation, approximately $60,000 of net liabilities which consisted of approximately: $240,000 in receivables; $490,000 of inventory; $290,000 of property and equipment; $180,000 in other assets; $360,000 in accounts payable and accrued liabilities; and $900,000 notes payable to Engelhard. The amounts transferred were recorded at ICC's historical cost basis.
The accompanying financial statements have been prepared assuming the Partnership will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Until the Partnership generates sufficient cash flows from operations, it will be primarily dependent upon its partners to provide any required working capital. Revenues have been insufficient to cover costs of operations for the Partnership. The Partnership's continuation as a going concern is dependent on its ability to: (i) generate sufficient cash flows to meet its obligations on a timely basis; (ii) obtain additional financing as may be required; and (iii) ultimately attain profitable operations and positive cash flows from operations.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership obtained third party financing through the issuance of bonds in April 1995 (see note 7). Additional financial support continues to be supplied to the Partnership by the Partners until the Partnership attains sufficient positive cash flows; however, there can be no assurance that the Partnership will be able to obtain the sufficient cash flows. The financial statements do not include any adjustments should the Partnership be unable to continue as a going concern.
The Partnership fabricates large cell honeycomb substrate materials at its Miami facility under a Manufacturing and Supply Agreement with Ciba-Geigy Corporation ('Ciba'). Ciba provides the raw materials to be fabricated into large cell honeycomb substrate and retains title to the raw materials, work-in-process and finished goods. The partnership receives processing fees for fabricating the raw materials into large cell honeycomb substrate. Processing fees are recognized in revenues in the period the fabricated substrate material is shipped.
Inventories are carried at lower of cost (first in, first out) or market. Market for raw materials is based in replacement costs and for finished goods and work-in-process at net realizable value. Inventory of $120,000 was written off against the inventory allowance for the nine months ended September 30, 1995.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, net, consist of the following:
Other assets consist of the following:
On December 1, 1994, the Partnership acquired for $8 million in cash, real property and substantially all other manufacturing assets of an existing manufacturing facility located in Miami, Florida from Ciba which currently produces the small cell, honeycomb substrate used to manufacture the desiccant and heat exchange rotors that are an integral part of the Partnership's products. The former Ciba plant produced primarily large cell substrate which the Partnership is prohibited to produce or sell to parties other than Ciba. The Partnership also acquired, as part of the transaction, an exclusive technology license to use Ciba's proprietary process which is necessary to manufacture such small cell, honeycomb structures. Assets acquired consisted of approximately $6.9 million of property, plant and equipment and $1.1 million of intangibles. To finance the acquisition, the general partners each lent to the Partnership $4,000,000 ('General Partners' Loan'). In April 1995, the Partnership obtained financing from the issuance of $8,500,000 of industrial development revenue bonds (see note 8). The proceeds of these bonds were used to repay $3,000,000 of the General Partners' Loan, $1,500,000 to each general partner and provide for improvements and capital equipment at the Miami facility (see note 9).
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following:
In connection with the issuance of the industrial revenue bonds (see note 7), cash of $1,060,865 was held in escrow pending the Partnership's incurrence of certain qualified expenditures.
Maturities of long-term debt at September 30, 1995 for the Partnership consist of:
The general partners are guarantors of the long-term debt. The notes payable due April 2000 are collateralized by related purchased property and equipment. In addition, Engelhard is the guarantor on the short-term loan which amounts to $2,750,000 as of September 30, 1995.
In conjunction with the General Partners' Loan of $8,000,000 and issuance of $8,500,000 of industrial development revenue bonds (see note 7), $3,000,000 was repaid to each general partner and the remaining $5,000,000 outstanding balance on the loan was converted into a capital contribution, $2,500,000 for each general partner.
In August 1995, $1,000,000 was contributed by each of the general partners. Subsequent to September 30, 1995, an additional $2,000,000 was contributed by each of the general partners.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership provided approximately $24,000 and $64,000 during the three and nine months ended September 30, 1995, and $19,000 and $67,000 for the three month and year to date periods ended September 30, 1994 in various administrative office support services to ICC. Furthermore, Engelhard provided approximately $147,000 and $285,000 during the three and nine months ended September 30, 1995, and $137,000 and $254,000 during the three month and year to date periods ended September 30, 1994, in various administration services to the Partnership. The Partnership incurred approximately $10,000 and $328,000 for the three and nine months ended September 30, 1995, of interest expense payable to the general partners in connection with the $8,000,000 promissory notes (see note 7).
11. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Excluded from the Statement of Cash Flows for the period ended September 30, 1994, were the effects of assets and liabilities transferred to the Partnership from ICC which consisted of approximately $240,000 in receivables; $490,000 of inventory; $290,000 of property and equipment; $180,000 in other assets; $360,000 in accounts payable and accrued liabilities; and $900,000 notes payable to Engelhard.
Excluded from the Statement of Cash Flows for the nine months ended September 30, 1995 was the conversion of $5,000,000 of General Partners' Loans to Partners' Capital and the write-off of $14,283 of bad debts against the allowance.
To The Partners of Engelhard/ICC:
We have audited the accompanying balance sheet of Engelhard/ICC as of December 31, 1994 and the related statements of operations, changes in partners' capital and cash flows for the period February 7, 1994 (date of formation) to December 31, 1994. These financial statements are the responsibility of the Partnership'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 audit provides 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 Engelhard/ICC as of December 31, 1994 and the results of its operations and its cash flows for the period February 7, 1994 (date of formation) to December 31, 1994 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 1, the Partnership incurred losses of $5,624,845 through December 31, 1994 and the Partnership is primarily dependent upon its partners for financial support. These factors, among others, raise substantial doubt about the Partnership's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The accompanying notes are an integral part of the financial statements.
FOR THE PERIOD FEBRUARY 7, 1994 (DATE OF FORMATION) TO DECEMBER 31, 1994
The accompanying notes are an integral part of the financial statements.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE PERIOD FEBRUARY 7, 1994 (DATE OF FORMATION) TO DECEMBER 31, 1994
The accompanying notes are an integral part of the financial statements.
FOR THE PERIOD FEBRUARY 7, 1994 (DATE OF FORMATION) TO DECEMBER 31, 1994
The accompanying notes are an integral part of the financial statements.
Engelhard/ICC (the 'Partnership') is a Pennsylvania general partnership. The Partnership is engaged in the business of designing, manufacturing and marketing climate control systems to supplement or replace conventional air conditioning systems. On February 7, 1994, ICC Technologies, Inc. ('ICC') and Engelhard Corporation ('Engelhard'), through their respective subsidiaries (the 'general partners'), formed the Partnership. The desiccant air conditioning business conducted by ICC prior to the formation of the Partnership is now being conducted by the Partnership.
The general partners both have an equal 50% interest in the Partnership. In exchange for its 50% interest in the Partnership, ICC transferred to the Partnership substantially all of its assets, with the exception of cash and certain other assets not related to the desiccant air conditioning business, subject to certain liabilities. Engelhard in exchange for a 50% interest in the Partnership: (a) contributed to the Partnership approximately $8,600,000; (b) entered into a Supply Agreement pursuant to which it agreed to supply desiccants to the Partnership; (c) entered into a Technology License Agreement pursuant to which Engelhard and the Partnership licensed to each other certain technology rights; and (d) agreed to provide credit support to the Partnership in the amount of $3,000,000.
ICC transferred to the Partnership, upon formation, approximately $60,000 of net liabilities which consisted of approximately: $240,000 in receivables; $490,000 of inventory; $290,000 of property and equipment; $180,000 in other assets; $360,000 in accounts payables and accrued liabilities; and $900,000 notes payable to Engelhard Corporation. The amounts transferred were recorded at ICC's historical cost basis.
The accompanying financial statements have been prepared assuming the Partnership will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Until the Partnership generates sufficient cash flows from operations, it will be primarily dependent upon the partners to provide any required working capital. Revenues have been insufficient to cover costs of operations for the Partnership. The Partnership's continuation as a going concern is dependent on its ability to: (i) generate sufficient cash flows to meet its obligations on a timely basis; (ii) obtain additional financing as may be required; and (iii) ultimately attain profitable operations and positive cash flows from operations.
The Partnership intends to seek additional financial support from the partners or third parties as needed to continue operations until the Partnership attains positive sufficient cash flows; however, there can be no assurance that the Partnership will be able to obtain the additional financing or sufficient cash flows. The financial statements do not include any adjustments should the Partnership be unable to continue as a going concern.
The financial statements include the accounts of the Partnership for the period from February 7, 1994 (date of formation) to December 31, 1994 (the 'period ended December 31, 1994').
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents for the purpose of determining cash flows.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventories are valued at the lower of cost (first-in, first-out) or market.
Property, plant and equipment are stated at cost. Assets under capital lease are recorded at the present value of the future lease payments. Costs of major additions and improvements are capitalized and replacements, maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to operations as incurred.
When an asset is sold, retired or otherwise disposed of, the cost of the property and equipment and the related accumulated depreciation are removed from the respective accounts, and any resulting gains or losses are reflected in operations.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leased assets under capital leases are amortized over the period of the lease or the service lives of the improvements, whichever is shorter, using the straight-line method.
Purchased intangible assets, consisting primarily of a license agreement acquired in connection with the acquisition of certain assets (see note 6), are amortized over ten years using the straight-line method.
Patents are amortized over their estimated useful lives not exceeding seventeen years.
Partnership income, if any, is taxable to the general partners. Accordingly, no provision for income taxes has been made by the Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenues are recognized when equipment is shipped for equipment sales contracts, and when equipment is installed and operating for installation contracts. Maintenance service revenue is recognized when services provided are complete. Maintenance revenues totaled $55,230 for the period ended December 31, 1994.
Research and development costs are expensed as incurred. Research and development costs amounted to approximately $895,000 for the period ended December 31, 1994. Included in this amount are approximately $320,000 of development costs incurred by Engelhard Corporation on behalf of and paid for by the Partnership.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
The Partnership's warranty on its equipment is for one year from date of shipment. The Partnership records a reserve for the estimated cost of repairing or replacing any faulty equipment covered under the Partnership's warranty.
The Partnership invests its cash primarily in deposits with major banks. The Partnership has sold its equipment and services to end-users in retail industry, primarily in the continental United States. Concentration of credit risk with respect to trade receivables is moderate due to the relatively diverse customer base. Ongoing credit evaluations of customers' financial condition are performed and generally no collateral is required. The Partnership maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's expectations.
Raw materials purchased from Engelhard amounted to approximately $169,000.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, net, consist of the following:
Machinery and equipment purchased through or from Engelhard amount to approximately $122,000.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Other assets consist of the following:
On December 1, 1994, the Partnership acquired for $8 million in cash, real property and substantially all other manufacturing assets of an existing manufacturing facility located in Miami, Florida from Ciba-Geigy Corporation ('Ciba'), which currently produces the small cell, honeycomb substrate used to manufacture the desiccant and heat exchange rotors that are an integral part of the Partnership's products. The former Ciba plant produced primarily large cell substrate which the Partnership is prohibited to produce or sell other than to Ciba. The Partnership also acquired, as part of the transaction, an exclusive technology license to use Ciba's proprietary process which is necessary to manufacture such small cell, honeycomb structures. Assets acquired consisted of approximately $6.9 million of plant, property and equipment and $1.1 million of intangibles.
To finance the acquisition, the general partners each lent to the Partnership $4,000,000. The loans, which are evidenced by promissory notes, mature on December 31, 1995 and bear interest payable monthly at the Prime Rate plus 1%. The principal amount of each of the loans is intended to be repaid by the Partnership prior to the maturity date upon the receipt of replacement financing which the Partnership is currently seeking. The Partnership is in the process of obtaining third party replacement financing. There is no assurance that the Partnership will be able to obtain replacement financing prior to the maturity date or that such replacement financing will be sufficient to repay the loans.
Long-term debt consists of the following:
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT: -- (CONTINUED)
The future minimum payments for the Partnership consists of:
The general partners are guarantors of the long-term debt. The notes payable due April 2000 are collateralized by related purchased property and equipment.
The Partnership has operating lease commitments for its facilities, vehicles and certain equipment. In certain instances, these leases contain purchase and renewal options, both of which are at fair market value. The Partnership's offices are leased on a month-to-month basis.
The future minimum lease payments for these leases at December 31, 1994 are as follows:
Rental expense under these operating leases was $188,158 for the period ended December 31, 1994.
The Partnership assumed, at formation, a five-year lease commitment which began April 1993, for approximately 55,000 square feet of manufacturing and assembly space. Additionally, the Partnership is responsible for paying its allocable portion of all real estate taxes, water and sewer rates, and common expenses. The Partnership assumed a lease, which expires in 1996, in connection with the asset acquisition (see note 6), for a building with approximately 24,000 square feet and corresponding parking lot adjacent to the Miami manufacturing facility.
At December 31, 1994, the Partnership had an employment contract with one officer. The contract expires in 1999, subject to certain provisions in the contract. The contract provides for total annual compensation of $155,000, plus certain benefits.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership provided approximately $91,000 in various administrative office support services to ICC. Engelhard provides research and development services to the Partnership. Furthermore, Engelhard provided approximately $297,000 in various administration services to the Partnership. The Partnership incurred approximately $63,000 interest expense payable to the general partners in connection with the $8 million promissory notes issued (See note 6). In accordance with the Transfer Agreement entered into by the general partners, a distribution of approximately $140,000 was due ICC.
10. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Excluded from the Statement of Cash Flows were the effects of assets and liabilities transferred to the Partnership from ICC which consisted of approximately $240,000 in receivables; $490,000 of inventory; $290,000 of property and equipment; $180,000 in other assets; $360,000 in accounts payable and accrued liabilities; and $900,000 notes payable to Engelhard.
DESICCANT AND HEAT EXCHANGE ROTORS [PICTURE-SEE DESCRIPTION IN APPENDIX A, NO. 4]
ETS(TRADEMARK) DESICCANT [PICTURE-SEE DESCRIPTION IN APPENDIX A, NO. 4]
HONEYCOMB SUBSTRATE [PICTURE-SEE DESCRIPTION IN APPENDIX A, NO. 4]
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, ANY SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED THEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS 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 OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
GERARD KLAUER MATTISON & CO., LLC
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Item 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation contains a provision which limits the personal liability of directors to the Company or the stockholders for monetary damages for breach of fiduciary duty. The Certificate of Incorporation provides that a director of the Company shall not be personally liable for a breach of fiduciary duty as a director except for liabilities (i) for any breach of the director's duty of loyalty, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for an unlawful dividend payment or an unlawful repurchase of stock, or (iv) for any transaction from which the director derived an improper personal benefit.
The Company's Certificate of Incorporation also provides that the Company will indemnify and pay legal expenses and damages incurred by officers and directors in any legal action arising from their actions as agents of the Company as long as the officer or director had acted in good faith in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal action, had no reasonable cause to believe his conduct was unlawful.
Nothing in these provisions eliminates a director's fiduciary duty to act with care or precludes a stockholder from pursuing injunctive or other equitable remedies.
Under Section 145 of the Delaware General Corporation Law, as amended, the Company has the power to indemnify directors and officers under certain prescribed circumstances and subject to certain limitations against certain costs and expenses, including attorney's fees, actually and reasonably incurred in connection with any action, suit or proceeding, whether civil, criminal, administrative or investigative, to which any of them is a party by reason of his being a director or officer of the Company if it is determined that he acted in accordance with the applicable standard of conduct set forth in such statutory provisions.
See Section 8(b) of the Underwriting Agreement, filed as Exhibit 1 hereto, pursuant to which the Underwriters agree to indemnify the Company, its directors, officers and controlling persons against certain liabilities, including liabilities under the Securities Act.
The Company has also purchased directors' and officers' liability insurance.
(a) The undersigned Registrant hereby undertakes:
(i) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as at the time it was declared effective.
(ii) For the purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions discussed in Item 15 of this registration statement, 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.
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all requirements for filing on Form S-2 and has duly caused this Amendment to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on January 10, 1996.
By: /s/ IRWIN L. GROSS
Pursuant to the requirements of the Securities Act of 1933, this Amendment to this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
APPENDIX A FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following table presents fair and accurate narrative descriptions of graphic and image material omitted from this EDGAR Submission File due to ASCII-incompatibility and cross-references this material to the location of each occurrence in the text.
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC GRAPHIC OR IMAGE OR IMAGE IN TEXT 1. Four-color page on outside of Inside front cover of the gate-fold containing six graphs Prospectus depicting the following:
Graph showing number of dehumidification hours and cooling hours per month that the outdoor humidity and temperature exceed indoor air temperature of 75 degrees Fahrenheit and 50 percent relative humidity in Washington. The aggregate number of such dehumidification and cooling hours per year appears below such graph.
The following are the approximate number of dehumidification and cooling hours per month depicted in the graph for Washington:
Graph showing number of dehumidification hours and cooling hours per month that the outdoor humidity and temperature exceed indoor air temperature of 75 degrees Fahrenheit and 50 percent relative humidity in New York. The aggregate number of such dehumidification and cooling hours per year appears below such graph.
The following are the approximate number of dehumidification and cooling hours per month depicted in the graph for New York:
Graph showing number of dehumidification hours and cooling hours per month that the outdoor humidity and temperature exceed indoor air temperature of 75 degrees Fahrenheit and 50 percent relative humidity in Houston. The aggregate number of such dehumidification and cooling hours per year appears below such graph.
The following are the approximate number of dehumidification and cooling hours per month depicted in the graph for Houston:
Graph showing number of dehumidification hours and cooling hours per month that the outdoor humidity and temperature exceed indoor air temperature of 75 degrees Fahrenheit and 50 percent relative humidity in Tampa. The aggregate number of such dehumidification and cooling hours per year appears below such graph.
The following are the approximate number of dehumidification and cooling hours per month depicted in the graph for Tampa:
Graph showing number of dehumidification hours and cooling hours per month that the outdoor humidity and temperature exceed indoor air temperature of 75 degrees Fahrenheit and 50 percent relative humidity in Taipei. The aggregate number of such dehumidification and cooling hours per year appears below such graph.
The following are the approximate number of dehumidification and cooling hours per month depicted in the graph for Taipei:
Graph showing number of dehumidification hours and cooling hours per month that the outdoor humidity and temperature exceed indoor air temperature of 75 degrees Fahrenheit and 50 percent relative humidity in Tokyo. The aggregate number of such dehumidification and cooling hours per year appears below such graph.
The following are the approximate number of dehumidification and cooling hours per month depicted in the graph for Tokyo:
2. Four-color two-page spread on inside of gate Inside front cover of the fold containing a diagram showing a desiccant Prospectus climate control system.
3. Diagram depicting the basic operation Page 29 of the gas or waste heat powered climate control systems.
4. Four-color page depicting each of the Inside back cover of the
Photo showing desiccant and heat | S-2/A | S-2/A | 1996-01-12T00:00:00 | 1996-01-11T17:48:48 |
0000922326-96-000007 | 0000922326-96-000007_0000.txt | <DESCRIPTION>AMENDMENT NO. 10 FORM N-1A
As filed with the Securities and Exchange Commission on January 12, 1996 Equity 500 Equal Weighted Index Portfolio
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)
Registrant's Telephone Number, including Area Code: 617-423-0800
Philip W. Coolidge, 6 St. James Avenue, Boston, Massachusetts 02116 (Name and Address of Agent for Service)
This Registration Statement on Form N-1A (the "Registration Statement") has been filed by the Registrant pursuant to Section 8(b) of the Investment Company Act of 1940, as amended. However, beneficial interests in the series of the Registrant are not being registered under the Securities Act of 1933, as amended (the "1933 Act"), because such interests will be issued solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Registrant's series may only be made by investment companies, insurance company separate accounts, common or commingled trust funds or similar organizations or entities that are "accredited investors" within the meaning of Regulation D under the 1933 Act. The Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any beneficial interests in any series of the Registrant.
This Amendment No. 10 (the "Amendment") to the Registration Statement includes Part A and Part B relating to U.S. Bond Index Portfolio, Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio and EAFE(R) Equity Index Portfolio, each an active series of the Registrant, and incorporates by reference herein: Part A and Part B of Amendment No. 4 relating to International Bond Portfolio; Part A and Part B of Amendment No. 5 relating to European Equity Portfolio; Part A and Part B of Amendment No. 7 relating to Global High Yield Securities Portfolio, Latin American Equity Portfolio, Small Cap Portfolio and Pacific Basin Equity Portfolio; Part A and Part B of Amendment No. 8 relating to Liquid Assets Portfolio and Part A and Part B of Amendment No. 9 relating to Asset Management Portfolio II and Asset Management Portfolio III.
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
Responses to Items 1 through 3 and 5A have been omitted pursuant to paragraph 4 of Instruction F of the General Instructions to Form N-1A.
Item 4. General Description of Registrant.
BT Investment Portfolios (the "Trust") is a no-load, open-end management investment company which was organized as a trust under the laws of the State of New York on March 27, 1993.
Beneficial interests in the Trust are divided into separate series, each having distinct investment objectives and policies, only four of which, U.S. Bond Index Portfolio, Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio and EAFE(R) Equity Index Portfolio (each a "Portfolio" and collectively, the "Portfolios"), are described herein. Beneficial interests in the Portfolios are issued solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"). Investments in the Portfolios may only be made by investment companies, insurance company separate accounts, common or commingled trust funds or similar organizations or entities that are "accredited investors" within the meaning of Regulation D under the 1933 Act. This registration statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act.
Investments in the Portfolios are neither insured nor guaranteed by the U.S. Government. Investments in the Portfolios are not obligations of, or guaranteed by, Bankers Trust Company ("Bankers Trust"), the Trust's investment adviser (the "Adviser") with respect to the Portfolios, and are not Federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other agency.
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:
U.S. Treasury and agency securities 54% International (dollar- denominated) bonds 3% Dollar-weighted average maturity (Years) 8.6 yrs
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 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 Portfolio is not sponsored, endorsed, sold or promoted by Wilshire Associates. Wilshire makes no representation or warranty, express or implied, to the investors in the Portfolio or any member of the public regarding the advisability of investing in securities generally or in the Portfolio particularly or the ability of the index to track general stock market performance.
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.
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 Equal Weighted Portfolio is not sponsored, endorsed, sold or promoted by Standard & Poor's Corporation. S&P makes no representation or warranty, express or implied, to the investors in the Portfolio or any member of the public regarding the advisability of investing in securities generally or in 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 Portfolio, owners of 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 to Part B.
The Small Cap Index Portfolio seeks to replicate as closely as possible (before deduction of expenses of the 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 Equity Index Portfolio seeks to replicate as closely as possible (before deduction of expenses of the 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. 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.
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.
This Portfolio 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 Portfolio or any member of the public regarding the advisability of investing in securities generally or in this Portfolio 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 Portfolio or this Portfolio. Morgan Stanley has no obligation to take the needs of the issuer of this Portfolio or the owners of this Portfolio 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 the determination of the timing of, prices at, or quantities of this Portfolio to be issued or in the determination or calculation of the equation by which this Portfolio is redeemable for cash. Morgan Stanley has no obligation or liability to owners of this Portfolio in connection with the administration, marketing or trading of this Portfolio. This Portfolio 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. GENERAL
Over time, the correlation between the performance of each Portfolio, before the deduction of Expenses, and the respective Index is expected to be 0.95 or higher before deduction of Expenses of the Portfolio. A correlation of 1.00 would indicate perfect correlation, which would be achieved when the net asset value of the Portfolio, including the value of its dividend and any capital gain distributions, increases or decreases in exact proportion to changes in the Index. Each Portfolio's ability to track its respective index may be affected by, among other things, transaction costs, administration and other expenses incurred by the 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 Board 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).
policies of each Portfolio are contained in the Part B of the Portfolios' Registration Statement.
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 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 the Portfolios, which are sent to Portfolio investors twice a year.
Fixed Income Security Risk - U.S. Bond Index Portfolio Investors in the U.S. Bond Index Portfolio 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
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 Equal Weighted Index Portfolio, Small Cap Index Portfolio and EAFE Equity Index Portfolio 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 Portfolio 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 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. 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 is generally less government supervision and regulation of securities exchanges, brokers and issuers in foreign countries than in the United States.
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 investor 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 investor 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 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.
Item 5. Management of the Fund.
The Board of Trustees of the Trust provides broad supervision over the affairs of the Trust. A majority of the Trust's Trustees are not affiliated with the Adviser. As the administrator (the "Administrator"), Bankers Trust supervises the overall administration of the Trust. The Trust's fund accountant, transfer agent and custodian is also Bankers Trust.
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. 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%; and EAFE Equity Index Portfolio, 0.25%.
Bankers Trust has been advised by its counsel that, in counsel's opinion, Bankers Trust currently may perform the services for the Trust and the Portfolios described herein 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 and the Small Cap 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 EAFE 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 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%; and EAFE Equity Index Portfolio, 0.10%. Under each Administration and Services Agreement, Bankers Trust may delegate one or more of its responsibilities to others, including Signature Broker-Dealer Services, Inc. ("Signature"), each Portfolio's placement agent and sub-administrator, at Bankers Trust's expense.
Bankers Trust acts as custodian of the assets of each Portfolio and serves as the transfer agent (the "Transfer Agent") for each Portfolio under the Administration and Services Agreement with each Portfolio.
Each Portfolio bears its own expenses. Operating expenses for each Portfolio generally consist of all costs not specifically borne by Bankers Trust or Signature including investment advisory and administration and service fees, fees for necessary professional services, the costs associated with regulatory compliance and maintaining legal existence and investor relations.
Item 6. Capital Stock and Other Securities.
The Trust is organized as a trust under the laws of the State of New York. Under the Declaration of Trust, the Trustees are authorized to issue beneficial interests in separate series of the Trust, such as the Portfolio. Each investor is entitled to a vote in proportion to the amount of its investment in the Portfolio. Investments in the Portfolio may not be transferred, but an investor may withdraw all or any portion of his investment at any time at net asset value. Investors in the Portfolio (e.g., investment companies, insurance company separate accounts and common and commingled trust funds) will each be liable for all obligations of the Portfolio. However, the risk of an investor in the Portfolio 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.
The Trust reserves the right to add additional series in the future, in which case investments in each series would participate equally in the earnings and assets of the particular series. Currently, the Trust has fifteen series: the Portfolios, Liquid Assets Portfolio, Asset Management Portfolio II, Asset Management Portfolio III, Global High Yield Securities Portfolio, Latin American Equity Portfolio, Small Cap Portfolio, Pacific Basin Equity Portfolio, European Equity Portfolio, International Bond Portfolio, Growth and Income Portfolio and 100% Treasury Portfolio.
Investments in the Portfolio have no pre-emptive or conversion rights and are fully paid and non-assessable, except as set forth below. The Trust is not required and has no current intention to hold annual meetings of investors, but the Trust will hold special meetings of investors when in the judgment of the Trustees it is necessary or desirable to submit matters for an investor vote. These meetings may be called to elect or remove trustees, change fundamental policies, approve Portfolio investment advisory agreement, or for other purposes. Investors not attending these meetings are encouraged to vote by proxy. The Trust's Transfer Agent will mail proxy materials in advance, including a voting card and information about the proposals to be voted on. Changes in fundamental policies will be submitted to investors for approval. Investors have under certain circumstances (e.g. upon application and submission of certain specified documents to the Trustees by a specified percentage of the aggregate value of the Trust's outstanding interests) the right to communicate with other investors in connection with requesting a meeting of investors for the purpose of removing one or more Trustees. Investors also have the right to remove one or more Trustees without a meeting by a declaration in writing by a specified number of investors. Upon liquidation of the Portfolio, investors would be entitled to share pro rata in the net assets of the Portfolio available for distribution to investors. Each series of the Trust will vote separately on any matter involving the corresponding Portfolio. Investors of all of the series of the Trust will, however, vote together to elect Trustees of the Trust and for certain other matters. Under certain circumstances, the investors of one or more series could control the outcome of these votes.
The net asset value of a Portfolio is determined each day on which the Portfolio is open ("Portfolio Business Day") (and on such other days as are deemed necessary in order to comply with Rule 22c-1 under the 1940 Act). This determination is made twice during each such day as of 12:00 noon, New York time and as of the close of regular trading on the New York Stock Exchange Inc. ("NYSE") which is currently 4:00 p.m., New York time (each, a "Valuation Time").
Each investor in a Portfolio may add to or reduce its investment in the Portfolio on each Portfolio Business Day. At each Valuation Time on 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 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 Valuation Time, 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 Valuation 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 will then be applied to determine the value of the investor's interest in the Portfolio as of the Valuation Time, on the following business day of the Portfolio.
The net income of a Portfolio shall consist of (i) all income accrued, less the amortization of any premium, on the assets of the Portfolio, less (ii) all actual and accrued expenses of the Portfolio determined in accordance with generally accepted accounting principles ("Net Income"). Interest income includes discount earned (including both original issue and market discount) on discount paper accrued ratably to the date of maturity and any net realized gains or losses on the assets of the Portfolio. All the Net Income of a Portfolio is allocated pro rata among the investors in the Portfolio. The Net Income is accrued daily and distributed monthly to the investors in the Portfolio.
Under the anticipated method of operation of the Trust, the Portfolios will not be subject to any income tax. However, each investor in a Portfolio will be taxable on its share (as determined in accordance with the governing instruments of the Trust) of the Portfolio's ordinary income and capital gain in determining its income tax liability. The determination of such share will be made in accordance with the Internal Revenue Code of 1986, as amended (the "Code"), and regulations promulgated thereunder.
It is intended that each Portfolio's assets, income and distributions will be managed in such a way that an investor in the Portfolio will be able to satisfy the requirements of Subchapter M of the Code, assuming that the investor invested all of its assets in the Portfolio.
Item 7. Purchase of Securities Being Offered.
Beneficial interests in each Portfolio are issued solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. See "General Description of Registrant" above.
An investment in a Portfolio may be made without a sales load. All investments are made at the net asset value next determined if an order is received by the Portfolio by the designated cutoff time for each accredited investor. The net asset value of the Portfolio is determined on each Portfolio Business Day. The Portfolios' securities are valued at amortized cost, which the Trustees of the Trust have determined in good faith constitutes fair value for the purposes of complying with the 1940 Act. This valuation method will continue to be used with respect to the Portfolios until such time as the Trustees of the Trust determine that it does not constitute fair value for such purposes.
There is no minimum initial or subsequent investment in a Portfolio. However, because each Portfolio intends to be as fully invested at all times as is reasonably practicable in order to enhance the yield on its assets, investments must be made in Federal funds (i.e., monies credited to the account of the Trust's custodian bank by a Federal Reserve Bank).
The Trust and Signature reserve the right to cease accepting investments in the Portfolio at any time or to reject any investment order.
The placement agent for the Trust is Signature. The principal business address of Signature is 6 St. James Avenue, Boston, Massachusetts 02116. Signature receives no additional compensation for serving as the placement agent for the Trust.
Item 8. Redemption or Repurchase.
An investor in a Portfolio may withdraw all or any portion of its investment at the net asset value next determined if a withdrawal request in proper form is furnished by the investor to the Portfolio by the designated cutoff time for each accredited investor. The proceeds of a withdrawal will be paid by the Portfolio in Federal funds normally on the Portfolio Business Day the withdrawal is effected, but in any event within seven days. Each Portfolio reserves the right to pay redemptions in kind. Investments in a Portfolio may not be transferred.
The right of any investor to receive payment with respect to any withdrawal may be suspended or the payment of the withdrawal proceeds postponed during any period in which the NYSE is closed (other than weekends or holidays) or trading on such Exchange is restricted, or, to the extent otherwise permitted by the 1940 Act, if an emergency exists.
Item 9. Pending Legal Proceedings.
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
Item 11. Table of Contents. Page
General Information and History . . . . . . . . . . . B-1 Investment Objectives and Policies . . . . . . . . . B-1 Management of the Fund . . . . . . . . . . . . . . . B-31 Control Persons and Principal Holders of Securities . . . . . . . . . . . . . . . . B-33 Investment Advisory and Other Services . . . . . . . B-33 Brokerage Allocation and Other Practices . . . . . . B-36 Capital Stock and Other Securities . . . . . . . . . B-37 Purchase, Redemption and Pricing of Securities Being Offered . . . . . . . . . . B-39 Tax Status . . . . . . . . . . . . . . . . . . . . . B-42 Underwriters . . . . . . . . . . . . . . . . . . . . B-42 Calculation of Performance Data . . . . . . . . . . . B-42 Financial Statements . . . . . . . . . . . . . . . . B-42
Item 12. General Information and History.
Item 13. Investment Objectives and Policies.
Part A contains additional information about the investment objectives and policies of U.S. Bond Index Portfolio, Equity 500 Equal Weighted Index Portfolio, Small Cap Index Portfolio and EAFE(R) Equity Index Portfolio (each a "Portfolio" and collectively, the "Portfolios"), each a series of BT Investment Portfolios (the "Trust"). This Part B should only be read in conjunction with Part A. This section contains supplemental information concerning the types of securities and other instruments in which the Portfolios may invest, the investment policies and portfolio strategies that the Portfolios may utilize and certain risks attendant to those investments, policies and strategies.
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 Part B.
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 Company ("Bankers Trust"), Signature Broker-Dealer Services, Inc. ("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 ratings are available, the 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 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 individual credits of 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 repurchase price, 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 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 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 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 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 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 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 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 not for speculation. Index funds 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 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 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 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 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 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 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 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 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 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 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 Portfolio to eliminate the obligation from its portfolio, but Bankers Trust will consider such an event in its determination of whether a Portfolio should continue to hold the obligation. A description of the ratings used herein and in Part A of the Portfolios' Registration Statement is set forth in the Appendix A herein.
The following investment restrictions are "fundamental policies" of each Portfolio and may not be changed with respect to Portfolio without the approval of a "majority of the outstanding voting securities" of the Portfolio. "Majority of the outstanding voting securities" under the 1940 Act, and as used in this Part B and Part A, means, with respect to the Portfolio, the lesser of (i) 67% or more of the total beneficial interests of the Portfolio present at a meeting, if the holders of more than 50% of the total beneficial interests of the Portfolio are present or represented by proxy or (ii) more than 50% of the total beneficial interests of the Portfolio.
As a matter of fundamental policy, no Portfolio may:
(1) borrow money or mortgage or hypothecate assets of the Portfolio, except that in an amount not to exceed 1/3 of the current value of the Portfolio'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 a Portfolio or the Trust 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 portfolio securities and provided that any such loans not exceed 30% of the Portfolio'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 fundamental policy with respect to 20% risk weighing for financial institutions prevent the Portfolio from engaging in securities lending);
(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 may hold and sell, for the Portfolio's portfolio, real estate acquired as a result of the Portfolio's ownership of securities);
(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 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 will not as a matter of operating policy:
(i) borrow money (including through reverse repurchase or forward roll transactions) for any purpose in excess of 5% of the Portfolio's total assets (taken at cost), except that the Portfolio 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 total assets (taken at market value),
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, and the value of securities of any one issuer in which the Portfolio is short exceeds the lesser of 2.0% of the value of the Portfolio'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 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 have no current intention to engage in short
(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 if such purchase at the time thereof would cause: (a) more than 10% of the Portfolio'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 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; provided further that, except in the case of a merger or consolidation, the Portfolio shall not purchase any securities of any open-end investment company unless the Portfolio (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 total assets (taken at the greater of cost or market value) in securities (excluding Rule 144A securities) that are restricted as to resale under
(viii) invest more than 15% of the Portfolio'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 total assets are invested in securities issued by issuers which (including predecessors) have been in operation
(ix) with respect to 75% of the Portfolio's total assets, purchase securities of any issuer if such purchase at the time thereof would cause the Portfolio 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
(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 Trust, or is an officer or partner of the Adviser, if after the purchase of the securities of such issuer for 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 market
(xii) invest in warrants (other than warrants acquired by the Portfolio 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 net assets or if, as a result, more than 2% of the Portfolio'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
(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 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 net assets; (c) the securities subject to the exercise of the call written by the Portfolio must be owned by the Portfolio at the time the call is
sold and must continue to be owned by the Portfolio until the call has been exercised, has lapsed, or the Portfolio has purchased a closing call, and such purchase has been confirmed, thereby extinguishing the Portfolio's obligation to deliver securities pursuant to the call it has sold; and (d) at the time a put is written, the Portfolio 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 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 has purchased a closing put, which is a put of the same series as the one
(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 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 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 Portfolio will comply with the permitted investments and investment limitations in the securities laws and regulations of all states in which any registered investment company investing in the Portfolio is registered.
Portfolio Transactions and Brokerage Commissions. 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%.
Set forth below are descriptions of the ratings of Moody's and S&P, which represent their opinions as to the quality of the securities which they undertake to rate. It should be emphasized, however, that ratings are relative and subjective and are not absolute standards of quality.
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.
Item 14. Management of the Fund.
The Board of Trustees is composed of persons experienced in financial matters who meet throughout the year to oversee the activities of the Portfolios they represent. In addition, the Trustees review contractual arrangements with companies that provide services to the Portfolios and review the Portfolios' performance.
The Trustees and officers of the Trust 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 and officers 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 02116.
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, Signature Financial Group, Inc. ("SFG") (since December, 1988) and Signature (since April, 1989).
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 Trust. No director, officer or employee of Signature or any of its affiliates will receive any compensation from the Trust for serving as an officer or Trustee of the Trust. The Trust, EAFE 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, BT Investment Funds and BT Advisor Funds (collectively the "Fund Complex") collectively pay an annual fee of $10,000 per annum plus $1,250 per meeting attended and reimburses for travel and out-of-pocket expenses to each Trustee who is not a director, officer or employee of the Adviser, the Placement Agent, the Administrator or any of their affiliates.
The Trust's Declaration of Trust provides that it 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 the investors in a Portfolio or any other series of the Trust, it is finally adjudicated that they engaged in wilful 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 or in a written opinion of independent counsel, that such officers or Trustees have not engaged in wilful misfeasance, bad faith, gross negligence or reckless disregard of their duties.
Item 15. Control Persons and Principal Holders of Securities.
As of January 5, 1996, Bond Index Fund, Equity 500 Equal Weighted Fund, Small Cap Index Fund and EAFE Equity Index Fund (each a "Fund"), each a series of shares of BT Advisor Funds, owned approximately 100% of the value of the outstanding interests in the corresponding Portfolio. Because each Fund controls the corresponding Portfolio, it may take actions without the approval of any other investor in the Portfolio.
Each Fund has informed the Trust that whenever it is requested to vote on matters pertaining to the fundamental policies of the corresponding Portfolio, the Fund will hold a meeting of shareholders and will cast its votes as instructed by the Fund's shareholders. It is anticipated that other registered investment companies investing in any of the Portfolios will follow the same or a similar practice.
Item 16. Investment Advisory and Other Services.
Under the terms of each Portfolio's investment advisory agreement (the "Advisory Agreement"), Bankers Trust (the "Adviser") manages the Portfolio subject to the supervision and direction of Board of Trustees of the Portfolio. Bankers Trust will: (i) act in strict conformity with the 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. Each Portfolio bears certain other expenses incurred in its operation, including: taxes, interest, brokerage fees and commissions, if any; fees of Trustees of the Portfolio who are not officers, directors or employees of Bankers Trust, Signature or any of their affiliates; SEC 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 offering materials for regulatory purposes and for distribution to existing investors; costs of investors' reports and meetings of investors, officers and Trustees of the Portfolio; and any extraordinary 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.
Bankers Trust may not recoup any 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 Portfolios reasonably deems necessary for the proper administration of the Portfolios. Bankers Trust will: generally assist in all aspects of each 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 investors; prepare and file tax returns; supply financial information and supporting data for reports to and filings with the SEC; 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
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. Bankers Trust also provides fund accounting and transfer agency to the Portfolios pursuant to the Administration Agreement.
Pursuant to a sub-administration agreement (the "Sub-Administration Agreement"), Signature performs such sub-administration duties for the Trust 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.
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 Portfolios described in Part A and Part B, herein, 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 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.
Bankers Trust serves as Custodian for the Portfolios pursuant to the administration and services agreements. As Custodian, it holds each Portfolio's assets. Bankers Trust also serves as transfer agent of each Portfolio pursuant to the respective administration and services agreement. Bankers Trust may be reimbursed by 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.
Coopers & Lybrand L.L.P. are the Independent Accountants for the Trust, providing audit services, tax return preparation, and assistance and consultation with respect to the preparation of filings with the SEC. The principal business address of Coopers & Lybrand L.L.P. is 1100 Main, Suite 900, Kansas City, Missouri 64105.
Item 17. Brokerage Allocation and Other Practices.
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 beneficial interests 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 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 the 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 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.
Item 18. Capital Stock and Other Securities.
Under the Declaration of Trust, the Trustees are authorized to issue beneficial interests in separate series, such as the Portfolio. No series of the Trust has any preference over any other series. Investors in the Portfolio are entitled to participate pro rata in distributions of taxable income, loss, gain and credit of the Portfolio. Upon liquidation or dissolution of the Portfolio, investors are entitled to share pro rata in the net assets of the Portfolio available for distribution to investors. Investments in the Portfolio have no preference, preemptive, conversion or similar rights and are fully paid and nonassessable, except as set forth below. Investments in the Portfolio may not be transferred.
Each investor in the Portfolio is entitled to a vote in proportion to the amount of its investment. The Portfolio and the other series of the Trust will all vote together in certain circumstances (e.g., election of the Trust's Trustees and auditors, as required by the 1940 Act and the rules thereunder). One or more series of the Trust could control the outcome of these votes. Investors do not have cumulative voting rights, and investors holding more than 50% of the aggregate beneficial interests in the Trust, or in a series as the case may be, may control the outcome of votes and in such event the other investors in the Portfolio, or in the series, would not be able to elect any Trustee. The Trust is not required and has no current intention to hold annual meetings of investors but the Trust will hold special meetings of investors when in the judgment of the Trust's Trustees it is necessary or desirable to submit matters for an investor vote. No material amendment may be made to the Trust's Declaration of Trust without the affirmative majority vote of investors (with the vote of each being in proportion to the amount of its investment).
The Trust, with respect to the Portfolio, may enter into a merger or consolidation, or sell all or substantially all of its assets, if approved by the vote of two-thirds of the Portfolio's investors (with the vote of each being in proportion to its percentage of the beneficial interests in the Portfolio), except that if the Trustees of the Trust recommend such sale of assets, the approval by vote of a majority of the investors (with the vote of each being in proportion to its percentage of the beneficial interests of the Portfolio) will be sufficient. The Portfolio may also be terminated (i) upon liquidation and distribution of its assets, if approved by the vote of two-thirds of its investors (with the vote of each being in proportion to the amount of its investment), or (ii) by the Trustees of the Trust by written notice to its investors.
The Trust is organized as a trust under the laws of the State of New York. Investors in the Portfolio or any other series of the Trust will be held personally liable for its obligations and liabilities, subject, however, to indemnification by the Trust in the event that there is imposed upon an investor a greater portion of the liabilities and obligations than its proportionate beneficial interest. The Declaration of Trust also provides that the Trust shall maintain appropriate insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Trust, its investors, Trustees, officers, employees and agents covering possible tort and other liabilities. Thus, the risk of an investor incurring financial loss on account of investor liability is limited to circumstances in which both inadequate insurance existed and the Trust itself was unable to meet its obligations with respect to any series thereof.
The Declaration of Trust further provides that obligations of a Portfolios or any other series of the Trust are not binding upon the Trustees individually but only upon the property of the Portfolio or other series of the Trust, as the case may be, and that the Trustees will not be liable for any 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 wilful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office.
The Trust reserves the right to create and issue a number of series, in which case investments in each series would participate equally in the earnings and assets of the particular series. Investors in each series would be entitled to vote separately to approve advisory agreements or changes in investment policy, but investors of all series may vote together in the election or selection of Trustees, principal underwriters and accountants. Upon liquidation or dissolution of any series of the Trust, the investors in that series would be entitled to share pro rata in the net assets of that series available for distribution to investors.
Item 19. Purchase, Redemption and Pricing of Securities Being Offered.
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.
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 Portfolio and valued as they are for purposes of computing the Portfolio's net asset value, as the case may be (a redemption in kind). If payment is made to in securities, an investor may incur transaction expenses in converting these securities into cash. Each Portfolio has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of which each Portfolio is obligated to redeem beneficial interests 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 Portfolio 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. Each Portfolio will not redeem in kind except in circumstances in which the corresponding Fund is permitted to redeem in kind or unless requested by the Fund.
Each investor in a Portfolio 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 Portfolio may, at its own option, accept securities in payment for interests. The securities delivered in payment for interests are valued by the method described under "Net Asset Value" as of the day the Portfolio receives the securities. This is a taxable transaction to the investor. Securities may be accepted in payment for interests only if they are, in the judgment of Bankers Trust, appropriate investments for the Portfolio. In addition, securities accepted in payment for shares of beneficial interest must: (i) meet the investment objective and policies of the acquiring Portfolio; (ii) be acquired by the applicable Portfolio for investment and not for resale; (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. Each Portfolio reserves the right to accept or reject at its own option any and all securities offered in payment for its interests.
The Portfolio determines its net asset value as of 12:00 noon and 4:00 p.m., New York time, on each day on which the Portfolio is open ("Portfolio Business Day"), by dividing 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) by the value of the investment of the investors in the Portfolio at the time the determination is made. (As of the date of this Registration Statement, the Portfolio is open every weekday except for: (a) the following holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and Christmas Day and (b) the preceding Friday of the subsequent Monday when one of the calendar- determined holidays falls on a Saturday or Sunday, respectively. Purchases and withdrawals will be effected at the time of determination of net asset value next following the receipt of any purchase or withdrawal order.
The valuation of each Portfolio's securities is based on their amortized cost, which does not take into account unrealized capital gains or losses. Amortized cost valuation involves initially valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, generally without regard to the impact of fluctuating interest rates on the market value of the instrument. Although this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price the Portfolio would receive if it sold the instrument.
Each Portfolio's use of the amortized cost method of valuing its securities is permitted by a rule adopted by the SEC.
Pursuant to the rule, the Board of Trustees of the Trust also has established procedures designed to allow investors in a Portfolio to stabilize, to the extent reasonably possible, the investors' price per share as computed for the purpose of sales and redemptions. These procedures include review of a Portfolio's holdings by the Trust's Board of Trustees, at such intervals as it deems appropriate, to determine whether the value of the Portfolio's assets calculated by using available market quotations or market equivalents deviates from such valuation based on amortized cost.
The rule also provides that the extent of any deviation between the value of a Portfolio's assets based on available market quotations or market equivalents and such valuation based on amortized cost must be examined by the Trust's Board of Trustees. In the event the Board of Trustees determines that a deviation exists that may result in material dilution or other unfair results to investors, pursuant to the rule, the Trust's Board of Trustees must cause the Portfolio to take such corrective action as the Board of Trustees regards as appropriate, including: selling portfolio instruments prior to maturity to realize capital gains or losses or to shorten average portfolio maturity; paying distributions from capital or capital gains; redeeming interests in kind; or valuing the Portfolio's assets by using available market quotations.
The Trust is organized as a trust under New York law. Under the anticipated method of operation of the Trust, the Portfolio will not be subject to any income tax. However each investor in the Portfolio will be taxable on its share (as determined in accordance with the governing instruments of the Trust) of the Portfolio's ordinary income and capital gain in determining its income tax liability. The determination of such share will be made in accordance with the Internal Revenue Code of 1986, as amended (the "Code"), and regulations promulgated thereunder.
The Trust's taxable year-end is December 31. Although, as described above, the Portfolio will not be subject to Federal income tax, the Trust will file appropriate income tax returns with respect to the Portfolio.
It is intended that the assets, income and distributions of the Portfolio will be managed in such a way that an investor in the Portfolio will be able to satisfy the requirements of Subchapter M of the Code, assuming that the investor invested all of its assets in the Portfolio.
There are certain tax issues that will be relevant to only certain of the investors, specifically investors that are segregated asset accounts and investors who contribute assets rather than cash to the Portfolio. It is intended that such segregated asset accounts will be able to satisfy diversification requirements applicable to them and that such contributions of assets will not be taxable provided certain requirements are met. Such investors are advised to consult their own tax advisors as to the tax consequences of an investment in the Portfolio.
The placement agent for the Trust is Signature, which receives no additional compensation for serving in this capacity. Investment companies, insurance company separate accounts, common and commingled trust funds and similar organizations and entities may continuously invest in the Portfolio.
Item 22. Calculation of Performance Data.
The financial statements included herein have been included in reliance upon the report of Coopers & Lybrand L.L.P., Independent Accountants, as experts in accounting and auditing.
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.
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.
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.
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.
AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's 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 highest rated issues only in a 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 than debt in higher rated categories.
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 a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher rated categories.
BB -- Debt rated "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. The "BB" rating category is also used for debt subordinated to senior debt that is assigned an actual or implied "BBB-" rating.
Plus(+) or Minus(-) -- The ratings from "AA" to "BB" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
Commercial Paper, including Tax Exempt
A -- Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1 -- This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus (+) designation.
A-2 -- Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated "A-1".
A-3 -- Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations.
Aaa -- Bonds which are 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 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 risk appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are 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.
Note: Moody's applies numerical modifiers, 1,2, and 3 in each generic rating classification from Aa through Bb in its corporate bond rating system. The modifier 1 indicates that the security rates 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. Those municipal bonds within the Aa, A, Baa, and Ba categories that Moody's believes possess the strongest credit attributes within those categories are designated by the symbols Aa1, A1, Baa1, and Ba1.
Prime-1 -- Issuers rated P-1 (or supporting institutions) have a superior ability for repayment of short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the following characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high internal cash generation.
- Well established access to a range of financial markets and assured sources of alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or supporting institutions) have a strong ability 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, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 -- Issuers rated Prime-3 (or supporting institutions) have an acceptable ability for repayment of senior short-term obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and may require relatively high financial leverage. Adequate alternate liquidity is maintained.
Not Prime -- Issuers rated "Not Prime" do not fall within any of the Prime rating categories.
AAA -- Securities of this rating are regarded as strictly high-grade, broadly marketable, suitable for investment by trustees and fiduciary institutions, and liable to but slight market fluctuation other than through changes in the money rate. The factor last named is of importance varying with the length of maturity. Such securities are mainly senior issues of strong companies, and are most numerous in the railway and public utility fields, though some industrial obligations have this rating. The prime feature of an AAA rating is showing of earnings several times or many times interest requirements with such stability of applicable earnings that safety is beyond reasonable question whatever occur in conditions. Other features may enter in, such as a wide margin of protection through collateral security or direct lien on specific property as in the case of high class equipment certificates or bonds that are first mortgages on valuable real estate. Sinking funds or voluntary reduction of the debt by call or purchase are often factors, while guarantee or assumption by parties other than the original debtor may also influence the rating.
AA -- Securities in this group are of safety virtually beyond question, and as a class are readily salable while many are highly active. Their merits are not greatly unlike those of the AAA class, but a security so rated may be of junior though strong lien - in many cases directly following an AAA security - or the margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to ratings by the lesser financial power of the enterprise and more local type of market.
A -- Securities of this rating are considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered to be strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings.
BBB -- Securities of this rating are considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings.
Plus(+) or Minus(-) -- Plus and minus signs are used with a rating symbol to indicate the relative position of a credit within the rating category. Plus and minus signs, however, are not used in the "AAA" category.
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 the strongest issue.
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.
F-3 -- Fair Credit Quality. Issues assigned this rating have characteristics suggesting that the degree of assurance for timely payment is adequate, however, near-term adverse changes could cause these securities to be rated below investment grade.
AAA -- Highest credit quality. The risk factors are negligible, being only slightly more than for risk-free U.S. Treasury Funds.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below average protection factors but still considered sufficient for prudent investment. Considerable variability in risk during economic cycles.
Duff 1+ -- Highest certainty of timely payment. Short term liquidity, including internal operating factors and/or access to alternative sources of funds, is outstanding, and safety is just below risk free U.S. Treasury short term obligations.
Duff 1 -- Very high certainty of timely payment. Liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong and supported by good fundamental protection factors. Risk factors are very small.
Duff 2 -- Good certainty of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small.
Duff 3 -- Satisfactory liquidity and other protection factors qualify issue as to investment grade. Risk factors are larger and subject to more variation. Nevertheless, timely payment is expected.
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
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
Item 24. Financial Statements and Exhibits.
The financial statements called for by this Item are included in Part B and listed in Item 23 hereof.
1. Declaration of Trust of the Registrant.3
2. By-Laws of the Registrant.3
5(A). Investment Advisory Agreement between the Registrant and Bankers
5(B). Sub-Investment Advisory Agreement between Bankers Trust and BT Fund Managers International Limited.2
5(C). Schedule of Fees under Investment Advisory Agreement.4
9. Administration and Services Agreement between the Registrant and
13. Investment representation letters of initial investors.1, 4
1Incorporated by reference to the Registrant's Registration Statement as filed with the Commission on June 7, 1993.
2Incorporated by reference to Amendment No. 3 to the Registrant's Registration Statement as filed with the Commission on September 20, 1993.
3Incorporated by reference to Amendment No. 9 to the Registrant's Registration Statement as filed with the Commission on August 1, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant.
Item 26. Number of Holders of Securities.
Title of Class Number of Record Holders Series of Beneficial Interests (as of January 12, 1996)
Growth and Income Portfolio 0 Asset Management Portfolio II 1 Asset Management Portfolio III 1 Global High Yield Securities Portfolio 1 Latin American Equity Portfolio 1 Pacific Basin Equity Portfolio 1 U. S. Bond Index Portfolio 1 Equity 500 Equal Weighted Index Portfolio 1 Small Cap Index Portfolio 1
Reference is hereby made to Article V of the Registrant's Declaration of Trust, filed as an Exhibit herewith.
The Trustees and officers of the Registrant and the personnel of the Registrant's administrator are insured under an errors and omissions liability insurance policy. The Registrant and its officers are also insured under the fidelity bond required by Rule 17g-1 under the Investment Company Act of 1940.
Item 28. Business and Other Connections of Investment Adviser.
Bankers Trust serves as investment adviser to each Portfolio. Bankers Trust, a New York banking corporation, is a wholly owned subsidiary of Bankers Trust New York Corporation. Bankers Trust conducts a variety of commercial banking and trust activities and is a major wholesale supplier of financial services to the international institutional market.
To the knowledge of the Trust, none of the directors or officers of Bankers Trust, except those set forth below, is or has been at any time during the past two fiscal years engaged in any other business, profession, vocation or employment of a substantial nature, except that certain directors and officers also hold various positions with and engage in business for Bankers Trust New York Corporation. Set forth below are the names and principal businesses of the directors and officers of Bankers Trust who are or during the past two fiscal years have been engaged in any other business, profession, vocation or employment of a substantial nature. These persons may be contacted c/o Bankers Trust Company, 280 Park Avenue, New York, New York 10015.
Principal Occupation and Other Information
Retired Senior Vice President and Director, Member of Advisory Board of International Business Machines Corporation. Director of Bankers Trust and Bankers Trust New York Corporation. Director of FlightSafety International, Inc. Director of Phillips Petroleum Company. Director of Roadway Services, Inc. Director of Rohm and Hass Company.
Chairman of the Board and Chief Executive Officer, J.C. Penney Company, Inc. Director of Bankers Trust and Bankers Trust New York Corporation. Also a Director of Exxon Corporation, Halliburton Company and Warner-Lambert Corporation.
Salt Lake City, UT 84111
Chairman and Chief Executive Officer, Huntsman Chemical Corporation, Director of Bankers Trust and Bankers Trust New York Corporation. Chairman of Constar Corporation, Huntsman Corporation, Huntsman Holdings Corporation and Petrostar Corporation. President of Autostar Corporation, Huntsman Polypropylene Corporation and Restar Corporation. Director of Razzleberry Foods Corporation and Thiokol Corporation. General Partner of Huntsman Group Ltd., McLeod Creek Partnership and Trustar Ltd.
1333 New Hampshire Ave., N.W.
Partner, Akin, Gump, Strauss, Hauer & Feld, LLP. Director of Bankers Trust and Bankers Trust New York Corporation. Also a Director of American Express Company, Corning Incorporated, Dow Jones, Inc., J.C. Penney Company, Inc., RJR Nabisco Inc., Revlon Group Incorporated, Ryder System, Inc., Sara Lee Corporation, Union Carbide Corporation and Xerox Corporation.
Chairman of the Executive Committee, Philip Morris Companies Inc. Director of Bankers Trust and Bankers Trust New York Corporation. Director of The News Corporation Limited.
Chairman Emeritus, Collins & Aikman Corporation. Director of Bankers Trust and Bankers Trust New York Corporation. Director of Massachusetts Mutual Life Insurance Co. and Melville Corporation.
Former President, Co-Chief Executive Officer and Director of Time Warner Inc. Director of Bankers Trust and Bankers Trust New York Corporation. Also a Director of Xerox Corporation.
3600 Market Street, Suite 530
Chairman and Chief Executive Officer of The Palmer Group. Director of Bankers Trust and Bankers Trust New York Corporation. Also Director of Allied-Signal Inc., Contel Cellular, Inc., Federal Home Loan Mortgage Corporation, GTE Corporation, Goodyear Tire & Rubber Company, Imasco Limited, May Department Stores Company and Safeguard Scientifics, Inc. Member, Radnor Venture Partners Advisory Board.
Chairman and Chief Executive Officer, Schneider S.A. Director and member of the European Advisory Board of Bankers Trust and Director of Bankers Trust New York Corporation. Director of AXA (France) and Equitable Life Assurance Society of America, Arbed (Luxembourg), Banque Paribas (France), Ciments Francais (France), Cofibel (Belgique), Compagnie Industrielle de Paris (France), SIAPAP, Schneider USA, Sema Group PLC (Great Britain), Spie-Batignolles, Tractebel (Belgique) and Whirlpool. Chairman and Chief Executive Officer of Societe Parisienne d'Entreprises et de Participations.
Chairman of the Board of Bankers Trust and Bankers Trust New York Corporation. Also a Director of Mobil Corporation and J.C. Penney Company, Inc.
President of Bankers Trust and Bankers Trust New York Corporation.
c/o Office of the Secretary
Former Vice President, The Edna McConnell Clark Foundation. Director of Bankers Trust and Bankers Trust New York Corporation. Director, Borden Inc., Continental Corp. and Melville Corporation.
Vice Chairman of the Board of Bankers Trust and Bankers Trust New York Corporation. Director of Northwest Airlines and Private Export Funding Corp.
Item 30. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in part, at the office of the Registrant and the following locations:
Signature Broker-Dealer 6 St. James Avenue Services, Inc. Boston, MA 02116
Bankers Trust Company 280 Park Avenue (investment adviser, administrator, New York, NY 10017
Investors Fiduciary Trust Company 127 West 10th Street
BT Fund Managers International Ltd. Commonwealth Park Building, Level 23 (investment sub-advisor for 367 Collins Street Pacific Basin Equity Portfolio) Melbourne, Victoria
Pursuant to the requirements of the Investment Company Act of 1940, as amended, the Registrant has duly caused this Registration Statement on Form N-1A to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Boston and Commonwealth of Massachusetts on the 12th day of January, 1996.
By: /S/ THOMAS M. LENZ
EQUITY 500 EQUAL WEIGHTED INDEX PORTFOLIO
5(C). Schedule of Fees under Investment Advisory Agreement
13. Investment representation letters of initial investors | POS AMI | POS AMI | 1996-01-12T00:00:00 | 1996-01-12T16:39:41 |
0000912057-96-000441 | 0000912057-96-000441_0000.txt | INFORMATION REQUIRED IN 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 / /
/ / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) / / Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
(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). / / $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 is 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. Identifying 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.:
Massachusetts Financial Services Company ("MFS") acts as investment adviser to the Fund. In that capacity, MFS currently utilizes two sub-investment advisers to assist it in managing assets of the Fund invested outside the United States.
One of these sub-investment advisers is Batterymarch Financial Management, Inc. ("Batterymarch"), which manages the Fund's assets invested in emerging markets. The Board of Trustees responsible for the Fund has approved the termination by MFS of Batterymarch as a sub-adviser to the Fund and the retention by MFS of Foreign & Colonial Management Limited ("FCM") and of its subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), as new sub-advisers to the Fund to replace Batterymarch in the management of the Fund's assets invested in emerging markets, commencing on or about April 1, 1996. The retention by MFS of FCM and FCEM as sub-advisers to the Fund is subject to your approval, as shareholders of the Fund.
It is important to note that there would be no changes in your Fund's investment objectives or policies as a result of the replacement of Batterymarch with FCM and FCEM. Also, this change would not involve any change in MFS continuing to act as your Fund's investment adviser nor Oechsle International Advisors, L.P. continuing to act as the other sub-adviser for your Fund. THE TERMS AND CONDITIONS OF THE TWO NEW SUB-INVESTMENT ADVISORY AGREEMENTS BETWEEN MFS AND FCM AND BETWEEN FCM AND FCEM ARE SUBSTANTIALLY IDENTICAL TO THE TERMS AND CONDITIONS OF THE CURRENT SUB-INVESTMENT ADVISORY AGREEMENT BETWEEN MFS AND BATTERYMARCH. APPROVAL OF THE TWO NEW SUB-INVESTMENT ADVISORY AGREEMENTS WOULD HAVE NO EFFECT UPON THE AMOUNT OF MANAGEMENT FEES PAID BY THE FUND TO MFS. MFS, NOT THE FUND, PAYS MANAGEMENT FEES TO THE FUND'S SUB-ADVISERS, AND FCM AND FCEM WOULD RECEIVE FROM MFS THE SAME LEVEL OF COMPENSATION MFS CURRENTLY PAYS BATTERYMARCH.
THE BOARD OF TRUSTEES RESPONSIBLE FOR YOUR FUND RECOMMENDS THAT YOU APPROVE THE TWO NEW SUB-INVESTMENT ADVISORY AGREEMENTS BETWEEN MFS AND FCM AND BETWEEN FCM AND FCEM.
Because your Board of Trustees has approved the two new sub-investment advisory agreements, the matter is now subject to approval by you and your fellow shareholders at a special meeting of your Fund to be held on Monday, March 18, 1996. Even if you cannot attend, it is important that you complete and return the enclosed proxy card. TIMELY VOTES SAVE MONEY.
Should you have any questions, please call the Fund's shareholder servicing agent, MFS Service Center, Inc., toll-free at 1-800-225-2606 any business day between 8 a.m. and 6 p.m.
500 Boylston Street, Boston, Massachusetts 02116
Notice of Special Meeting of Shareholders To be held March 18, 1996
A Special Meeting of Shareholders of MFS World Growth Fund (the "Fund") will be held at 500 Boylston Street, Boston, Massachusetts, on Monday, March 18, 1996 at 9:30 a.m. for the following purposes:
ITEM 1. To approve two new Sub-Investment Advisory Agreements, one between Massachusetts Financial Services Company ("MFS") and Foreign & Colonial Management Limited ("FCM"), and the other between FCM and its subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), containing substantially the same terms and conditions as the current Sub-Investment Advisory Agreement between MFS and Batterymarch Financial Management, Inc. ("Batterymarch"), to become effective on or about April 1, 1996.
ITEM 2. To transact such other business as may come before the Special Meeting of Shareholders and any adjournments thereof.
YOUR TRUSTEES RECOMMEND THAT YOU VOTE IN FAVOR OF ITEM 1.
Only shareholders of record on January 18, 1996 will be entitled to vote at the Special Meeting of Shareholders and at any adjournments thereof.
STEPHEN E. CAVAN, Secretary and Clerk
YOUR VOTE IS IMPORTANT. WE WOULD APPRECIATE YOUR PROMPTLY VOTING, SIGNING, DATING AND RETURNING THE ENCLOSED PROXY, WHICH WILL HELP IN AVOIDING THE ADDITIONAL EXPENSE OF A SECOND SOLICITATION. THE ENCLOSED ADDRESSED ENVELOPE REQUIRES NO POSTAGE AND IS PROVIDED FOR YOUR CONVENIENCE.
This proxy statement is furnished in connection with the solicitation of proxies by and on behalf of the Board of Trustees (the "Board of Trustees") of MFS Series Trust VIII (the "Trust") on behalf of MFS World Growth Fund (the "Fund"), a series of the Trust, to be used at a Special Meeting of Shareholders (the "Special Meeting") to be held at 500 Boylston Street, Boston, Massachusetts on March 18, 1996, and at any adjournment thereof, for the purposes set forth in the accompanying Notice. If the enclosed form of proxy is executed and returned, it may nevertheless be revoked prior to its exercise by a signed writing filed with the Trust's transfer and shareholder servicing agent, MFS Service Center, Inc. (the "Shareholding Servicing Agent" or "MFSC"), P.O. Box 2281, Boston, Massachusetts 02107-9906, or delivered at the Special Meeting. On January 18, 1996 there were outstanding shares of the Fund. Shareholders of record at the close of business on January 18, 1996 will be entitled to one vote for each share held.
The mailing address of the Fund is 500 Boylston Street, Boston, Massachusetts 02116. Solicitation of proxies is being made by the mailing of this Notice and proxy statement with its enclosures on or about February 1, 1996. A copy of the Trust's Annual Report may be obtained without charge by contacting the Shareholder Servicing Agent at P.O. Box 9024, Boston, MA 02205-9824, or by telephone toll-free at (800) 637-2304.
ITEM 1--TO APPROVE TWO NEW SUB-INVESTMENT ADVISORY AGREEMENTS, ONE BETWEEN MASSACHUSETTS FINANCIAL SERVICES COMPANY ("MFS") AND FOREIGN & COLONIAL MANAGEMENT LIMITED ("FCM"), AND THE OTHER BETWEEN FCM AND ITS SUBSIDIARY, FOREIGN & COLONIAL EMERGING MARKETS LIMITED, CONTAINING SUBSTANTIALLY THE SAME TERMS AND CONDITIONS AS THE CURRENT SUB-INVESTMENT ADVISORY AGREEMENT BETWEEN MFS AND BATTERYMARCH FINANCIAL MANAGEMENT, INC., TO BECOME EFFECTIVE ON OR ABOUT APRIL 1, 1996.
THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS OF THE FUND APPROVE THE NEW SUB-INVESTMENT ADVISORY AGREEMENTS.
Massachusetts Financial Services Company ("MFS" or the "Adviser") serves as the Fund's investment adviser and provides the Fund with overall investment advisory and administrative services, as well as general office facilities. MFS manages the Fund's assets invested in U.S. markets, and has engaged two sub-advisers, Oechsle International Advisors, L.P. ("Oechsle") and Batterymarch Financial Management, Inc. ("Batterymarch"), to manage the Fund's assets invested in foreign markets. Oechsle manages the Fund's assets invested in developed foreign markets, such as Western Europe, Japan, Australia and New Zealand, and Batterymarch manages the Fund's assets invested in emerging markets, such as Latin America and the Pacific Rim (excluding Japan).
At December 31, 1995, the Fund's net assets were $ and the net assets of the sub-portfolios of the Fund managed by MFS, Oechsle and Batterymarch were $ , $ and $ , respectively.
The Board of Trustees has approved the termination by MFS of Batterymarch as a sub-adviser to the Fund and the retention by MFS of Foreign & Colonial Management Limited ("FCM") and of its subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), as new sub-advisers to the Fund to replace Batterymarch. Under this arrangement, FCM and FCEM would commence managing the Fund's assets invested in emerging markets on or about April 1, 1996. FCM and FCEM are described below under the caption "Description of FCM and FCEM; Strategic Alliance Between MFS and FCM."
At the Special Meeting, shareholders of the Fund will be asked to approve two new Sub-Investment Advisory Agreements, one between MFS and FCM, and the other between FCM and FCEM (the "New Sub-Investment Advisory Agreements"). The proposed New Sub-Investment Advisory Agreements are substantially identical to the Sub-Investment Advisory Agreement between MFS and Batterymarch dated January 18, 1995 and currently in effect (the "Current Sub-Investment Advisory Agreement"). A description of the New Sub-Investment Advisory Agreements and the services to be provided by FCM and FCEM thereunder is set forth below under the caption "Description of the New Sub-Investment Advisory Agreements."
Approval of the new Sub-Investment Advisory Agreements would have no effect upon the amount of management fees paid by the Fund to MFS. MFS, not the Fund, pays management fees to the Fund's sub-advisers, and FCM and FCEM would receive from MFS the same level of compensation MFS currently pays Batterymarch.
DESCRIPTION OF MFS AND BATTERYMARCH
MFS, a Delaware corporation located at 500 Boylston Street, Boston, Massachusetts 02116, manages the Fund pursuant to an Investment Advisory Agreement, dated August 30, 1993 (the "Advisory Agreement"). The Adviser provides the Fund with overall investment advisory and administrative services, as well as general office facilities. Subject to such policies as the Board of Trustees may determine, the Adviser makes investment decisions for the Fund. For its services and facilities, MFS receives an annual management fee, computed and paid monthly, in an amount equal to 0.90% of the average daily net assets of the Fund on an annualized basis. The total management fee paid by the Fund to the Adviser under the Investment Advisory Agreement during the Fund's fiscal year ended October 31, 1995 was $3,459,664.
Batterymarch, a Maryland corporation located at 200 Clarendon Street, Boston, Massachusetts 02116, is a registered investment adviser that acts as one of the Fund's two sub-advisers pursuant to the Current Sub-Investment Advisory Agreement. The Current Sub-Investment Advisory Agreement was most recently approved by the Board of Trustees, including all of the Trustees who are not "interested persons," as defined in the Investment Company Act of 1940, as amended (the "1940 Act"), of any party to the Current Sub-Investment Advisory Agreement (collectively, the "Independent Trustees"), on June 1, 1995, and was approved by the Fund's shareholders on January 18, 1995, in connection with the acquisition of the predecessor to Batterymarch by Legg Mason, Inc.
Under the Current Sub-Investment Advisory Agreement, the Adviser has delegated to Batterymarch the authority to make investment decisions with respect to that portion of the Fund's assets as the Adviser shall from time to time designate. This delegation is subject to oversight by the Adviser and determinations as to investment policy by the Board of Trustees. Batterymarch manages the Fund's assets which the Adviser has designated for investment in emerging countries or regions. For its services, the Adviser (not the Fund) pays Batterymarch a management fee computed and paid monthly, in an amount equal to 1.00% per annum of the average daily net asset value of the Fund's assets managed by Batterymarch. The total management fee paid by the Adviser to Batterymarch under the Current Sub-Investment Advisory Agreement during the Fund's fiscal year ended October 31, 1995 was $651,916.
DESCRIPTION OF FCM AND FCEM; STRATEGIC ALLIANCE BETWEEN MFS AND FCM
DESCRIPTION OF FCM AND FCEM. FCM and FCEM are each companies incorporated under the laws of England and Wales and are located at Exchange House, Primrose Street, London EC2A 2NY, United Kingdom. FCM is a wholly owned subsidiary of Hypo Foreign & Colonial Management (Holdings) Ltd. ("Hypo F&C"). Fifty percent of the outstanding voting securities of Hypo F&C is owned by each of (i) Pountney Hill Holdings Limited, which is wholly owned by five closed-end, publicly listed investment trusts managed by FCM, including Foreign & Colonial Investment Trust PLC, and (ii) Hypo (U.K.) Holdings Ltd., which is a wholly owned subsidiary of HYPO-BANK (Bayerische Hypotheken-und Wechsel-Bank AG), the oldest publicly listed, and fifth largest, commercial bank in Germany, founded in 1835. FCM has a history of money management dating from 1868 and the establishment of the world's oldest closed-end fund, Foreign & Colonial Investment Trust PLC. As of December 31, 1995, FCM managed approximately U.S. $[ ] billion of assets, including approximately U.S. $[ ] billion of assets in equity securities and approximately U.S. $[ ] billion of assets in fixed income securities.
FCEM is a wholly owned subsidiary of FCEM (HOLDINGS) Limited ("FCEM Holdings"). FCEM Holdings is a subsidiary of FCM, which owns 75.1% of the outstanding voting securities of FCEM Holdings. Garantia Banking Limited, a wholly owned subsidiary of Banco de Investimentos Garantia SA located at Rua Jorge Coelho, 16-13th Floor, CEP 01451-020, Sao Paulo, Brazil, owns 14.9% of the outstanding voting securities of FCEM Holdings, and Audley William Twiston Davies, the Managing Director of FCEM, owns 10% of the outstanding voting securities of FCEM Holdings. FCEM manages emerging market investments for FCM and FCEM serves as the investment adviser to public closed-end and open-end funds and segregated accounts specializing in emerging markets. As of December 31, 1995, FCEM managed approximately U.S. $[ ] billion of assets invested in emerging markets.
The name, address and principal occupation of the principal executive officer and each director of FCM and FCEM are set forth on Appendix A. The size and the rate of FCM's and FCEM's investment advisory compensation with respect to other U.S. registered investment companies having a similar investment objective to the Fund advised by FCM and FCEM are set forth in Appendix B.
STRATEGIC ALLIANCE BETWEEN MFS AND FCM. MFS and FCM have entered into a strategic alliance pursuant to which they have agreed to cooperate in distributing, advising and managing investment products throughout the world. In this arrangement certain expenses and revenues relating to their cooperative activities, including, if Item I is approved by shareholders of the Fund, investment advisory fees received from the Fund and certain expenses incurred by MFS, FCM and their affiliates attributable to their services to the Fund, are shared. As part of this alliance, the portfolio managers and investment analysts of MFS and FCM share their views on a variety of investment related issues, such as the economy, securities markets, portfolio securities and their issuers, investment recommendations, strategies and techniques, risk analysis, trading strategies and other portfolio management matters. MFS has access to the extensive international equity investment expertise of FCM, and FCM has access to the extensive U.S. equity investment expertise of MFS. MFS investment analysts are working for an extended period with FCM portfolio managers and investment analysts at their offices in London. In return, one or more FCM employees are expected to work in a similar manner at MFS' Boston offices.
In certain instances there may be securities which are suitable for the Fund's portfolio as well as for portfolios of other clients of MFS or clients of FCM. Some simultaneous transactions are inevitable when several clients receive investment advice from MFS and FCM, particularly when the same security is suitable for more than one client. While in some cases this arrangement could have a detrimental effect on the price or availability of the security as far as the Fund is concerned, in other cases it may produce increased investment opportunities for the Fund.
PROPOSED SUBSTITUTION OF FCM AND FCEM FOR BATTERYMARCH
MFS has exercised its right under the Current Sub-Investment Advisory Agreement with Batterymarch to terminate that Agreement effective on or about April 1, 1996. However, the termination of that Agreement is conditioned upon the approval by the Fund's shareholders of the proposed New Sub-Investment Advisory Agreements with FCM and FCEM, which if so approved will become effective on or about April 1, 1996. If the New Sub-Investment Advisory Agreements are not approved by the Fund's shareholders, Batterymarch will continue to serve as sub-adviser to the Fund pursuant to the Current Sub-Investment Advisory Agreement pending consideration by MFS and the Board of Trustees, including the Independent Trustees, of what further action, if any, should be taken in the best interests of shareholders.
As discussed more fully below under the caption "Description of the New Sub-Investment Advisory Agreements," the terms of the proposed New Sub-Investment Advisory Agreements are substantially identical to the Current
Agreement. Under the Current Sub-Investment Advisory Agreement, Batterymarch receives a sub-investment management fee from MFS (not from the Fund) equal to 1.00% per annum of the average daily net asset value of the assets of the Fund managed by Batterymarch. Likewise, under the proposed New Sub-Investment Advisory Agreements between MFS and FCM, FCM would receive a sub-investment management fee from MFS (not from the Fund) equal to 1.00% per annum of the average daily net asset value of the assets of the Fund managed by FCM. FCM would, in turn, pay the sub-investment management fee it receives from MFS over to FCEM, as the proposed New Sub-Investment Advisory Agreement between FCM and FCEM provides that FCEM would receive a sub-investment management fee from FCM (not from the Fund or MFS) equal to 1.00% per anum of the average daily net asset value of the assets of the Fund managed by FCEM.
In addition to receiving this cash compensation, FCM and FCEM, like Batterymarch, would receive certain benefits from placing portfolio transactions on behalf of the Fund. The initial criteria FCM and FCEM apply in selecting a broker to effect a securities transaction for their respective clients is whether the broker can provide the best price and execution for the transaction. In accordance with Section 28(e) of the Securities Exchange Act of 1934, however, FCM and FCEM may from time to time select as brokers for their respective clients those firms that furnish research services to them. These services are generally defined as those providing lawful and appropriate assistance to FCM and FCEM in the performance of their investment decision making responsibilities. Among the specific kinds of research services that FCM and FCEM may receive from brokers are fundamental analysis of the economy, the political environment, the financial markets, individual companies and specific industries and technical analysis of individual securities. In following a policy of selecting brokers furnishing research services, FCM and FCEM may pay commissions higher than those obtainable from other brokers who do not provide such services. FCM and FCEM will use the research they obtain to service all the accounts they manage and use no formal procedures to direct client transactions to a particular broker in return for products and research services received.
Joseph C. Williams is currently the portfolio manager for the assets of the Fund allocated to Batterymarch. Mr. Williams leads the emerging markets investment activities of Batterymarch and has been a portfolio manager with the predecessor of Batterymarch since 1994. Prior to joining Batterymarch, Mr. Williams served as a director at Morgan Grenfell Investment Services in London.
If the Fund's shareholders approve the proposed New Sub-Investment Advisory Agreements, it is anticipated that Dr. Arnab Kumar Banerji, Chief Investment Officer of FCEM, will become the portfolio manager for the assets of the Fund allocated to FCM and FCEM. Dr. Banerji has been employed by FCEM since 1993 before which he served as Joint Head of Emerging Markets for Citibank Global Asset Management since 1989.
RECOMMENDATION OF THE BOARD OF TRUSTEES
The Board of Trustees approved the proposed New Sub-Investment Advisory Agreements at a meeting held on December 13, 1995. Prior to this meeting, MFS had discussed with the Board of Trustees its analysis that FCM and FCEM achieved superior investment performance in the management of emerging market investments. MFS informed the Board of Trustees at a meeting held on October 11, 1995 of its intention to recommend that the Board of Trustees consider replacing Batterymarch with FCM and FCEM. Before approving these Agreements, the Board reviewed and discussed materials furnished by MFS and FCM, including drafts of the proposed New Sub-Investment Advisory Agreements; background information concerning FCM and FCEM covering their corporate, management and operational structures and personnel, their history and significant achievements, their product lines and emphasis, and their investment philosophy and style; the investment performance of accounts advised by FCM and FCEM as compared to various benchmarks and to the investment performance of the portion of the Fund's assets managed by Batterymarch; the financial statements of Hypo F&C (FCM's parent); and certain regulatory filings of FCM and FCEM. Representatives of FCM and MFS discussed these materials with the Board of Trustees during the meeting.
Upon conclusion of its review of these materials and the presentations made by FCM and MFS, the Board of Trustees, including the Independent Trustees, unanimously approved the proposed New Sub-Investment Advisory Agreements. In deciding to approve these Agreements, the Board placed particular emphasis on the following factors:
the investment performance of FCM and FCEM in managing emerging market investments as those results significantly outperformed relevant benchmarks;
the depth, qualifications and experience of FCM's and FCEM's investment management and research personnel and the fact that FCM and FCEM have 23 investment management and research personnel devoted to emerging markets;
the terms of the proposed New Sub-Investment Advisory Agreements, which are substantially identical to the Current Sub-Investment Advisory Agreement;
the fact that FCM and FCEM would receive from MFS the same compensation for their sub-advisory services as MFS currently pays Batterymarch;
the history, reputation and background of FCM and FCEM and their financial
the fact that MFS and FCM have entered into a strategic alliance, as discussed above under the caption "Description of FCM and FCEM; Strategic Alliance between MFS and FCM."
THE BOARD OF TRUSTEES HAS DETERMINED THAT THE PROPOSED NEW SUB-INVESTMENT ADVISORY AGREEMENTS ARE IN THE BEST INTEREST OF THE FUND AND ITS SHAREHOLDERS AND RECOMMENDS THEIR APPROVAL BY SHAREHOLDERS.
DESCRIPTION OF THE NEW SUB-INVESTMENT ADVISORY AGREEMENTS
The Advisory Agreement between MFS and the Fund permits MFS from time to time to engage one or more sub-advisers to assist in the performance of its services. Pursuant to the Advisory Agreement, MFS has engaged Batterymarch as one of two sub-advisers to the Fund.
Under the proposed New Sub-Investment Advisory Agreement between MFS and FCM (the "FCM Agreement"), which is substantially identical to the Current Sub-Investment Advisory Agreement, MFS may delegate to FCM the authority to make investment decisions for the Fund. Pursuant to the FCM Agreement, it is intended that FCM, through FCEM, would provide portfolio management services for assets of the Fund invested in emerging markets. For its services, MFS would pay FCM a management fee computed and paid monthly, in an amount equal to 1.00% per annum of the average daily net asset value of the Fund's assets managed by FCM. This is the same fee as is currently paid by MFS to Batterymarch under the Current Sub-Investment Advisory Agreement.
The terms of the FCM Agreement would permit FCM from time to time to engage one or more sub-advisers to assist in the performance of its services. Under the terms of the proposed New Sub-Investment Advisory Agreement between FCM and FCEM (the "FCEM Agreement"), FCM would delegate to FCEM its obligations under the terms of the FCM Agreement, which reflects the fact that FCEM is the FCM affiliate which has the investment expertise in emerging markets. For these services, FCM would pay FCEM under the FCEM Agreement a sub-advisory fee equal to 1.00% on an annualized basis of the average daily net asset value of the assets of the Fund managed by FCEM. The FCEM Agreement is substantially identical to the FCM Agreement.
Under the terms of the proposed New Sub-Investment Advisory Agreements, FCM and FCEM would be required to furnish MFS with information and advice, including advice on the allocation of investments among emerging market countries or regions, relating to such portion of the Fund's assets as MFS shall from time to time designate, to furnish continuously an investment program with respect to such assets, and otherwise to manage the Fund's investments in accordance with the investment objective and policies as stated in the Fund's then current Prospectus and Statement of Additional Information. FCM and FCEM would bear all expenses in connection with the performance of their services under the proposed New Sub-Investment Advisory Agreements.
The proposed New Sub-Investment Advisory Agreements provide that in the absence of willful misfeasance, bad faith or gross negligence, neither FCM nor FCEM shall be liable for any act or omission in the course of, or in connection with, the rendering of their services thereunder.
Each proposed New Sub-Investment Advisory Agreement would remain in effect pursuant to its terms until April 1, 1998, and thereafter with respect to the Fund for successive periods if and so long as such continuation is specifically approved at least annually by (a) the Board of Trustees or (b) the affirmative vote of the lesser of (1) more than fifty percent (50%) of the outstanding shares of the Fund or (2) sixty-seven percent (67%) or more of the shares of the Fund present at the meeting if more than fifty percent (50%) of the outstanding shares of the Fund are represented at the meeting in person or by proxy (a "Majority Vote"), provided that in either event the continuation also is approved by a majority of the Independent Trustees by a vote cast in person at a meeting called for the purpose of voting on such approval. Each proposed New Sub-Investment Advisory Agreement would be terminable, without penalty, by the Board of Trustees, by a Majority Vote of the Fund's shareholders, by MFS or by FCM, and in the case of the FCEM Agreement, by FCEM, in each case on not more than sixty nor less than thirty days' written notice, unless terminated by FCM, with respect to the FCM Agreement, or FCEM, with respect to the FCEM Agreement, in which case such termination is required to be on not more than ninety days nor less than sixty days written notice. Each proposed New Sub-Investment Advisory Agreement would terminate automatically in the event of its assignment (as defined in the 1940 Act) or in the event of the termination of the Advisory Agreement between the Trust, on behalf of the Fund, and MFS.
The description of the proposed New Sub-Investment Advisory Agreements is qualified in its entirety by reference to the forms of FCM Agreement and FCEM Agreement which are attached as Appendix C and Appendix D, respectively, to this proxy statement.
MANNER OF VOTING PROXIES AND VOTE REQUIRED
All proxies received by management of the Trust will be voted on all matters presented at the Special Meeting and at any adjournments thereof, and if not Limited to the contrary, will be voted FOR Item 1. Approval of Item 1 requires a Majority Vote of the Fund's shareholders (as defined above).
Broker-dealer firms holding Fund shares in "street name" for the benefit of their customers and clients will request the instructions of such customers and clients on how to vote their shares on Item 1 before the Special Meeting. All proxies voted, including proxies that reflect (i) broker non-votes (if a broker has voted on any item before the Meeting) or (ii) abstentions, will be counted toward establishing a quorum. Abstentions and broker non-votes will have the same effect as a vote AGAINST Item 1.
At some point during the solicitation period, the Fund or its agents may solicit votes by telephone. While votes taken by telephone are authorized by the Trust's By-Laws, they may be subject to challenge and thus the Fund has adopted procedures designed to ensure the validity of such votes. The Fund will require the telephone solicitor to follow one or more of the following procedures: (i) recording shareholders instructions; (ii) requiring shareholders to give their social security numbers or other identifying information such as randomly assigned Personal Identification Numbers; (iii) confirming votes by immediate follow-up calls; (iv) confirming votes by written confirmations by mail; and/or (v) following a script which has been filed with the SEC as additional soliciting material.
Management of the Trust knows of no other matters to be brought before the Special Meeting. If, however, any other matters come before the Special Meeting and any adjournments thereof, it is the management's intention that proxies not Limited to the contrary will be voted in accordance with the judgment of the persons named in the enclosed form of proxy.
The Trust is a Massachusetts business trust, and as such is not required to hold annual meetings of shareholders. However, meetings of shareholders may be held from time to time to consider such matters as the approval of investment management agreements or changes in certain investment restrictions. Proposals of shareholders which are intended to be presented at future shareholder's meetings must be received by the Trust a reasonable time prior to the Trust's solicitation of proxies relating to such future meeting.
The information contained in this proxy statement relating to FCM and FCEM has been furnished by FCM and FCEM.
The table contained in Appendix E hereto presents certain information regarding the ownership of Fund shares by Trustees of the Trust.
As discussed above, the Trust engages as its investment adviser MFS, a Delaware corporation, with offices at 500 Boylston Street, Boston, MA 02116. MFS is a wholly owned subsidiary of Sun Life Assurance Company of Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02181, which is in turn a wholly owned subsidiary of Sun Life Assurance Company of Canada, 150 King Street West, Toronto, Canada M5H1J9. The Trust engages as its distributor MFS Fund Distributors, Inc. ("MFD"), a Delaware corporation, with offices at 500 Boylston Street, Boston, MA 02116. MFD is a wholly owned subsidiary of MFS.
To obtain the necessary representation at the Special Meeting, solicitations may be made by mail, telephone, or interview by or its agents as well as by officers of the Fund, employees of MFS and securities dealers by whom shares of the Fund have been sold. It is anticipated that the total cost of any such solicitations, if made by or its agents, would be approximately $ plus out-of-pocket expenses, and if made by any other party, would be nominal. The expense of solicitations as well
and mailing of the enclosed form of proxy, and this Proxy Statement, will be borne by the Fund.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY
February 1, 1996 MFS World Growth Fund
(1)The address of each of the individuals listed above is Exchange House, Primrose Street, London EC2A 2NY, United Kingdom, unless indicated otherwise.
(2)The address of Messrs. Ducas and Palone is Suite 2910, 225 Franklin Street, Boston, Massachusetts 02110.
(1)The address of each of the individuals listed above is Exchange House, Primrose Street, London EC2A 2NY, United Kingdom, unless indicated otherwise.
REGISTERED INVESTMENT COMPANIES FOR WHICH CURRENTLY ACT AS INVESTMENT ADVISER
(1)A series of MFS Series Trust X.
(2)A series of MFS/Sun Life Series Trust.
(3)FCEM receives 1.25% of the value of the Fund's average weekly net assets (as opposed to average daily net assets).
SUB-ADVISORY AGREEMENT, dated this 1st day of April, 1996 by and between MASSACHUSETTS FINANCIAL SERVICES COMPANY, a Delaware corporation (the "Adviser") and FOREIGN & COLONIAL MANAGEMENT LIMITED, a company incorporated under the laws of England and Wales (the "Sub-Adviser").
WHEREAS, the Adviser provides MFS World Growth Fund (the "Fund"), a series of MFS Series Trust VIII (the "Trust"), an open-end investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), business services pursuant to the terms and conditions of an investment advisory agreement dated August 30, 1993 (the "Advisory Agreement") between the Adviser and the Trust, on behalf of the Fund; and
WHEREAS, the Sub-Adviser is willing to provide services to the Adviser on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties hereto as herein set forth, the parties covenant and agree as follows:
1. DUTIES OF THE SUB-ADVISER. The Sub-Adviser will furnish the Adviser with information and advice, including advice on the allocation of investments among emerging market countries or regions, relating to such portion of the Fund's assets as the Adviser shall from time to time designate (the "Designated Assets"). Subject to the supervision of the Trustees of the Trust and the Adviser, the Sub-Adviser will: (a) manage the Designated Assets on behalf of the Fund in accordance with the Fund's investment objective, policies and limitations as stated in the Fund's then current Prospectus (the "Prospectus") and Statement of Additional Information (the "Statement"), and the Trust's Declaration of Trust dated July 31, 1987, as amended and restated May 6, 1991, and Amended and Restated By-Laws, each as from time to time in effect (respectively, the "Declaration" and the "By-Laws") and in compliance with the 1940 Act and the rules, regulations and orders thereunder; (b) make investment decisions with respect to the Designated Assets; (c) place purchase and sale orders for portfolio transactions with respect to the Designated Assets; (d) manage otherwise uninvested cash assets with respect to the Designated Assets; (e) as the agent of the Fund, give instructions (including trade tickets) to the custodian and any sub-custodian of the Fund as to deliveries of securities, transfers of currencies and payments of cash with respect to the Designated Assets (the Sub-Adviser shall promptly notify the Adviser of such instructions); (f) employ professional portfolio managers to provide research services to the Fund; (g) attend periodic meetings of the Board of Trustees of the Trust and (h) obtain all the registrations, qualifications and consents, on behalf of the Fund, which are necessary for the Fund to purchase and sell assets in each jurisdiction (other than the United States) in which the Fund's Designated Assets are to be invested (the Sub-Adviser shall promptly provide the Adviser with copies of any such registrations, qualifications and consents). In providing these services, the Sub-Adviser will furnish continuously an investment program with respect to the Designated Assets. The Sub-Adviser shall be responsible for monitoring the Fund's compliance with the Prospectus, the Statement, the Declaration, the By-Laws and the 1940 Act and the rules, regulations and orders thereunder and in monitoring such compliance the Sub-Adviser shall do so in the functional currency of the Fund. The Sub-Adviser shall only be responsible for compliance with the above-mentioned restrictions in regards to the Designated Assets. The Adviser agrees to provide the Sub-Adviser with such assistance as may be reasonably requested by the Sub-Adviser in connection with its activities under this Agreement, including, without limitation, information concerning the Fund, its funds available, or to become available, for investment and generally as to the conditions of the Fund's affairs. From time to time the Adviser will notify the Sub-
Adviser of the aggregate U.S. Dollar amount of the Designated Assets. The Adviser will have responsibility for exercising proxy, consent and other rights pertaining to the Designated Assets; PROVIDED, HOWEVER, that the Sub-Adviser will, as requested, make recommendations to the Adviser as to the manner in which such proxy, consent and other rights should be exercised.
Should the Trustees of the Trust or the Adviser at any time make any determination as to investment policy and notify the Sub-Adviser thereof in writing, the Sub-Adviser shall be bound by such determination for the period, if any, specified in such notice or until notified that such determination has been revoked. Further, the Adviser or the Trustees of the Trust may at any time, upon written notice to the Sub-Adviser, suspend or restrict the right of the Sub-Adviser to determine what Designated Assets shall be purchased or sold and what portion, if any, of the Fund's Designated Assets shall be held uninvested. It is understood that the Adviser undertakes to discuss with the Sub-Adviser any such determinations of investment policy and any such suspension or restrictions on the right of the Sub-Adviser to determine what Designated Assets shall be purchased or sold or held uninvested, prior to the implementation thereof.
2. CERTAIN INFORMATION TO THE SUB-ADVISER. Copies of the Prospectus, the Statement, the Declaration and the By-Laws have been delivered to the Sub-Adviser. The Adviser agrees to notify the Sub-Adviser of each change in the investment policies of the Fund and to provide to the Sub-Adviser as promptly as practicable copies of all amendments and supplements to the Prospectus, the Statement, the Declaration and the By-Laws. In addition, the Adviser will promptly provide the Sub-Adviser with any procedures applicable to the Sub-Adviser adopted from time to time by the Trustees of the Trust and agrees to provide promptly to the Sub-Adviser copies of all amendments thereto.
3. EXECUTION OF CERTAIN DOCUMENTS. Subject to any other written instructions of the Adviser and the Trustees of the Trust, the Sub-Adviser is hereby appointed the Adviser's and the Trust's agent and attorney-in-fact to execute account documentation, agreements, contracts and other documents as the Sub-Adviser shall be requested by brokers, dealers, counterparties and other persons in connection with its management of the Designated Assets.
4. REPORTS. The Sub-Adviser shall furnish to the Trustees of the Trust or the Adviser, or both, as may be appropriate, quarterly reports of its activities on behalf of the Fund, as required by applicable law or as otherwise requested from time to time by the Trustees of the Trust or the Adviser, and such additional information, reports, evaluations, analyses and opinions as the Trustees of the Trust or the Adviser, as appropriate, may request from time to time.
5. BROKERAGE. In connection with the selections of brokers, dealers or other entities and the placing of orders for the purchase and sale of portfolio investments for the Fund, the Sub-Adviser is directed to seek for the Fund execution at the most favorable price by responsible brokerage firms at reasonably competitive commission rates. In fulfilling this requirement, the Sub-Adviser shall not be deemed to have acted unlawfully or to have breached any duty, created by this Agreement or otherwise, solely by reason of its having caused the Fund to pay a broker, dealer or other entity an amount of commission for effecting a securities transaction in excess of the amount of commission another broker, dealer or other entity would have charged for effecting that transaction, if the Sub-Adviser determined in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services (within the meaning of Section 28(e) of the Securities Exchange Act of 1934, as amended) provided by such broker, dealer or other entity, viewed in terms of either that particular transaction or the Sub-Adviser's overall responsibilities with respect to the Fund and to other clients of the Sub-Adviser as to which the Sub-Adviser exercises investment discretion.
6. SERVICES TO OTHER COMPANIES OR ACCOUNTS. On occasions when the Sub-Adviser deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients, the Sub-Adviser, to the extent permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction will be made by the Sub-Adviser in the manner it considers to be the most equitable. The Sub-Adviser agrees to allocate similarly opportunities to sell or otherwise dispose of securities among the Fund and other clients of the Sub-Adviser.
7. OTHER SUB-ADVISERS. The Sub-Adviser may from time to time enter into investment sub-advisory agreements with one or more investment advisers, (an "Other Sub-Adviser"), to the Fund to perform some or all of the services for which the Sub-Adviser is responsible pursuant to this Agreement upon such terms and conditions as the Adviser and the Sub-Adviser may determine; PROVIDED, HOWEVER, that such investment sub-advisory agreements have been approved by a majority of the Trustees of the Trust who are not interested persons of the Trust, or the Sub-Adviser or the Other Sub-Adviser and by vote of a majority of the outstanding voting securities of the Fund; and, PROVIDED, FURTHER, that the Sub-Adviser shall own a majority of the voting securities of any Other Sub-Adviser. The Sub-Adviser may terminate the services of any Other Sub-Adviser at any time in its sole discretion, and shall at such time assume the responsibilities of such Other Sub-Adviser unless and until a successor Other Sub-Adviser is selected. The Sub-Adviser shall be liable for any error of judgment or mistake of law by any Other Sub-Adviser and for any act or omission in the execution and management of the Fund by any Other Sub-Adviser.
8. COMPENSATION OF THE SUB-ADVISER. For the services to be rendered by the Sub-Adviser under this Agreement, the Adviser shall pay to the Sub-Adviser compensation, computed and paid monthly in arrears in U.S. dollars, at a rate of 1.00% per annum of the average daily net asset value of the Designated Assets. If the Sub-Adviser shall serve for less than the whole of any month, the compensation payable to the Sub-Adviser with respect to the Fund will be prorated. The Sub-Adviser will pay its expenses incurred in performing its duties under this Agreement. Neither the Trust nor the Fund shall be liable to the Sub-Adviser for the compensation of the Sub-Adviser. For the purpose of determining fees payable to the Sub-Adviser, the value of the Fund's net assets shall be computed at the times and in the manner specified in the Prospectus and/or Statement. In the event that the Adviser reduces its management fee payable under the Advisory Agreement in order to comply with the expense limitations of a State securities commission or otherwise (but not a voluntary reduction), the Sub-Adviser agrees to reduce its fee payable under this Agreement by a pro rata amount.
9. LIMITATION OF LIABILITY OF THE SUB-ADVISER. The Sub-Adviser shall not 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 and management of the Fund, except for willful misfeasance, bad faith or gross negligence in the performance of its duties and obligations hereunder. The Trust, on behalf of the Fund, may enforce any obligations of the Sub-Adviser under this Agreement and may recover directly from the Sub-Adviser for any liability it may have to the Fund.
10. ACTIVITIES OF THE SUB-ADVISER. The services of the Sub-Adviser to the Fund are not deemed to be exclusive, the Sub-Adviser being free to render investment advisory and/or other services to others. It is understood that the Trustees, officers and shareholders of the Trust, the Fund or the Adviser are or may be or become interested in the Sub-Adviser or any person controlling, controlled by or under common control with the Sub-Adviser, as trustees, officers, employees or otherwise and that trustees, officers and employees of the Sub-Adviser or any person controlling, controlled by or under common control with the Sub-Adviser may become similarly interested in the Trust, the Fund or the Adviser and that the Sub-Adviser may be or become interested in the Fund as a shareholder or otherwise.
11. COVENANTS OF THE SUB-ADVISER. The Sub-Adviser agrees that it (a) will not deal with itself, "affiliated persons" of the Sub-Adviser, the Trustees of the Trust or the Fund's distributor, as principals, agents, brokers or dealers in making purchases or sales of securities or other property for the account of the Fund, except as permitted by the 1940 Act and the rules, regulations and orders thereunder and subject to the prior written approval of the Adviser, (b) will not take a long or short position in the shares of the Fund except as permitted by the Declaration and (c) will comply with all other provisions of the Declaration and the By-Laws and the then-current Prospectus and Statement relative to the Sub-Adviser and its trustees, officers, employees and affiliates.
12. REPRESENTATIONS, WARRANTIES AND ADDITIONAL AGREEMENTS OF THE SUB-ADVISER. The Sub-Adviser represents, warrants and agrees that:
(a) It: (i) is registered as an investment adviser under the U.S. Investment Advisers Act of 1940 (the "Advisers Act"), is authorized to undertake investment business in the United Kingdom by virtue of its membership in the Investment Management Regulatory Organisation ("IMRO") and is registered under the laws of any jurisdiction in which the Sub-Adviser is required to be registered as an investment adviser in order to perform its obligations under this Agreement, and will continue to be so registered for so long as this Agreement remains in effect; (ii) is not prohibited by the 1940 Act or the Advisers Act from performing the services contemplated by this Agreement; (iii) has met, and will continue to meet for so long as this Agreement remains in effect, any other applicable Federal or State requirements, or the applicable requirements of any regulatory or industry self-regulatory agency, necessary to be met in order to perform the services contemplated by this Agreement; (iv) has the authority to enter into and perform the services contemplated by this Agreement; (v) will immediately notify the Adviser in writing of the occurrence of any event that would disqualify the Sub-Adviser from serving as an investment adviser of an investment company pursuant to Section 9(a) of the 1940 Act or otherwise; and (vi) will immediately notify the Adviser in writing of any change of control of the Sub-Adviser or any parent of the Sub-Adviser resulting in an "assignment" of this Agreement.
(b) It will maintain, keep current and preserve on behalf of the Fund, in the manner and for the periods of time required or permitted by the 1940 Act and the rules, regulations and orders thereunder and the Advisers Act and the rules, regulations and orders thereunder, records relating to investment transactions made by the Sub-Adviser for the Fund as may be reasonably requested by the Adviser or the Fund from time to time. The Sub-Adviser agrees that such records are the property of the Fund, and will be surrendered to the Fund promptly upon request; PROVIDED, HOWEVER, that the Sub-Adviser may retain copies of such records for archival purposes as required by IMRO.
(c) The Sub-Adviser has adopted a written code of ethics complying with the requirements of Rule 17j-1 under the 1940 Act and, if it has not already done so, will provide the Adviser and the Trust with a copy of such code of ethics, and upon any amendment to such code of ethics, promptly provide such amendment. At least annually the Sub-Adviser will provide the Trust and the Adviser with a certificate signed by the chief compliance officer (or the person performing such function) of the Sub-Adviser certifying, to the best of his or her knowledge, compliance with the code of ethics during the immediately preceding twelve (12) month period, including any material violations of or amendments to the code of ethics or the administration thereof.
(d) It has provided the Adviser and the Trust with a copy of its Form ADV as most recently filed with the Securities and Exchange Commission (the "SEC") and will, promptly after filing any amendment to its Form ADV with the SEC, furnish a copy of such amendment to the Adviser and the Trust.
13. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement shall become effective on the date first above written and shall govern the relations between the parties hereto thereafter, and shall remain in force until April 1, 1998 and each year thereafter but only so long as its continuance is "specifically approved at least annually" (a) by the vote of a majority of the Trustees of the Trust who are not "interested persons" of the Trust or of the Adviser or of the Sub-Adviser at a meeting specifically called for the purpose of voting on such approval, and (b) by the Board of Trustees of the Trust, or by "vote of a majority of the outstanding voting securities" of the Fund. This Agreement may be terminated at any time without the payment of any penalty by the Trustees of the Trust, by "vote of a majority of the outstanding voting securities" of the Fund or by the Adviser, on not more than sixty days nor less than thirty days written notice, or by the Sub-Adviser on not more than ninety days nor less than sixty days written notice. This Agreement shall automatically terminate in the event of its "assignment" or in the event that the Advisory Agreement shall have terminated for any reason.
14. AMENDMENTS TO THIS AGREEMENT. This Agreement may be amended only if such amendment is approved by "vote of a majority of the outstanding voting securities" of the Fund, by the Adviser and by the Sub-Adviser.
15. CERTAIN DEFINITIONS. The terms "specifically approved at least annually", "vote of a majority of the outstanding voting securities", "assignment", "control", "affiliated persons" and "interested person", when used in this Agreement, shall have the respective meanings specified, and shall be construed in a manner consistent with, the 1940 Act and the rules, regulations and orders thereunder, SUBJECT, HOWEVER, to such exemptions as may be granted by the SEC under the 1940 Act.
16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; DUTY TO UPDATE INFORMATION. All representations and warranties made by the Sub-Adviser pursuant to Section 12 hereof shall survive for the duration of this Agreement and the Sub-Adviser shall immediately notify, but in no event later than five (5) business days, the Adviser in writing upon becoming aware that any of the foregoing representations and warranties are no longer true.
17. MISCELLANEOUS. This Agreement shall be governed by and construed in accordance with the internal laws of The Commonwealth of Massachusetts. All notices provided for by this Agreement shall be in writing and shall be deemed given when received, against appropriate receipt, by the Sub-Adviser's Secretary in the case of the Sub-Adviser, the Adviser's General Counsel in the case of the Adviser, and the Trust's Secretary in the case of the Fund, or such other person as a party shall designate by notice to the other parties. This Agreement constitutes the entire agreement among the parties hereto and supersedes any prior agreement among the parties relating to the subject matter hereof. The section headings of this Agreement are for convenience of reference and do not constitute a part hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered in their names and on their behalf by the undersigned, thereunto duly authorized, and their respective seals to be hereto affixed, all as of the day and year first written above.
The foregoing is hereby agreed to:
A copy of the Declaration of Trust of the Trust is on file with the Secretary of State of The Commonwealth of Massachusetts. The parties hereto acknowledge that the obligations of or arising out of this instrument are not binding upon any of the Trust's trustees, officers, employees, agents or shareholders individually, but are binding solely upon the assets and property of the Trust in accordance with its proportionate interest hereunder. If this instrument is executed by the Trust on behalf of one or more series of the Trust, the parties hereto acknowledge that the assets and liabilities of each series of the Trust are separate and distinct and that the obligations of or arising out of this instrument are binding solely upon the assets or property of the series on whose behalf the Trust has executed this instrument. If the Trust has executed this instrument on behalf of more than one series of the Trust, the parties hereto also agree that the obligations of each series hereunder shall be several and not joint, in accordance with its proportionate interest hereunder, and the parties hereto agree not to proceed against any series for the obligations of another series.
MFS SERIES TRUST VIII, on behalf of
SUB-ADVISORY AGREEMENT, dated this 1st day of April, 1996, by and between FOREIGN & COLONIAL MANAGEMENT LIMITED, a company incorporated under the laws of England and Wales (the "Sub-Adviser"), and FOREIGN & COLONIAL EMERGING MARKETS LIMITED, a company incorporated under the laws of England and Wales ("FCEM").
WHEREAS, Massachusetts Financial Services Company (the "Adviser") provides MFS World Growth Fund (the "Fund"), a series of MFS Series Trust VIII (the "Trust"), an open-end investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), business services pursuant to the terms and conditions of an investment advisory agreement dated August 30, 1993 (the "Advisory Agreement") between the Adviser and the Trust, on behalf of the Fund;
WHEREAS, the Sub-Adviser provides services to the Adviser pursuant to the terms and conditions of a sub-advisory agreement dated the date hereof (the "FCM Sub-Advisory Agreement") between the Adviser and the Sub-Adviser; and
WHEREAS, FCEM is willing to provide services to the Sub-Adviser on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements of the parties hereto as herein set forth, the parties covenant and agree as follows:
1. DUTIES OF FCEM. FCEM will furnish the Sub-Adviser with information and advice, including advice on the allocation of investments among emerging market countries or regions, relating to such portion of the Fund's assets as the Adviser, Sub-Adviser and FCEM shall from time to time mutually designate (the "Designated Assets"). Subject to the supervision of the Trustees of the Trust, the Adviser and the Sub-Adviser, FCEM will: (a) manage the Designated Assets on behalf of the Fund in accordance with the Fund's investment objective, policies and limitations as stated in the Fund's then current Prospectus (the "Prospectus") and Statement of Additional Information (the "Statement"), and the Trust's Declaration of Trust dated July 31, 1987, as amended and restated May 6, 1991, and Amended and Restated By-Laws, each as from time to time in effect (respectively, the "Declaration" and the "By-Laws") and in compliance with the 1940 Act and the rules, regulations and orders thereunder; (b) make investment decisions with respect to the Designated Assets; (c) place purchase and sale orders for portfolio transactions with respect to the Designated Assets; (d) manage otherwise uninvested cash assets with respect to the Designated Assets; (e) as the agent of the Fund, give instructions (including trade tickets) to the custodian and any sub-custodian of the Fund as to deliveries of securities, transfers of currencies and payments of cash with respect to the Designated Assets (FCEM shall promptly notify the Adviser and the Sub-Adviser of such instructions); (f) employ professional portfolio managers to provide research services to the Fund; (g) attend periodic meetings of the Board of Trustees of the Trust and (h) obtain all the registrations, qualifications and consents, on behalf of the Fund, which are necessary for the Fund to purchase and sell assets in each jurisdiction (other than the United States) in which the Designated Assets are to be invested (FCEM shall promptly provide the Adviser and the Sub-Adviser with copies of any such registrations, qualifications and consents). In providing these services, FCEM will furnish continuously an investment program with respect to the Designated Assets. FCEM shall be responsible for monitoring the Fund's compliance with the Prospectus, the Statement, the Declaration, the By-Laws and the 1940 Act and the rules, regulations and orders thereunder and in monitoring such compliance FCEM shall do so in the functional currency of the Fund. FCEM shall only be responsible for compliance with the above-mentioned restrictions in regards to the Designated Assets.
The Sub-Adviser agrees to provide FCEM with such assistance as may be reasonably requested by FCEM in connection with its activities under this Agreement, including, without limitation, information concerning the Fund, its funds available, or to become available, for investment and generally as to the conditions of the Fund's affairs.
Should the Trustees of the Trust or the Adviser and the Sub-Adviser at any time make any determination as to investment policy and notify FCEM thereof in writing, FCEM shall be bound by such determination for the period, if any, specified in such notice or until notified that such determination has been revoked. Further, the Adviser and the Sub-Adviser or the Trustees of the Trust may at any time, upon written notice to FCEM, suspend or restrict the right of FCEM to determine what assets of the Fund shall be purchased or sold and what portion, if any, of the Fund's assets shall be held uninvested. It is understood that the Adviser and the Sub-Adviser undertake to discuss with FCEM any such determinations of investment policy and any such suspensions or restrictions on the right of FCEM to determine what assets of the Fund shall be purchased or sold or held uninvested, prior to the implementation thereof.
2. EXECUTION OF CERTAIN DOCUMENTS. Subject to any other written instructions of the Adviser, the Sub-Adviser and the Trustees of the Trust, FCEM is hereby appointed the Sub-Adviser's and the Trust's agent and attorney-in-fact to execute account documentation, agreements, contracts and other documents as FCEM shall be requested by brokers, dealers, counterparties and other persons in connection with its management of the Designated Assets.
3. BROKERAGE. In connection with the selections of brokers, dealers or other entities and the placing of orders for the purchase and sale of portfolio investments for the Fund with respect to the Designated Assets, FCEM is directed to seek for the Fund execution at the most favorable price by responsible brokerage firms at reasonably competitive commission rates. In fulfilling this requirement, FCEM shall not be deemed to have acted unlawfully or to have breached any duty, created by this Agreement or otherwise, solely by reason of its having caused the Fund to pay a broker, dealer or other entity an amount of commission for effecting a securities transaction in excess of the amount of commission another broker, dealer or other entity would have charged for effecting that transaction, if FCEM determined in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services (within the meaning of Section 28(e) of the Securities Exchange Act of 1934, as amended) provided by such broker, dealer or other entity, viewed in terms of either that particular transaction or FCEM's overall responsibilities with respect to the Fund and to other clients of FCEM as to which FCEM exercises investment discretion.
4. REPORTS. FCEM shall furnish to the Trustees of the Trust, the Adviser or the Sub-Adviser, or all of them, as may be appropriate, quarterly reports of its activities on behalf of the Fund, as required by applicable law or as otherwise requested from time to time by the Trustees of the Trust, the Adviser or the Sub-Adviser, and such additional information, reports, evaluations, analyses and opinions as the Trustees of the Trust, the Adviser or the Sub-Adviser, as appropriate, may request from time to time.
5. SERVICES TO OTHER COMPANIES OR ACCOUNTS. On occasions when FCEM deems the purchase or sale of a security to be in the best interest of the Fund as well as other clients, FCEM, to the extent permitted by applicable laws and regulations, may, but shall be under no obligation to, aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction will be made by FCEM in the manner it considers to be the most equitable. FCEM agrees to allocate similarly opportunities to sell or otherwise dispose of securities among the Fund and other clients of FCEM.
6. COMPENSATION OF FCEM. For the services to be rendered by FCEM under this Agreement, the Sub-Adviser shall pay to FCEM compensation, computed and paid monthly in arrears, at a rate of 1.00% per annum of the average daily net asset value of the Designated Assets. If FCEM shall serve for less than the whole of any month, the compensation payable to FCEM with respect to the Fund will be prorated. FCEM will pay its expenses incurred in performing its duties under this Agreement. Neither the Trust, the Adviser nor the Fund shall be liable to FCEM for the compensation of FCEM. For the purpose of determining fees payable
FCEM, the value of the Fund's net assets shall be computed at the times and in the manner specified in the Prospectus and/or Statement. In the event that the Sub-Adviser reduces its management fee payable under the FCM Sub-Advisory Agreement in order to comply with the expense limitations of a State securities commission or otherwise (but not a voluntary reduction), FCEM agrees to reduce its fee payable under this Agreement by a pro rata amount.
7. LIMITATION OF LIABILITY OF FCEM. FCEM shall not 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 and management of the Fund, except for willful misfeasance, bad faith or gross negligence in the performance of its duties and obligations hereunder. The Trust, on behalf of the Fund, may enforce any obligations of FCEM under this Agreement and may recover directly from FCEM for any liability it may have to the Fund.
8. ACTIVITIES OF FCEM. The services of FCEM to the Fund are not deemed to be exclusive, FCEM being free to render investment advisory and/or other services to others. It is understood that the Trustees, officers and shareholders of the Trust, the Fund, the Adviser or the Sub-Adviser are or may become interested in FCEM or any person controlling, controlled by or under common control with FCEM, as trustees, officers, employees or otherwise and that trustees, officers and employees of FCEM or any person controlling, controlled by or under common control with FCEM may become similarly interested in the Trust, the Fund, the Adviser or the Sub-Adviser and that FCEM may be or become interested in the Fund as a shareholder or otherwise.
9. COVENANTS OF FCEM. FCEM agrees that it (a) will not deal with itself, "affiliated persons" of FCEM, the Sub-Adviser, the Trustees of the Trust or the Fund's distributor, as principals, agents, brokers or dealers in making purchases or sales of securities or other property for the account of the Fund, except as permitted by the 1940 Act and the rules, regulations and orders thereunder and subject to the prior written approval of the Adviser, (b) will not take a long or short position in the shares of the Fund except as permitted by the Declaration and (c) will comply with all other provisions of the Declaration and the By-Laws and the then-current Prospectus and Statement relative to FCEM and its trustees, officers, employees and affiliates.
10. REPRESENTATIONS, WARRANTIES AND ADDITIONAL AGREEMENTS OF FCEM. FCEM represents, warrants and agrees that:
(a) It: (i) is registered as an investment adviser under the U.S. Investment Advisers Act of 1940 (the "Advisers Act"), is authorized to undertake investment business in the United Kingdom by virtue of its membership in the Investment Management Regulatory Organisation ("IMRO") and is registered under the laws of any jurisdiction in which FCEM is required to be registered as an investment adviser in order to perform its obligations under this Agreement, and will continue to be so registered for so long as this Agreement remains in effect; (ii) is not prohibited by the 1940 Act or the Advisers Act from performing the services contemplated by this Agreement; (iii) has met, and will continue to meet for so long as this Agreement remains in effect, any other applicable Federal or State requirements, or the applicable requirements of any regulatory or industry self-regulatory agency, necessary to be met in order to perform the services contemplated by this Agreement; (iv) has the authority to enter into and perform the services contemplated by this Agreement; (v) will immediately notify the Adviser and the Sub-Adviser in writing of the occurrence of any event that would disqualify FCEM from serving as an investment adviser of an investment company pursuant to Section 9(a) of the 1940 Act or otherwise; and (vi) will immediately notify the Adviser and the Sub-Adviser in writing of any change of control of FCEM or any parent of FCEM resulting in an "assignment" of this Agreement.
(b) It will maintain, keep current and preserve on behalf of the Fund, in the manner and for the periods of time required or permitted by the 1940 Act and the rules, regulations and orders thereunder and the Advisers Act and the rules, regulations and orders thereunder, records relating to investment transactions made by FCEM for the Fund as may be reasonably requested by the Adviser or the Fund from time to time. FCEM agrees that such records are the property of the Fund, and will be surrendered to the Fund promptly upon request; PROVIDED, HOWEVER, that FCEM may retain copies of such records for archival purposes as required by IMRO.
(c) It has adopted a written code of ethics complying with the requirements of Rule 17j-1 under the 1940 Act and, if it has not already done so, will provide the Adviser, the Sub-Adviser and the Trust with a copy of such code of ethics, and upon any amendment to such code of ethics, promptly provide such amendment. At least annually FCEM will provide the Trust, the Sub-Adviser and the Adviser with a certificate signed by the chief compliance officer (or the person performing such function) of FCEM certifying, to the best of his or her knowledge, compliance with the code of ethics during the immediately preceding twelve (12) month period, including any material violations of or amendments to the code of ethics or the administration thereof.
(d) It has provided the Adviser, the Sub-Adviser and the Trust with a copy of its Form ADV as most recently filed with the Securities and Exchange Commission (the "SEC") and will, promptly after filing any amendment to its Form ADV with the SEC, furnish a copy of such amendment to the Adviser, the Sub-Adviser and the Trust.
11. DURATION AND TERMINATION OF THIS AGREEMENT. This Agreement shall become effective on the date first above written and shall govern the relations between the parties hereto thereafter, and shall remain in force until April 1, 1998 and each year thereafter but only so long as its continuance is "specifically approved at least annually" (a) by the vote of a majority of the Trustees of the Trust who are not "interested persons" of the Trust, the Adviser, the Sub-Adviser or FCEM at a meeting specifically called for the purpose of voting on such approval, and (b) by the Board of Trustees of the Trust, or by "vote of a majority of the outstanding voting securities" of the Fund. This Agreement may be terminated at any time without the payment of any penalty by the Trustees of the Trust, by "vote of a majority of the outstanding voting securities" of the Fund or by the Adviser or the Sub-Adviser, on not more than sixty days nor less than thirty days written notice, or by FCEM on not more than ninety days nor less than sixty days written notice. This Agreement shall automatically terminate in the event of its "assignment" or in the event that the FCM Sub- Advisory Agreement or the Advisory Agreement shall have terminated for any reason.
12. AMENDMENTS TO THIS AGREEMENT. This Agreement may be amended only if such amendment is approved by "vote of a majority of the outstanding voting securities" of the Fund, by the Adviser, by the Sub-Adviser and by FCEM.
13. CERTAIN DEFINITIONS. The terms "specifically approved at least annually", "vote of a majority of the outstanding voting securities", "assignment", "control", "affiliated person" and "interested person", when used in this Agreement, shall have the respective meanings specified, and shall be construed in a manner consistent with, the 1940 Act and the rules, regulations and orders thereunder, SUBJECT, HOWEVER, to such exemptions as may be granted by the SEC under the 1940 Act.
14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; DUTY TO UPDATE INFORMATION. All representations and warranties made by FCEM pursuant to Section 9 hereof shall survive for the duration of this Agreement and FCEM shall immediately notify, but in no event later than five (5) business days, the Adviser and the Sub-Adviser in writing upon becoming aware that any of the foregoing representations and warranties are no longer true.
15. MISCELLANEOUS. This Agreement shall be governed by and construed in accordance with the internal laws of The Commonwealth of Massachusetts. All notices provided for by this Agreement shall be in writing and shall be deemed given when received, against appropriate receipt, by the Sub-Adviser's Secretary in the case of the Sub-Adviser, by the Adviser's General Counsel in the case of the Adviser, by FCEM's Secretary in the case of FCEM and by the Trust's Secretary in the case of the Fund, or such other person as a party shall designate by notice to the other parties. This Agreement constitutes the entire agreement among the parties hereto and supersedes any prior agreement among the parties relating to the subject matter hereof. The section headings of this Agreement are for convenience of reference and do not constitute a part hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered in their names and on their behalf by the undersigned, thereunto duly authorized, and their respective seals to be hereto affixed, all as of the day and year first written above.
The foregoing is hereby agreed to:
A copy of the Declaration of Trust of the Trust is on file with the Secretary of State of The Commonwealth of Massachusetts. The parties hereto acknowledge that the obligations of or arising out of this instrument are not binding upon any of the Trust's trustees, officers, employees, agents or shareholders individually, but are binding solely upon the assets and property of the Trust in accordance with its proportionate interest hereunder. If this instrument is executed by the Trust on behalf of one or more series of the Trust, the parties hereto acknowledge that the assets and liabilities of each series of the Trust are separate and distinct and that the obligations of or arising out of this instrument are binding solely upon the assets or property of the series on whose behalf the Trust has executed this instrument. If the Trust has executed this instrument on behalf of more than one series of the Trust, the parties hereto also agree that the obligations of each series hereunder shall be several and not joint, in accordance with its proportionate interest hereunder, and the parties hereto agree not to proceed against any series for the obligations of another series.
MFS SERIES TRUST VIII, on behalf of
TRUSTEE OWNERSHIP OF FUND SHARES
The following table presents certain information regarding the ownership of Fund shares by Trustees of the Trust. An asterisk beside a Trustee's name indicates that he is an "interested person," as defined in the 1940 Act, of the Trust's investment adviser and that he has been affiliated with the investment adviser for more than five years.
(1)Numbers are approximate and include, where applicable, shares owned by a Trustee's spouse or minor children or shares which were otherwise reported by the Trustee as "beneficially owned" in light of pertinent SEC rules.
(2)Percentage of shares outstanding on January 18, 1996. All shares are held with sole voting and investment power, except to the extent that such powers may be by a family member or a trustee of a family trust.
(3)[KAREN TO ADD FOOTNOTE RE DCP SHARES.]
By signing and dating the lower portion of this card, you authorize the proxies to vote each proposal as marked, or, if not marked to vote, "FOR" each proposal and to use their discretion to vote any other matter as may come before the Special Meeting. If you do not intend personally to attend the Special Meeting, please complete, detach and mail the lower portion of this card at once in the enclosed envelope.
PROXY SOLICITED BY THE BOARD OF TRUSTEES FOR A SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints James R. Bordewick, Jr., A. Keith Brodkin, Stephen E. Cavan and W. Thomas London, and each of them, proxies with several powers of substitution, to vote for the undersigned at a Special Meeting of Shareholders of MFS World Growth Fund, to be held at 500 Boylston Street, Boston, Massachusetts, on March 18, 1996, notice of which meeting and the proxy statement accompanying the same have been received by the undersigned, or at any adjournment thereof, upon the following matters as described in the notice of Special Meeting and accompanying proxy statement, according to the number of votes and as fully as the undersigned would be entitled to vote if personally present, hereby revoking any prior proxy or proxies. If more than one of the above-named proxies shall be present in person or by substitute, a majority of the proxies so present and voting shall have and may exercise all the powers hereby granted. Please sign and return as soon as possible but in any event by March 18, 1996.
To vote mark an X in blue or black ink on the proxy card below. Keep this portion for your records.
(DETACH HERE AND RETURN THIS PORTION ONLY)
SAID PROXIES WILL VOTE THIS PROXY AS DIRECTED, OR IF NO DIRECTION IS INDICATED, FOR ITEM 1 UNLESS AUTHORITY TO DO SO IS SPECIFICALLY WITHHELD IN THE MANNER PROVIDED, AND WILL USE THEIR DISCRETION WITH RESPECT TO ANY OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU VOTE FOR ITEM 1
Please sign name or names exactly as printed above to authorize the voting of your shares as indicated above. Where shares are registered with joint owners, all joint owners should sign. Persons signing as executors, administrators, trustees, etc. should so indicate. Corporate proxies should be signed by an authorized officer. | PRES14A | PRES14A | 1996-01-12T00:00:00 | 1996-01-12T14:30:42 |
0000038009-96-000013 | 0000038009-96-000013_0000.txt | PROSPECTUS and Pricing Supplement No. 44 PROSPECTUS SUPPLEMENT, each Effective at 1:02 P.M. Dated October 10, 1995 January 12, 1996
U.S. $4,000,000,000 Rule 424 (b)(3) FORD MOTOR CREDIT COMPANY Statement No.
Due from 9 Months to 30 Years from Date of Issue
Interest payable each March 15 and September 15 and at Maturity
Range of Maturities Per Annum
More than 9 months to less than 1 year .......... 2.55% 1 year to less than 18 months................... 3.00 18 months to less than 2 years................... 3.05 2 years to less than 3 years..................... 5.35 3 years to less than 4 years..................... 5.55 4 years to less than 5 years..................... 5.80 5 years to less than 6 years..................... 5.95 6 years to less than 7 years..................... 6.05 7 years to less than 8 years..................... 6.15 8 years to less than 9 years..................... 6.30 9 years to less than 10 years.................... 6.40 10 years to less than 15 years................... 6.45 15 years to less than 20 years................... NA 20 years to less than 25 years................... NA 25 years to less than 30 years................... NA
The interest rates on the Medium-Term Notes may be changed by Ford Motor Credit Company from time to time, but any such change will not affect the interest rate on any Medium-Term Note ordered prior to the effective time of the change.
GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. DAIWA SECURITIES AMERICA INC. NOMURA SECURITIES INTERNATIONAL, INC. | 424B3 | 424B3 | 1996-01-12T00:00:00 | 1996-01-12T16:12:08 |
0001001606-96-000003 | 0001001606-96-000003_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 No.) 4520 Executive Park Drive 36116-1602 (Address of principal executive offices)
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
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.
Class of Common Stock November 30, 1995 Class A Common Stock $.01 Par Value 13,122,219 shares Class B Common Stock $.01 Par Value 5,925,755 shares
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES
November 30, 1995 and February 28, 1995 3
Consolidated Statements of Income - three months and nine months ended November 30, 1995 and 1994 4
Consolidated Statements of Cash Flows - nine months ended November 30, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis 11
Exhibit 11 - Computation of Net Income
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES (In thousands, except share data)
Cash and cash equivalents, including short-term investments of $75,197 and $40,266 $ 77,225 $ 43,390 Accounts receivable, net of allowances for doubtful accounts of $3,065 and $2,611 106,955 130,774 Deferred income taxes 25,050 25,068 Other current assets 8,131 16,153 Total current assets 292,601 292,460 Property, plant and equipment, net of accumulated depreciation of $155,681 and $145,561 122,138 134,368 Cost in excess of net assets of acquired businesses, net 66,697 68,762
Notes payable and current maturities of long-term debt $ 4,438 $ 7,791 Other current liabilities 486 4,658 Total current liabilities 127,044 169,164 Long-term debt, exclusive of current maturities 95,984 98,254 Deferred income taxes, exclusive of current portion 18,617 19,214 Shareholders' equity (Note 2): Common Stock: par value $.01 per share Class A: 13,122,219 and 12,844,179 shares issued 131 128 Class B, convertible: 5,925,755 and 6,045,636 Capital in excess of par value of stock 30,582 28,681 Accumulated translation adjustment 8,463 8,250 Total shareholders' equity 244,157 207,714 Total Liabilities and Shareholders' Equity $509,023 $520,792
* Restated. See Note 2. The accompanying notes are an integral part of these statements.
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES (In thousands, except share data)
Three months ended Nine months ended Sales $ 157,964 $ 157,459 $ 469,319 $ 441,924 Cost of sales 102,923 104,496 310,474 293,348 Gross profit 55,041 52,963 158,845 148,576 administrative expenses 31,011 30,061 90,674 89,797 Income from operations 24,030 22,902 68,171 58,779 Interest expense (2,705) (2,699) (7,937) (8,313) Interest income 1,127 668 2,891 1,837 Other income (expense), net (45) (487) 493 143 Income before income taxes 22,407 20,384 63,618 52,446 Provision for income taxes 5,645 8,048 22,499 20,762 Net income $ 16,762 $ 12,336 $ 41,119 $ 31,684 Net income per common share $ .86 $ .64 $ 2.11 $ 1.64 adjusted for the effect of the merger and the 3 for 2 See Note 2) 19,475,336 19,417,313 19,466,676 19,365,867 per share (as adjusted for the effect of the merger and the 3 for 2 common stock exchange ratio, See Note 2) Class A common stock $ .095 $ .083 $ .285 $ .250 Class B common stock $ .087 $ .075 $ .260 $ .225
* Restated. See Note 2. The accompanying notes are an integral part of these statements.
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended November 30, Cash Flows From Operating Activities: Net income $ 41,119 $ 31,684 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (579) 159 Loss on disposals of property, plant and equipment 242 473 Changes in assets and liabilities, net of effects of businesses acquired and sold: Decrease in accounts receivable 15,125 2,318 (Increase) decrease in inventories 1,655 (2,140) (Increase) decrease in other assets 4,737 (1,650) Decrease in accounts payable (13,622) (13,608) Increase (decrease) in accrued expenses (12,082) 20,008 Decrease in other liabilities (5,993) (11,126) Net cash provided by operating activities 47,060 43,401 Cash Flows From Investing Activities: Proceeds from sales of businesses and property, plant and equipment 4,910 2,947 Purchases of property, plant and equipment (8,977) (6,113) Net cash used in investing activities (4,067) (13,269) Cash Flows From Financing Activities: Net increase (reduction) in short-term borrowings 582 (4,646) Issuance of long-term debt 800 6,000 Reduction of long-term debt (7,061) (18,728) Decrease (increase) in restricted funds 1,410 (5,020) Issuance of stock under stock option and dividend Net cash used in financing activities (9,158) (26,054)
Net increase in cash and cash equivalents 33,835 4,078 Cash and cash equivalents at beginning of period 43,390 54,088 Cash and cash equivalents at end of period $ 77,225 $ 58,166
The accompanying notes are an integral part of these statements.
BLOUNT INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 In the opinion of management, the accompanying unaudited consolidated financial statements, which include the accounts of Blount International, Inc. ("BII") and Blount, Inc. and its Subsidiaries, contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at November 30, 1995 and the results of operations and cash flows for the periods ended November 30, 1995 and 1994. These financial statements should be read in conjunction with the notes to BII's consolidated financial statements for the year ended February 28, 1995, as included in BII's registration statement on Form S-4 filed on October 3, 1995 (See Note 2). The results of operations for the periods ended November 30, 1995 and 1994 are not necessarily indicative of the results to be expected for the full fiscal year, due to the seasonal nature of certain operations.
NOTE 2 On November 3, 1995, the stockholders of Blount, Inc. approved a merger agreement dated August 17, 1995, among BII, Blount, Inc., and a wholly-owned subsidiary of BII ("the subsidiary"). As a result, i) the subsidiary was merged with and into Blount, Inc., ii)Blount, Inc. was the surviving corporation in the merger and became a wholly-owned subsidiary of BII, iii) Blount, Inc. stockholders received three shares of BII Class A common stock in exchange for each two shares held of Blount, Inc. Class A common stock and three shares of BII Class B common stock in exchange for each two shares held of Blount, Inc. Class B common stock, and iv) BII assumed all Blount, Inc. stock option plans. BII filed a Form S-4 registration statement with the Securities and Exchange Commission on October 3, 1995, for the shares to be issued as a result of the merger. Immediately following the merger, the equity ownership of BII was the same as that which previously existed for Blount, Inc. Blount, Inc. was delisted from the American Stock Exchange effective November 3, 1995, and BII began trading on the New York Stock Exchange on November 6, 1995.
Prior to the merger, BII was owned 100% by Blount, Inc.'s Chairman of the Board, Winton M. Blount, and members of his family, and BII owned an approximate 62% voting interest and approximately 38% of the shares of Blount, Inc.'s Common Stock outstanding. Except for the equity interest in Blount, Inc., BII has had no other operations or business since February 1993.
The authorized capital stock of BII consists of 60 million shares of Class A Common Stock, 14 million shares of Class B Common Stock and 4,456,855 shares of Preferred Stock, each with a par value of $.01 per share. As of November 30, 1995, 13,122,219 shares of Class A Common Stock and 5,925,755 shares of Class B Common Stock were issued and outstanding (reflecting the 3 for 2 common stock exchange ratio), and no shares of Preferred Stock were outstanding. The Class A Common Stock is entitled to elect 25% of BII's Board of Directors, is entitled to one-tenth of one vote per share on all other matters and will receive an additional dividend of $.00833 in any quarter that a cash dividend is declared on the Class B Common Stock. The Class B Common Stock is entitled to elect 75% of BII's Board of Directors and is entitled to one vote per share on all other matters. Each share of Class B Common Stock is convertible at any time at the option of the shareholder into one share of Class A Common Stock.
The merger has been accounted for in a manner similar to that in pooling of interests accounting. The consolidated financial statements, and all related share data, of BII and Subsidiaries for periods prior to November 3, 1995, have been restated to reflect the merger and the 3 for 2 common stock exchange ratio. The assets and liabilities of BII, Blount, Inc. and its Subsidiaries are stated at their historical recorded amounts. As of the date of the merger, the consolidated assets and liabilities of BII and Subsidiaries did not differ materially from those of Blount, Inc. and Subsidiaries. For the three months and nine months ended November 30, 1995, BII incurred approximately $.7 million and $2.2 million, respectively, of expenses associated with the merger. Such expenses were borne by BII, not Blount, Inc. Additionally, as a result of the merger, charitable contribution carryovers reduced BII's consolidated provision for income taxes by approximately $1.7 million for the three months ended November 30, 1995. The results of Blount, Inc.'s operations for the three months and nine months ended November 30, 1995 and 1994 were as follows (in thousands):
Three months ended Nine months ended Sales $ 157,964 $ 157,459 $ 469,319 $ 441,924 Cost of sales 102,923 104,496 310,474 293,348 Gross profit 55,041 52,963 158,845 148,576 administrative expenses 29,713 29,992 87,313 89,582 Income from operations 25,328 22,971 71,532 58,994 Interest expense (2,731) (2,733) (8,030) (8,387) Interest income 1,115 599 2,625 1,620 Other income (expense), net (76) (561) 466 (1,203) Income before income taxes 23,636 20,276 66,593 51,024 Provision for income taxes 8,449 7,940 25,305 19,981 Net income $ 15,187 $ 12,336 $ 41,288 $ 31,043
NOTE 3 Inventories consist of the following (in thousands):
Finished goods $ 33,440 $ 35,769 Work in process 12,922 14,075 Raw materials and supplies 28,878 27,231
NOTE 4 The principal assets and liabilities of the discontinued construction operations included in the consolidated balance sheets are as follows (in thousands):
Accounts receivable $ 16,115 $ 45,706 Other current assets 5,337 11,911 Other current liabilities (486) (4,659)
During the first quarter of fiscal 1996, Pozzo Construction Company, which was part of the remaining discontinued construction operations, and the Injection Molding Metal Products operations were sold. These transactions were not material to the consolidated financial condition of BII and Subsidiaries.
NOTE 5 In August 1995, Blount, Inc. entered into agreements expiring August 31, 1998 with certain financial organizations under which it may sell up to $25 million of undivided interests in a pool of eligible accounts receivable in which the purchasers retain a security interest. The purchasers' level of investment may fluctuate based on the level of the eligible receivables in the pool. As of November 30, 1995, no receivables have been sold under this agreement.
At November 30, 1995 and February 28, 1995, $8.7 million and $10.1 million, representing the unexpended proceeds from industrial development revenue bonds issued in fiscal 1995, was held in trust and is included in "Other assets" in the consolidated balance sheets.
NOTE 6 The United States Environmental Protection Agency ("EPA") has designated a predecessor of Blount, Inc. as a potentially responsible party ("PRP") with respect to the Onalaska Municipal Landfill in Onalaska, Wisconsin (the "Site"). The waste complained of was placed in the landfill prior to 1981 by a corporation, some of whose assets were purchased in 1981 by a predecessor of Blount, Inc. It is the view of management that because Blount, Inc.'s predecessor corporation purchased assets rather than stock, Blount, Inc. does not have successor liability and is not properly a PRP. However, the EPA has indicated it does not accept this position. Management believes the EPA is wrong on the successor liability issue. However, with other PRP's, Blount, Inc. made a good faith offer to the EPA to pay a portion of the clean-up costs. The offer was rejected and the EPA is proceeding with the clean-up. The estimated past and future clean-up costs are approximately $12 million. In 1989 the EPA named four PRP's. One of the PRP's, the Town of Onalaska (the "Town") and the EPA and State of Wisconsin negotiated a consent decree under which the Town would have been released from future liability in return for paying $110 thousand, granting access to the Site and adjacent properties and performing some future maintenance work. The United States District Court for the District of Wisconsin found, on December 21, 1994, that the settlement was not fair, reasonable or in the public interest, and refused to approve and confirm it as the order of the Court. Blount, Inc. denies that it is a PRP and is unable to determine any other party's share of total remediation costs. Blount, Inc. does not know the financial status of the other PRP's and other parties that, while not named by the EPA as PRP's, may have liability with respect to the Site. Management does not expect the situation to have a material adverse effect on consolidated financial condition or operating results.
Blount, Inc. is closing the Resource Conservation and Recovery Act ("RCRA") Part B Storage Permit at its Sporting Equipment Division's CCI operations facility in Lewiston, Idaho. As part of the closure process, Blount, Inc. is required by the State of Idaho to undertake RCRA correction action at the facility. This requires Blount, Inc. to investigate all areas at the facility where solid waste and hazardous waste have historically been managed. The facility has been operating since the 1950s. In order to effect the investigation, in March 1994, Blount, Inc. and the State of Idaho Division of Environmental Quality ("IDEQ") entered into an Administrative Consent Order which governs the completion of the corrective action activities. The RCRA Facility Investigation has commenced and the soils investigation is complete. Environmental sampling indicates the presence of lead contamination in a limited number of shallow surface soils. The IDEQ has approved Blount's proposal to excavate this limited lead contamination and dispose of it at a RCRA permitted landfill. There is also some trichloroethylene and perchloroethylene contamination of the uppermost groundwater beneath the facility. This uppermost groundwater is not the drinking water supply source and does not appear to be connected to the deeper drinking water aquifer. Further groundwater investigation is ongoing. It is expected that the range of remediation costs is from $2.8 million to $6.2 million. Management does not expect the situation to have a material adverse effect on consolidated financial condition or operating results beyond amounts accrued.
Under the provisions of Washington State environmental laws, the Washington State Department of Ecology ("WDOE") has notified Blount, Inc. that it is one of many companies named as a Potentially Liable Party ("PLP"), for the Pasco Sanitary Landfill site, Pasco, Washington ("the Site"). Although the cleanup costs are believed to be substantial, accurate estimates will not be available until the environmental studies have been completed at the Site. However, based upon the total documented volume of waste sent to the Site, Blount, Inc.'s waste volume compared to that total waste volume should cause Blount, Inc. to be classified as a "de minimis" PLP. In July, 1992, Blount, Inc. and thirty-eight (38) other PLPs entered into an Administrative Agreed Order with WDOE to perform a Phase I Remedial Investigation at the Site. In October 1994, WDOE issued an administrative Unilateral Enforcement Order to all PLPs to complete a Phase II Remedial Investigation and Feasibility Study ("RI/FS") under the Scope of Work established by WDOE. The results of the RI/FS investigation are not expected until after the first quarter of 1997. Blount, Inc. is unable to determine, at this time, the level of clean-up demands that may be ultimately placed on it. Management believes that, given the number of PLPs named with respect to the Site and their financial condition, Blount, Inc.'s potential response costs associated with the Site will not have a material adverse effect on Blount, Inc.'s financial condition or operating results.
Blount, Inc. is a defendant in a number of product liability lawsuits, some of which seek significant or unspecified damages, involving serious personal injuries for which there are large deductible amounts under insurance policies. In addition, Blount, Inc. is a party to a number of other suits arising out of the conduct of its business. While there can be no assurance as to their ultimate outcome, management does not believe these lawsuits will have a material adverse effect on consolidated financial condition or operating results.
Contingencies include normal liabilities for performance and completion of its remaining construction contracts. At November 30, 1995, there were outstanding bank letters of credit in the approximate amount of $15.0 million issued principally in connection with various foreign construction contracts for which Blount, Inc. is contingently liable to the issuing banks in the event payment is demanded by the holder.
See Notes 4 and 8 to BII's Consolidated Financial Statements for the year ended February 28, 1995, included in the Form S-4 registration statement filed on October 3, 1995 (See Note 2), for other commitments and contingencies which have not changed significantly since year-end.
NOTE 7 Segment information is as follows (in thousands):
Ended November 30, Ended November 30, Sales: Outdoor products $ 74,495 $ 73,938 $218,157 $204,337 Industrial and power equipment 59,264 52,685 173,529 154,391 Sporting equipment 24,205 30,836 77,633 83,196 Operating income: Outdoor products $ 15,623 $ 18,463 $ 44,232 $ 38,704 Industrial and power equipment 10,637 9,328 30,251 24,949 Sporting equipment 3,145 5,518 9,656 15,640 Operating income from segments 29,405 33,309 84,139 79,293 Corporate overhead expenses (5,375) (10,407) (15,968) (20,514) Income from operations 24,030 22,902 68,171 58,779 Interest expense (2,705) (2,699) (7,937) (8,313) Interest income 1,127 668 2,891 1,837 Other income, net (45) (487) 493 143 Income before income taxes $ 22,407 $ 20,384 $ 63,618 $ 52,446
NOTE 8 Income taxes paid during the nine months ended November 30, 1995 and 1994 were $29.0 million and $16.2 million. Interest paid during the nine months ended November 30, 1995 and 1994 was $6.1 million and $5.9 million.
NOTE 9 Net income per common share is based on the weighted average number of common and common equivalent shares (stock options) outstanding in each period, as adjusted for the merger and the 3 for 2 common stock exchange ratio (See Note 2).
NOTE 10 In December 1995, BII announced the successful completion of its tender offer for the outstanding common stock of Simmons Outdoor Corporation ("Simmons"). The purchase price will be approximately $38 million and the acquisition will be accounted for as a purchase. For its most recent fiscal year, Simmons reported sales and operating income of approximately $52.0 million and $5.4 million, respectively.
BII and Subsidiaries reported improved net income for the three months and nine months ended November 30, 1995. Sales for the third quarter and first nine months of fiscal 1996 were $158.0 million and $469.3 million compared to $157.5 million and $441.9 million for the comparable periods of fiscal 1995. Net income was $16.8 million ($.86 per share) and $41.1 million ($2.11 per share) for the third quarter and first nine months of fiscal 1996 compared to $12.3 million ($.64 per share) and $31.7 million ($1.64 per share) for the comparable periods of the prior year. The principal reasons for these results and the status of consolidated financial condition are set forth below and should be read in conjunction with the consolidated financial statements of BII and Subsidiaries for the year ended February 28, 1995, included in BII's Form S-4 registration statement filed on October 3, 1995 (See Note 2 of Notes to Consolidated Financial Statements).
Sales for the Outdoor Products segment for the third quarter and first nine months of fiscal 1996 were $74.5 million and $218.2 million compared to $73.9 million and $204.3 million during the third quarter and first nine months of fiscal 1995. Operating income was $15.6 million and $44.2 million during the third quarter and first nine months of fiscal 1996 compared to $18.5 million and $38.7 million during the same periods of the prior fiscal year. While sales were slightly higher in the current year's third quarter, operating income declined by $2.9 million reflecting the effect of a stronger Canadian dollar on costs and reduced earnings from operations in Brazil. Additionally, the prior year's third quarter included income from the reduction of certain operating accruals. The sales and operating income increases for the nine months ended November 30, 1995, were principally attributable to a higher volume of saw chain and saw bars sold in foreign markets by the Oregon Cutting Systems Division and an increase in the volume of riding lawn mowers shipped by Dixon Industries, Inc., partially offset by reduced income from operations in Brazil.
Sales for the Industrial and Power Equipment segment were $59.3 million and $173.5 million during the third quarter and the first nine months of fiscal 1996 compared to $52.7 million and $154.4 million during the comparable periods of fiscal 1995. Operating income increased to $10.6 million and $30.3 million for the three months and nine months ended November 30, 1995 from $9.3 million and $24.9 million during the same periods of the prior fiscal year. The improved operating results were principally due to higher average selling prices for timber harvesting equipment and a better sales mix of higher margin products, partially offset by reduced volume; improved sales and operating income by CTR Manufacturing, Inc., acquired on April 28, 1994, and its inclusion for the full nine months in the current year; and improved sales and operating income by the Gear Products, Inc. subsidiary, primarily due to higher volume.
The Sporting Equipment segment experienced a downturn during the second and third quarters of fiscal 1996. In the aftermath of last year's booming domestic market, a result of concern over the possibility of Congressional legislation adverse to the shooting sports industry, an industry slowdown occurred. Sales for the Sporting Equipment segment declined to $24.2 million for the third quarter of fiscal 1996 from $30.8 million during the prior year's third quarter, while current year-to-date sales of $77.6 million were $5.6 million less than last year's level for the comparable period. Operating income was down to $3.1 million and $9.7 million for the third quarter and first nine months of fiscal 1996 as compared to $5.5 million and $15.6 million during the same periods of fiscal 1995. These results reflect the reduced demand, higher raw material costs, costs associated with temporary plant shutdowns during the second quarter and a loss from the Ram-Line operation acquired late in fiscal 1995.
Corporate overhead expenses were lower during the three months and nine months ended November 30, 1995. The prior year included litigation and settlement costs related to the sale of a former subsidiary. Selling, general and administrative expenses for the third quarter and first nine months of fiscal 1996 include transaction costs of $.7 million and $2.2 million, respectively, associated with the merger (See Note 2 of Notes to Consolidated Financial Statements). The provision for income taxes has been reduced by $1.7 million during the current year's third quarter as a result of contribution carryovers associated with the merger. Total backlog at November 30, 1995 was approximately $139.6 million compared to $125.5 million at August 31, 1995 and $134.4 million at February 28, 1995.
Financial Condition, Liquidity and Capital Resources
At November 30,1995, no amounts were outstanding under the $100 million revolving credit agreement. In August 1995, Blount, Inc. entered into new receivable sales agreements under which up to $25 million in receivables may be sold (See Note 5 of Notes to Consolidated Financial Statements). As of November 30, 1995, no receivables had been sold under these agreements. The total capitalization at November 30, 1995 consists of $96.0 million long-term debt and equity of $244.2 million for a long-term debt to equity ratio of .4 to 1 as compared to a ratio of .5 to 1 at February 28, 1995. At November 30, 1995, 9% subordinated notes were outstanding in the principal amount of $79.4 million maturing in 2003. See Note 3 of Notes to the Consolidated Financial Statements for BII and Subsidiaries for the year ended February 28, 1995 for the terms and conditions of the $100 million revolving credit agreement and the 9% subordinated notes.
Working capital was $165.6 million at November 30, 1995 compared to $123.3 million at February 28, 1995. The increase resulted principally from earnings for the nine months ended November 30, 1995. Accounts receivable, accounts payable and accrued expenses decreased by $23.8 million, $21.4 million and $13.2 million, respectively, since February 28, 1995. The primary reason for the decrease in receivables is the reduction in balances attributable to the discontinued construction segment as those operations either wind down or are sold (See Note 4 of Notes to Consolidated Financial Statements). The reductions in accounts payable and accrued expenses also reflect the reduced construction activity, the sale of the Injection Molding Metal Products operations and higher estimated tax payments resulting from the higher earnings. Operating cash flows for the first nine months of fiscal 1996 were $47.1 million compared to $43.4 million in the first nine months of fiscal 1995, while cash and cash equivalent balances increased by $33.8 million since February 28, 1995. The improved operating cash flows reflect the improved year-to-date income from manufacturing operations and cash flows of approximately $9.4 million from the discontinued construction segment, partially offset by higher estimated income tax payments and other corporate expenditures.
The ability of BII to pay dividends is dependent upon Blount, Inc.'s ability to pay dividends to BII. Restrictions on the ability of Blount, Inc. to pay cash dividends are contained in the indenture related to the 9% subordinated notes and in certain financial covenants of the revolving credit agreement. Under the most restrictive requirement, Blount, Inc. retained earnings of approximately $57.6 million were available for the payment of dividends at 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 16, 1996 /s/ Harold E. Layman | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T09:44:42 |
0000912057-96-000503 | 0000912057-96-000503_0002.txt | SUN PAGING COMMUNICATIONS, A FLORIDA GENERAL PARTNERSHIP, AMERICAN MOBILPHONE, INC.
PURCHASE AND SALE OF ASSETS
1.1 Assets to be Acquired . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Assumption of Certain Liabilities . . . . . . . . . . . . . . . . . 1 1.4 Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.5 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.6 Deposit Escrow Agreement. . . . . . . . . . . . . . . . . . . . . . 4 1.7 Indemnification Escrow Agreement. . . . . . . . . . . . . . . . . . 5
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND PRONET
2.1 Due Organization. . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.3 Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.4 Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.5 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.6 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
OF THE SELLERS AND THE PARTNERS
3.1 Due Organization. . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.3 Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.4 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.5 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 7 3.6 Conduct of Business; Certain Actions. . . . . . . . . . . . . . . . 8 3.7 Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.8 Pagers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.9 Licenses and Permits. . . . . . . . . . . . . . . . . . . . . . . . 9 3.10 Intellectual Rights . . . . . . . . . . . . . . . . . . . . . . . . 9
3.11 Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . 10 3.12 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.13 ERISA Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.14 Contracts and Agreements. . . . . . . . . . . . . . . . . . . . . . 11 3.15 Claims and Proceedings. . . . . . . . . . . . . . . . . . . . . . . 11 3.16 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.17 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.18 Business Relations. . . . . . . . . . . . . . . . . . . . . . . . . 13 3.19 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.20 Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.21 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . 13 3.22 Customers and Suppliers . . . . . . . . . . . . . . . . . . . . . . 13 3.23 Interest in Competitors, Suppliers, and Customers . . . . . . . . . 14 3.24 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.25 Commission Sales Contracts. . . . . . . . . . . . . . . . . . . . . 14 3.26 Regulatory Certificates . . . . . . . . . . . . . . . . . . . . . . 14 3.27 Information Furnished . . . . . . . . . . . . . . . . . . . . . . . 14
COVENANTS OF THE SELLERS AND THE PARTNERS
4.1 Inspection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.2 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.3 Satisfaction of All Conditions Precedent. . . . . . . . . . . . . . 15 4.4 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.5 Notice of Developments. . . . . . . . . . . . . . . . . . . . . . . 15 4.6 Notice of Breach. . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.7 Notice of Litigation. . . . . . . . . . . . . . . . . . . . . . . . 16 4.8 Continuation of Insurance Coverage. . . . . . . . . . . . . . . . . 16 4.9 Maintenance of Credit Terms . . . . . . . . . . . . . . . . . . . . 16 4.10 Updating Information. . . . . . . . . . . . . . . . . . . . . . . . 16 4.11 Interim Operations of the Sellers . . . . . . . . . . . . . . . . . 16 4.12 Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 17 4.13 Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.14 Licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.1 Conditions to Obligations of the Purchaser and ProNet . . . . . . . 18 6.2 Conditions to Obligations of the Sellers and the Partners . . . . . 20
7.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.1 Indemnification of the Purchaser and ProNet . . . . . . . . . . . . 21 8.2 Indemnification Of the Seller and the Partners. . . . . . . . . . . 22 8.3 Defense of Third Party Claims . . . . . . . . . . . . . . . . . . . 22 8.4 Direct Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.5 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.1 Collateral Agreements, Amendments, and Waivers. . . . . . . . . . . 24 9.2 Risk of Loss - Damage to Transferred Assets . . . . . . . . . . . . 24 9.3 Prorations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 9.4 Allocation of Purchase Price. . . . . . . . . . . . . . . . . . . . 25
9.5 Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 9.6 Sellers' Liabilities. . . . . . . . . . . . . . . . . . . . . . . . 25 9.7 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . 25 9.8 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 9.9 Invalid Provisions. . . . . . . . . . . . . . . . . . . . . . . . . 26 9.10 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 9.11 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 9.12 Survival of Representations, Warranties, and Covenants. . . . . . . 27 9.13 Public Announcement . . . . . . . . . . . . . . . . . . . . . . . . 27 9.14 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . 27 9.15 No Third-Party Beneficiaries. . . . . . . . . . . . . . . . . . . . 27 9.16 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.17 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.18 Sections; Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . 28 9.19 Number and Gender of Words. . . . . . . . . . . . . . . . . . . . . 28 9.22 Specific Performance. . . . . . . . . . . . . . . . . . . . . . . . 28 9.23 ProNet Guarantee. . . . . . . . . . . . . . . . . . . . . . . . . . 28
A - Bill of Sale C - Form of Opinion of Counsel to the Sellers and the General Partners D - Form of Opinion of FCC Counsel to the Sellers and the Partners E - Noncompetition Agreement - Palmer Communications Incorporated E-1 - Noncompetition Agreement - American Mobilphone, Inc. F - Noncompetition Agreement - Sun Paging Communications H - Allocation of Purchase Price I - Indemnification Escrow Agreement J - Deposit Escrow Agreement
This Asset Purchase Agreement (this "Agreement") is made and entered into as of November 10, 1995, by and among Sun Paging Communications, a Florida general partnership (the "Seller"), Palmer Communications Incorporated ("Palmer"), American Mobilphone, Inc. ("American", collectively with Palmer, the "Partners"), and Contact Communications Inc., a Delaware corporation (the "Purchaser") and ProNet Inc., a Delaware corporation ("ProNet").
R E C I T A L S
A. The Partners are the only partners of the Seller.
B. The Purchaser desires to purchase from the Seller, and the Seller desires to sell to the Purchaser, upon the terms and subject to the conditions set forth herein, substantially all of the property and assets of the Seller that are used in the conduct of the Seller's radio paging system business in Florida (such property, assets, and business, including all rights to affiliated networks, being hereinafter collectively called the "System").
A G R E E M E N T S
NOW, THEREFORE, in consideration of the respective representations, warranties, agreements, and conditions hereinafter set forth, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:
PURCHASE AND SALE OF ASSETS
1.1 ASSETS TO BE ACQUIRED. On the Closing Date (as hereinafter defined), the Seller shall sell to the Purchaser, and the Purchaser shall purchase from the Seller, on the terms and conditions set forth in this Agreement, all of the property and assets of whatever nature of the Seller that are used in the conduct of the System (other than as provided in Section 1.2 hereof) including, without limitation, the assets described in SCHEDULE 1.1 attached hereto (collectively, the "Transferred Assets"), free and clear of all liens, security interests, claims, rights of another, and encumbrances of any kind or character except as disclosed in SCHEDULE 3.7 attached hereto.
1.2 EXCLUDED ASSETS. The Seller shall not sell, assign, transfer, or convey to the Purchaser hereunder any of the assets or property of the Seller used in the conduct of the System listed on SCHEDULE 1.2 attached hereto (the "Excluded Assets").
1.3 ASSUMPTION OF CERTAIN LIABILITIES. On the Closing Date, the Purchaser shall assume and agree to perform and discharge the liabilities and obligations of the Seller under:
(a) All personal property leases listed on ANNEX 2 to SCHEDULE 1.1
(b) All real estate leases (including any radio tower leases) listed on ANNEX 3 to SCHEDULE 1.1 (the "Real Estate Leases"); and
(c) All contracts, agreements, arrangements, policies, and instruments that are listed on ANNEX 4 to SCHEDULE 1.1 (the "Miscellaneous Contracts" and, collectively with the Personal Property Leases and the Real Estate Leases, the "Assumed Contracts"),
but only to the extent such liabilities and obligations relate to goods delivered to, services performed for, or benefits received by the Purchaser after the Closing.
In addition to the above described obligations under the Assumed Contracts, the Purchaser shall assume and agrees to discharge the obligations of the Seller with respect to the customer pager rental deposits in the amounts set forth on the Closing Balance Sheet (as hereinafter defined) and the obligations of the Seller to provide services with respect to the deferred revenue accounts transferred to the Purchaser at the Closing (as hereinafter defined) (such deposits, deferred revenue accounts and the Assumed Contracts collectively referred to herein as the "Assumed Liabilities"); provided however, that the Purchase Price shall be reduced by the amount of the customer pager rental deposits and deferred revenues existing on the Closing Date.
Notwithstanding the foregoing, it is expressly understood that the Purchaser shall not be liable for and shall not assume any of the Seller's obligations or liabilities (whether known or unknown, matured or unmatured, or fixed or contingent) other than obligations and liabilities expressly assumed in this Section 1.3. Without limiting the generality of the foregoing, the Purchaser shall not assume any of the Seller's obligations or liabilities in connection with the System with respect to (a) any claims for workers compensation for claimed injuries occurring prior to the Closing Date, (b) any foreign, Federal, state, county, or local taxes on income of the Seller whether arising before or after the Closing Date, any foreign, federal, state, county, or local taxes, fees, and assessments of any kind of the Seller or for which the Seller has the obligation to collect from any other party, including, without limitation, sales, use, gross receipts, franchise, excise, payroll, including Social Security and unemployment, value-added, withholding, and any other taxes, whether arising before or after the Closing Date (Purchaser shall be responsible, however, without limitation, for any foreign, state, county or local taxes relating to the Transferred Assets of the System which accrue or arise as of and after the Closing Date.) or any foreign, federal, state, county, or local taxes, including, without limitation, sales, use, gross receipts and value-added taxes, or any other fees assessed against Seller for sale of the Transferred Assets to Purchaser under Section 1.1 hereof (Purchaser shall, however, assume any liability for any taxes or fees assessed against Purchaser for the purchase of the Transferred Assets from Seller under Section 1.1 hereof.) (c) any liability for any violation by the Seller of any statutes, laws, regulations, or ordinances of any federal, state, or local government, including, without limitation, the failure to file or the improper filing of any and all tax returns and other reports or the failure to timely pay any and all taxes, fees, and assessments to any governmental unit, authority, or instrumentality by the Seller, (d) any liability for any breach of contract, negligence, or misconduct by the Seller or any of its agents, servants, or employees, (e) any liability of the Seller arising out of or pursuant to Seller's employee severance policy, if any, (f) any liability of the Seller relating to any litigation arising from any event, action, or omission relating to a time period prior to the Closing Date, (g) any liability of the Seller relating to employee benefit plans maintained by the Seller, (h) any liability arising out of or incurred in respect of any transaction of the Seller occurring prior to or after the Closing Date, (i) any liability of the Seller to its Partners, whether in connection with the transactions contemplated by this Agreement or any subsequent liquidation and dissolution of the Seller, or otherwise, including, but not limited to, liabilities or obligations of the Seller to make distributions to the Partners or distributions in liquidation. Seller shall indemnify Purchaser, pursuant to Section 8 hereof, for any liabilities of Seller not expressly assumed by the Purchaser pursuant to this Section 1.3.
1.4 PURCHASE PRICE. The aggregate purchase price payable by the Purchaser to Seller in consideration for the sale of the Transferred Assets shall be an amount equal to the sum of (A) $75,000, (the "Indemnification Funds") which amount shall be deposited with the Escrow Agent (hereinafter defined) as a deposit in accordance with Section 1.7 hereof and the terms of the Indemnification Escrow Agreement a copy of which is attached hereto as EXHIBIT I (B) $2,475,000 payable in cash to Seller on the Closing Date, (C) an amount payable in cash to Seller on the Closing Date equal to the sum of the Seller's accounts receivable in respect of services or merchandise provided by the System, less the amount of Seller's liabilities for Customer deposits for the System and less the amount of Seller's deferred revenues for the System, (for the purposes of this calculation, the amount of accounts receivables, customer deposits and deferred revenue shall be taken from Seller's accounting records as of the day before the Closing Date (the "Closing Balance Sheet"), (D) $50,0000 payable to Seller at Closing (the "Deposit") which amount has been deposited by Purchaser with Nations Bank of Texas, N.A., (the "Escrow Agent") as a deposit in accordance with the terms of that certain Depository Agreement of even date herewith, by and among the parties herein (the "Deposit Escrow Agreement"), a copy of which is attached hereto as EXHIBIT J, and (E) an amount payable in cash to Seller at the Closing or a Purchase Prices reduction to be determined by the Seller's Recurring Monthly Revenue (as hereinafter defined) for the last complete month prior to the date of the Closing; provided that in the event Recurring Monthly Revenue is less than $140,000, the Purchase Price shall be reduced by $10,000 for each $1,000 under $140,000; and further provided that in the event the Recurring Monthly Revenue exceeds $150,000, the Purchase Price shall be increased by $10,000 for each $1,000 over $150,000. "Recurring Monthly Revenue" shall be defined as total monthly operating revenue less net equipment sales revenue.
For purposes of calculating the Purchase Price, the Seller's accounts receivable shall be valued as follows: (A) 96% of face amount for accounts receivable that, as of the Closing Date, are less than 30 days past due from the date of billing; (B) 90% of face amount for accounts receivable that, as of the Closing Date, are 30 days or more and less than 60 days past due from the date of billing; (C) 30% of face amount for accounts receivable that, as of the Closing Date, are 60 days or more and less then 90 days past due from the date of billing; and (D) 5% of face amount for accounts receivable that, as of the Closing Date, are 90 days or more past due from the date of billing. Notwithstanding the foregoing, any accounts receivable in respect of any customers that opened new accounts with the Seller within 30 days immediately prior to the Closing Date shall be valued at 80% of the face amount for such accounts receivable.
Notwithstanding the foregoing, to the extent that any accounts receivable of any Seller are in dispute with the obligor or are known by the Seller or either Partner to be noncollectible at the time of Closing, no value shall be assigned to Purchaser. In addition, the parties hereto acknowledge and agree that no amount shall be paid by the Purchaser for accounts receivable relating to services to be performed, or goods sold, by the Purchaser after the Closing Date. The Purchase Price shall be paid by certified bank check or wire transfer of immediately available funds.
(a) CLOSING DATE. The closing of the transactions contemplated hereby (the "Closing") shall take place at the offices of the Purchaser located at 6340 LBJ Freeway, Dallas, Texas 75240 at 9:00 a.m., local time, on the last day of the month in which all Federal, state, and local regulatory approvals for the transactions contemplated hereby are received by Final Order (as hereinafter defined) or such other location as may be agreed upon by Seller and Purchaser. The date on which the Closing actually occurs is referred to herein as the "Closing Date".
(b) DELIVERY AND PAYMENT. At the Closing, (i) the Seller shall execute and deliver to the Purchaser a bill of sale and assignment with respect to the Transferred Assets substantially in the form attached hereto as EXHIBIT A (the "Bill of Sale"), and such other bills of sale, assignments, certificates of title, endorsements, and other instruments of conveyance as may be necessary to transfer the Transferred Assets to the Purchaser, and (ii) the Purchaser shall (A) execute and deliver to the Seller an assumption agreement with respect to the Assumed Liabilities substantially in the form attached hereto as EXHIBIT B (the "Assumption Agreement"), (B) deliver to the Seller by wire transfer the amount of the cash portion of the Purchase Price to be paid on the Closing Date as provided in Section 1.4 (b); 1.4(c) and 1.4 (e) hereof, and (C) deliver to the Escrow Agent by wire transfer the Indemnification Funds in accordance with the terms of the Indemnification Escrow Agreement, a copy of which is attached hereto as Exhibit I; and (iii) the Escrow Agent shall deliver the Deposit ($50,000) to the Seller by wire transfer and the interest accrued thereon to the Purchaser.
1.6 DEPOSIT ESCROW AGREEMENT. Pursuant to the Deposit Escrow Agreement, substantially in the form of EXHIBIT J, attached hereto, the Purchaser will deliver the Deposit to the Escrow Agent on the date of execution hereof. After the Sellers have executed and delivered the Seller's Closing Certificate (as defined in Section 6.1 (a)) to Purchaser and ProNet
ProNet and Purchaser have executed and delivered the Purchaser's Closing Certificate (as defined in Section 6.2 (a)) to Seller, Purchaser, ProNet and Sellers shall execute the written instructions in the form of Exhibit B-1 and deliver Exhibit B-1 to the Escrow Agent instructing the Escrow Agent to deliver the Deposit to Sellers and the interest accrued thereof to the Purchaser at the Closing in accordance with Section 1.4 of this Agreement. If this Agreement is terminated prior to Closing pursuant to Section 7.1 (b), then the Deposit, including all accrued interest thereon, shall be paid to Seller; and if this Agreement is terminated prior to Closing pursuant to Section 7.1 (c), then the Deposit, including all accrued interest thereon, shall be paid to Purchaser.
1.7. INDEMNIFICATION ESCROW AGREEMENT. Prior to or at the Closing, Purchaser, Sellers, and the Escrow Agent shall enter into an Indemnification Escrow Agreement (herein so called) substantially in the form of EXHIBIT I, attached hereto, whereby Buyer and Sellers shall agree that the Indemnification Funds shall be deposited on the Closing Date into and held in escrow under and pursuant to the Indemnification Escrow Agreement.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND PRONET
The Purchaser and ProNet hereby represent and warrant to the Seller and the Partners as follows (with the understanding that the Seller and the Partners are relying materially on each such representation and warranty in entering into and performing this Agreement):
2.1 DUE ORGANIZATION. The Purchaser and ProNet are corporations duly organized, validly existing, and in good standing under the laws of the State of Delaware and have full corporate power and corporate authority to own or lease their properties and to carry on their businesses as, and in the places where, such properties are owned or leased and such businesses are conducted.
2.2 DUE AUTHORIZATION. The Purchaser and ProNet have full corporate power and corporate authority to enter into and perform their obligations under this Agreement and each agreement, document, and instrument required to be executed by the Purchaser and ProNet in accordance herewith. The execution, delivery and performance of this Agreement and any other agreements required to be executed by Purchaser and ProNet have been duly authorized. This Agreement and the other agreements, documents, and instruments required to be executed and delivered by the Purchaser and ProNet in accordance herewith have been, or by the Closing shall have been, duly and validly executed and delivered by the Purchaser and ProNet and constitute, valid and binding obligations of the Purchaser and ProNet enforceable in accordance with their respective terms, except that (a) such enforcement may be subject to applicable bankruptcy, insolvency, fraudulent transfer, or other laws, now or hereafter in effect, affecting creditors' rights generally, and (b) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses (including commercial reasonableness, good faith, and fair dealing) and to the discretion of the court before which any proceeding therefor may be brought.
2.3 FUNDS. As of the date of this Agreement, the Purchaser has access to sufficient funds or has obtained commitments from a reputable financial institution to enable it to obtain such funds as are needed to pay the Purchase Price.
2.4 CONFLICTS. Except as set forth on Schedule 2.4, neither the execution, delivery, nor performance of this Agreement or any other agreement, document or instrument to be executed by Purchaser and/or ProNet in connection herewith shall (a) violate any Federal, state, county, or local law, rule, or regulation applicable to the Purchaser or ProNet, or (b) violate, conflict or constitute a default of any provision of the Certificate of Incorporation or Bylaws of Purchaser or ProNet.
2.5 CONSENTS. Set forth on Schedule 2.5 attached hereto is a complete list of all actions, consents, or approvals of, or filings with, any governmental authorities or third parties required in connection with the execution, delivery, or performance of this agreement, document, or other instrument to be executed in connection herewith by Purchaser and ProNet.
2.6 BROKERS AND FINDERS. Purchaser and ProNet have not employed any broker, finder, sales agent or investment banker or incurred any liability to such in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby.
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE PARTNERS
The Seller and the Partners hereby jointly and severally represent and warrant to the Purchaser and ProNet as follows (with the understanding that the Purchaser and ProNet are relying materially on each such representation and warranty in entering into and performing this Agreement):
3.1 DUE ORGANIZATION; OWNERSHIP. The Seller is a general partnership duly organized and validly existing, under the laws of the State of Florida and has full power and authority to own or lease its properties and to carry on its businesses as, and in the places where, such properties are owned or leased and such businesses are conducted. The Seller is qualified to do business in the states set forth on SCHEDULE 3.1 attached hereto, which states represent every jurisdiction where such qualification is required. No other jurisdiction has asserted a claim that the Seller is required to qualify to do business as a foreign corporation in such jurisdiction. All of the partnership interest in the Seller are owned of record and beneficially as set forth on SCHEDULE 3.1 attached hereto. There are no authorized or outstanding warrants, options, or rights of any kind to acquire from the Seller or the Partners any equity or debt securities of the Seller or securities convertible into or exchangeable for equity or debt securities of the Seller.
3.2 DUE AUTHORIZATION. The Seller has full power and authority to enter into and perform its obligations under this Agreement and each agreement, document, and instrument required to be executed by the Seller in accordance herewith. The execution, delivery, and performance of this Agreement and any agreements, documents, and instruments required to be executed by the Seller have been duly authorized by the Partners. This Agreement and the agreements, documents, and instruments required to be executed and delivered by the Seller or the Partners in accordance herewith have been duly and validly executed and delivered by the Seller and/or the Partners and constitute valid and binding obligations of the Seller and/or the Partners enforceable in accordance with their respective terms, except that (a) such enforcement may be subject to applicable bankruptcy, insolvency, fraudulent transfer, or other laws, now or hereafter in effect, affecting creditors' rights generally, and (b) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses (including commercial reasonableness, good faith, and fair dealing) and to the discretion of the court before which any proceeding therefor may be brought.
3.3 CONFLICTS. Except as set forth on SCHEDULE 3.3, neither the execution, delivery, nor performance of this Agreement or any other agreement, document, or instrument to be executed by the Seller and/or the Partners in connection herewith shall (a) violate any Federal, state, county, or local law, rule, or regulation applicable to the Seller or the Partners or their properties, (b) violate or conflict with, or permit the cancellation of, any agreement to which the Seller or the Partners are a party, or by which it, or their properties are bound, or result in the creation of any lien, security interest, charge, or encumbrance upon any of such properties, (c) result in the acceleration of the maturity of any indebtedness of, or indebtedness secured by any property or other assets of, the Seller or the Partners, or (d) violate or conflict with any provision of the partnership agreement of the Seller.
3.4 CONSENTS. Set forth on SCHEDULE 3.4 attached hereto is a complete list of all actions, consents, or approvals of, or filings with, any governmental authorities or third parties required in connection with the execution, delivery, or performance of this Agreement or any agreement, document, or other instrument to be executed in connection herewith by any of the Partners or the Seller.
3.5 FINANCIAL STATEMENTS. [FINANCIAL STATEMENTS TO BE CONFIRMED] The Seller has delivered to the Purchaser (a) the audited balance sheet and income statement of Seller through December 31, 1994, (the "1994 Financial Statements"), (b) balance sheet and income statement of Seller through July 31, 1995 (the "Interim Financial Statements and together with the 1994 Financial Statements, the "Financial Statements"), and (c) a list of the Transferred Assets together with the book value of each such Transferred Asset as of September 30, 1995, which list is set forth on SCHEDULE 3.5(a) attached hereto (the "September Asset List"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except, with respect to the Interim Financial Statements, for the absence of footnotes, and subject to normal year-end adjustments and accruals required to be made in the ordinary course of business consistent with past practices) and fairly present the financial position and, results of operations, of the Seller as of the indicated dates and for the indicated periods. The September Asset List has been prepared in accordance with and is otherwise consistent with the books and records of the Seller, presents fairly and accurately the book value of each of the Transferred Assets, and has been prepared in accordance with generally accepted accounting principles as used in the preparation of Financial Statements.
3.6 CONDUCT OF BUSINESS; CERTAIN ACTIONS. Except as set forth on SCHEDULE 3.6 attached hereto, since July 31, 1995, the Seller has conducted its business and operations in the ordinary course and consistent with its past practices and has not (a) increased the compensation of any of the directors, officers, or key employees of the System or, except for wage and salary increases made in the ordinary course of business and consistent with the past practices of the Seller, increased the compensation of any other employees of the System, (b) except as set forth in SCHEDULE 3.6 made any capital expenditures exceeding $10,000 individually or $25,000 in the aggregate, (c) sold any asset (or any group of related assets) used in the operation of the System in any transaction (or series of related transactions) in which the purchase price for such asset (or group of related assets) exceeded $5,000, (d) discharged or satisfied any lien or encumbrance or paid any obligation or liability, absolute or contingent, other than current liabilities incurred and paid in the ordinary course of business, (e) made or guaranteed any loans or advances to any party whatsoever, (f) suffered or permitted any lien, security interest, claim, charge, or other encumbrance to arise or be granted or created against or upon any of the Transferred Assets, (g) canceled, waived, or released any debts, rights, or claims of the System against third parties, (h) made any change in the method of accounting of the Seller, (i) made any investment or commitment therefor in any person, business, corporation, limited liability company, association, partnership, joint venture, trust, or other entity, (j) except as set forth on Schedule 3.6 made, entered into, amended, or terminated any written employment contract or created, made, amended, or terminated any bonus, stock option, pension, retirement, profit sharing, or other employee benefit plan or arrangement, or withdrawn from any "multi-employer plan" (as defined in Section 414(f) of the Internal Revenue Code of 1986, as amended (the "Code")) so as to create any liability under Article IV of ERISA (as hereinafter defined) to any entity, (k) amended, renewed, or experienced a termination of any FCC license related to the conduct of the System to which the Seller is a party, (l) entered into any other material transactions relating to the System except in the ordinary course of business, (m) suffered any material damage, destruction, or loss (whether or not covered by insurance) to any of the Transferred Assets, (n) experienced any strike, slowdown, or demand for recognition by a labor organization by or with respect to any of the employees of the System, or (o) experienced or effected any shutdown, slow-down, or cessation of any operations conducted by, or constituting part of, the System.
3.7 TITLE. The Seller does not own or lease any assets or property used in connection with or necessary for the operation of the System other than the Transferred Assets and the Excluded Assets. Except as set forth in SCHEDULE 3.7 attached hereto, the Seller has good and indefeasible title to all of the Transferred Assets. Except as set forth on SCHEDULE 3.7 attached hereto, the Transferred Assets are free and clear of all liens (including any liens for Taxes (as defined in Section 3.16 hereof), security interests, claims, rights of another, and encumbrances. Upon consummation of the transactions contemplated hereby, the Purchaser shall acquire good and indefeasible title to the Transferred Assets, free and clear of all liens, security interests, claims, rights of another, and encumbrances. The tangible Transferred Assets listed on ANNEX 1 to SCHEDULE 1.1 are in good operating condition and repair, normal wear and tear excepted, and are free from material defects. The operation of the System in the manner in which it is now and has been operated does not violate any material zoning ordinances, material municipal regulations, or other material rules, regulations, or laws. Except as set forth in SCHEDULE 3.7, no covenants, easements, rights-of-way, or regulations of record impair the uses of the Transferred Assets for the purposes for which they are now operated. There are no other parties in possession of any portion of the Transferred Assets. There are no pending or threatened condemnation or similar proceedings or assessments affecting the Transferred Assets.
3.8 PAGERS. ANNEX 1 to SCHEDULE 1.1 includes a true and complete list of the number and type of pagers in service in the System as of September 30, 1995. In the ordinary course of business, Seller requests that customers execute valid and binding lease and/or service agreements with the Seller or agents or resellers. The Seller and the Partners do not know of any current account or accounts totalling in the aggregate more than 600 pagers in service who intend to discontinue the use of such service for any reason including, but not limited to, the consummation of the transactions contemplated herein. As used herein, "lease" means, with respect to any pager, provision of communications common carriage and the rental or lease of subscriber equipment to the customer by the Seller or its agents or resellers to permit the customer to utilize such service. The rates charged to subscribers for each class of service and copies of all applicable tariffs filed with governmental agencies regulating the rates to be charged to subscribers of the System are all contained in SCHEDULE 3.8.
3.9 LICENSES AND PERMITS. Set forth on ANNEX 7 to SCHEDULE 1.1 attached hereto is a list of all material federal, state, county, and local governmental licenses, authorizations, certificates, permits, and orders held or applied for by the Seller in connection with or related to the operation of the System (collectively, the "Licenses"). Except as set forth on SCHEDULE 3.9, the Seller has complied in all material respects and is in material compliance with the terms and conditions of all Licenses, and no violation of any such Licenses or the laws or rules governing the issuance or continued validity thereof, has occurred which would materially impair Purchaser's ability to operate the System. Other than the consents required to be obtained in connection with this Agreement (which consents are set forth on SCHEDULE 3.4 hereto), no additional license, authorization, certificate, permit, or order is required from any Federal, state, county, or local governmental agency or body thereof in connection with the operation of the System by the Seller or the Purchaser or the ownership by the Seller or the Purchaser or the transfer of the Transferred Assets by the Seller to the Purchaser. No claim has been made by any governmental authority to the effect that any license, authorization, certificate, permit, or order in addition to those listed on ANNEX 7 to SCHEDULE 1.1 is necessary in respect of the operation of the System.
3.10 INTELLECTUAL RIGHTS. Attached hereto as SCHEDULE 3.10 is a list and description of all patents, trademarks, servicemarks, tradenames, and copyrights and applications therefor related to the System and owned by or registered in the name of the Seller or in which the Seller has any right, license, or interest. Except as disclosed on SCHEDULED 3.10, the Seller is not a party to any license agreements whether written or oral, either as licensor or licensee, with respect to any patents, trademarks, servicemarks, tradenames, or copyrights or applications therefor. The Seller has good and marketable title to or the right to use such patents, trademarks, service marks, tradenames, and copyrights and all inventions, processes, designs, formulae, trade secrets, and know-how necessary for the conduct of its business, without the payment of any royalty or similar payment except as disclosed on SCHEDULE 3.10. The Seller is not infringing any patent, trademark, servicemark, tradename, or copyright of others.
3.11 COMPLIANCE WITH LAWS. The Seller has complied in all material respects, and is in compliance in all material respects, with all federal, state, county, and local laws, regulations, and orders that are applicable to the Seller's business including, but not limited to, the rules and regulations of the Federal Communications Commission (the "FCC") and the Federal Aviation Administration (the "FAA") and the states and municipalities in which the System is located, and has filed with the proper authorities all statements and reports required by the laws, regulations, and orders to which the Seller or its properties or operations are subject. The Seller and the Partners represent and warrant that they have complied with Seller's and Partners' obligations in all material respects and, prior to the Closing, will comply in all material respects with, all rules, regulations, policies, precedents, and orders of the FCC and the FAA with respect to marking, lighting, notification, and approval of each and every tower used in the Seller's business. No claim has been made by any governmental authority (and, to the best knowledge of the Seller and the Partners, no such claim is anticipated) to the effect that the business conducted by the Seller fails to comply, in any material respect, with any law, rule, regulation, or ordinance. To the best of the Seller's and the Partners' knowledge, the Seller has complied with all laws, rules, regulations, ordinances, and orders related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, handling, presence, emission, discharge, release, or threatened release into or on the air, land, surface, water, groundwater, personal property, or structures, wherever located, of any contaminants, hazardous materials, hazardous or toxic substances, or wastes as defined under any federal, state, or local laws, regulations, or ordinances.
3.12 INSURANCE. Attached hereto as SCHEDULE 3.12 is a list of all current policies of fire, liability, business interruption, and other forms of insurance and all fidelity bonds held by or applicable to the Seller, which schedule sets forth in respect of each such policy the policy name, policy number, carrier, term, type of coverage, deductible amount or self-insured retention amount, limits of coverage, and annual premium. Except as set forth in SCHEDULE 3.12 attached hereto, no event relating to the Seller has occurred which is likely to result in any prospective upward adjustment in such premiums. The insurance currently held by the Seller is amounts and is of such types and scope as is customary in the industry in which the Seller is engaged. Excluding insurance policies which have expired and been replaced, no insurance policy of the Seller has been cancelled within the last three years, and no threat has been made to cancel any insurance policy of the Seller within such period.
3.13 ERISA PLANS. The Seller has no employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
3.14 CONTRACTS AND AGREEMENTS. The contracts and agreements listed and described in SCHEDULE 1.1 and SCHEDULE 1.2 attached hereto constitute all of the material written or oral contracts, commitments, leases, and other agreements (including, without limitation, promissory notes, loan agreements, and other evidences of indebtedness but excluding rental agreements and agreements with resellers) to which the Seller is a party or by which the Seller or its properties are bound with respect to which the obligations of or the benefits to be received by the Seller from any single agreement could reasonably be expected to have a value in excess of $10,000 in any consecutive 12 month period (each a "Material Agreement"). The Seller has also furnished to the Purchaser the Seller's standard form rental agreement and agreement with resellers used in the ordinary course of the Seller's business. The Seller is not a lessor under any rental agreement or reseller agreement that varies from such standard form agreement in any material respect. The Seller and the Partners afforded to the Purchaser and the Purchaser's officers, attorneys, and other representatives the opportunity to review complete and correct copies of all of the Material Agreements. The Seller is not and, to the best knowledge of the Seller and the Partners, no other party thereto is in default (and no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default) under any Material Agreements, and the Seller has not waived any right under any Material Agreements. Neither the Seller nor the Partners has received any notice of default or termination under any Material Agreements and, except for the assignment of the Assumed Contracts to the Purchaser pursuant to this Agreement, the Seller has not assigned or otherwise transferred any rights under any Material Agreements. None of the Material Agreements are leases in connection with which an election was made under Section 168(f)(8) of the Code.
3.15 CLAIMS AND PROCEEDINGS. Attached hereto as SCHEDULE 3.15 is a list and description of all claims, actions, suits, proceedings, and investigations pending or, to the best knowledge of the Seller and the Partners, threatened against or affecting the Seller or any of its properties or assets, at law or in equity, or before or by any court, municipal or other governmental department, commission, board, agency, or instrumentality. Except as set forth on SCHEDULE 3.15 attached hereto, none of such claims, actions, suits, proceedings, or investigations will result in any liability or loss to the Seller which (individually or in the aggregate) is material to the Seller, and the Seller has not been, and the Seller is not now, subject to any order, judgment, decree, stipulation, or consent of any court, governmental body, or agency. No inquiry, action, or proceeding has been asserted, instituted, or, to the best knowledge of the Seller and the Partners, threatened to restrain or prohibit the carrying out of the transactions contemplated by this Agreement or to challenge the validity of such transactions or any part thereof or seeking damages on account thereof.
the best knowledge of the Seller and the Partners, there is no basis for any such claim or action or any other claims or actions which would, or could reasonably be expected to (individually or in the aggregate), have a material adverse effect on the business, operations, or financial condition or prospects of the Seller or the System or result in a material liability of the Seller.
3.16 TAXES. To the best knowledge of the Seller and the Partners, all Federal, foreign, state, county, and local income, gross receipts, excise, property, ad valorem, transfer, franchise, capital stock, business and occupation, license, sales, use, value-added, transfer, profits, gains, mortgage recording, disability, employment, payroll, withholding, custom, estimated, and other taxes, fees and assessments imposed by any governmental entity, agency, or instrumentality (individually, a "Tax" and collectively, "Taxes") returns, reports, statements, invoices, and declarations of estimated tax (collectively, "Returns") which were required to be filed by the Seller on or before the date hereof have been filed within the time and in the manner provided by law, and all such Returns are true, correct, and complete and accurately reflect the liabilities for Tax of the Seller. To the best knowledge of the Seller and the Partners all Taxes, penalties, interest, and other additions to Taxes which have become due pursuant to such Returns have been adequately accrued in the Financial Statements of the Seller and, to the extent the due date for payment of such Taxes has occurred prior to the Closing date hereof, have been timely paid by the Seller. All annual or other FCC regulatory fees arising from the operations of the Seller have been paid. The Seller has not executed any presently effective waiver or extension of any statute of limitations against assessments and collections of Taxes, interest, penalties, or additions to Taxes or any extension of time to file any Return. There are no pending or threatened claims, assessments, notices, proposals to assess, deficiencies, or audits (collectively, "Seller Tax Actions") with respect to any Taxes, penalties, interest, or additions to Taxes owed or allegedly owed by the Seller. To the best knowledge of the Seller and the Partners, there is no basis for any Seller Tax Actions. To the best knowledge of the Seller and the Partners, there are no liens for Taxes, penalties, interest, or additions to Taxes on any of the assets of the Seller. To the best knowledge of the Seller and Partners, proper and accurate amounts of any and all payroll and employment Taxes that are required to be withheld have been withheld and remitted by the Seller from and in respect of its Partners and its employees for all periods in full and complete compliance with the tax withholding provisions of all applicable laws and regulations.
3.17 PERSONNEL. Attached hereto as SCHEDULE 3.17 is a list of the names and annual rates of compensation of the employees of the System whose annual rates of compensation during the fiscal year ending December 31, 1994 (including base salary, bonuses, commissions, and incentive pay), exceeded or are expected to exceed $20,000. SCHEDULE 3.17 attached hereto also summarizes the bonus, profit sharing, percentage compensation, company automobile, club membership, and other like benefits, if any, paid or payable to such employees during such fiscal year and to the date hereof. SCHEDULE 3.17 attached hereto also contains a brief description of all material terms of all employment agreements and confidentiality agreements to which the Seller is a party and all severance benefits which any director, officer, or employee of the Seller is or may be entitled to receive. The Seller has delivered to the Purchaser accurate and complete copies of all such employment agreements, confidentiality agreements, and all other agreements, other instruments relating to the System to which the Seller is a party and under which any of its employees are entitled to receive benefits of any nature. The employee relations of the Seller are good and there is no pending or, to the best knowledge of the Seller and the Partners, threatened labor dispute or union organization campaign involving the Seller. None of the employees of the Seller is represented by any labor union or organization. The Seller is in compliance with all federal and state laws respecting employment and employment practices, terms and conditions of employment, and wages and hours and is not engaged in any unfair labor practices. There is no unfair labor practice claim against the Seller before the National Labor Relations Board or any strike, labor dispute, work slowdown, or work stoppage pending or, to the best knowledge of the Seller and the Partners, threatened against or involving the Seller.
3.18 BUSINESS RELATIONS. Neither the Seller nor the Partners knows that any account or accounts totalling in the aggregate more than 600 pagers in service on the System will cease or otherwise refuse to do business with the Purchaser after the Closing in the same manner as such business was previously conducted with the Seller. The Seller has not received any notice of any disruption (including delayed deliveries or allocations by suppliers) in the availability of the materials or products used by the Seller in the operation of the System.
3.19 BROKERS. Except for Seller's agreement with Daniels & Associates, neither the Seller nor the Partners has caused any liability to be incurred to any finder, broker, or sales agent in connection with the execution, delivery, or performance of this Agreement or the transactions contemplated hereby.
3.20 WARRANTIES. To the best knowledge of the Seller and the Partners, no state of facts exists, or event has occurred, which may form the basis of any claim against the Seller for liability on account of any express or implied warranty to any third party related to the operation of the System.
3.21 ACCOUNTS RECEIVABLE. Except as set forth on SCHEDULE 3.21 attached hereto, all of the accounts, notes, and loans receivable that have been recorded on the books of the Seller are bona fide and represent amounts validly due (net of reserves set forth on the Seller's Closing Balance Sheet). All of such accounts, notes, and loans receivable are free and clear of any security interests, liens, encumbrances, or other charges; none of such accounts, notes, or loans receivable are subject to any offsets or claims of offset; and none of the obligors of such accounts, notes, or loans receivable have given notice that they will or may refuse to pay the full amount thereof or any portion thereof.
3.22 CUSTOMERS AND SUPPLIERS. SCHEDULE 3.22 attached hereto contains a true, correct, and complete list of the eight largest customers (measured in dollar volume of revenue) of the System during the quarter ended June 30, 1995, and the year ended December 31, 1994.
3.23 INTEREST IN COMPETITORS, SUPPLIERS, AND CUSTOMERS. With the exception of radio station WARO-FM, owned by Palmer, to the best of their knowledge none of the Seller, the Partners, nor any employee of the Seller, or affiliate of any of the foregoing, has any ownership interest in any competitor, supplier, or customer of the System or any property used in the operation of the System.
3.24 INVENTORY. Except as set forth on SCHEDULE 3.24 attached hereto, the inventories shown on the Financial Statements and SCHEDULE 1.1 consist of (and the inventories of the Seller at the Closing will consist of) material items (including pagers) in good operating condition except pagers in inventory needing repair.
3.25 COMMISSION SALES CONTRACTS. Except as disclosed in SCHEDULE 3.25 attached hereto, the Seller does not employ or have any relationship with any individual, corporation, partnership, or other entity whose compensation from the Seller arising from the operation of the System is in whole or in part determined on a commission basis.
3.26 REGULATORY CERTIFICATES. To the best knowledge of the Seller and the Partners, there are no facts or circumstances concerning the Seller or its operations that could cause the FCC or any other regulatory authority not to issue to the Purchaser all regulatory certificates and approvals necessary for the consummation of the transactions contemplated hereunder and for the Purchaser's operation of the System and ownership of the Transferred Assets.
3.27 INFORMATION FURNISHED. The Seller and the Partners have made available to the Purchaser and its officers, attorneys, accountants, lenders, and representatives true and correct copies of all material agreements, documents, and other items listed on the schedules to this Agreement and have allowed inspection of all books and records of the Seller relating to the Transferred Assets, and to the best knowledge of the Seller and the Partners, neither this Agreement, nor the schedules hereto, nor any information, agreements, or documents delivered to or made available to the Purchaser or its officers, attorneys, accountants, lenders, and representatives pursuant to this Agreement or otherwise contain any untrue statement of a material fact or omit any material fact necessary to make the statements herein or therein, as the case may be, not misleading.
COVENANTS OF THE SELLER AND THE PARTNERS
4.1 INSPECTION. From the date hereof to the Closing, the Seller and the Partners shall provide the Purchaser and the Purchaser's officers, attorneys, accountants, representatives, and lenders complete access during business hours to all books, records, tax returns, files, correspondence, personnel, facilities, and properties of the Seller; provide the Purchaser and its officers, attorneys, accountants, representatives, and lenders all pertaining to the business and affairs of the Seller as the Purchaser may deem necessary or appropriate. Any investigation by the Purchaser or its officers, attorneys, accountants, representatives, or lenders shall not in any manner affect the representations and warranties of the Seller and the Partners contained herein.
4.2 COMPLIANCE. From the date hereof to the Closing, neither the Seller nor the Partners shall take or fail to take any action which action or failure to take such action shall cause the representations and warranties made by the Seller or the Partners herein to be untrue or incorrect as of the Closing.
4.3 SATISFACTION OF ALL CONDITIONS PRECEDENT. From the date hereof to the Closing, the Seller and the Partners shall use their best efforts to cause all conditions precedent to the obligations of the Purchaser hereunder to be satisfied by the Closing.
4.4 NO SOLICITATION. From the date hereof until 11:59 p.m. on March 31, 1996, or the date of termination of this Agreement, whichever is sooner, the Seller and the Partners shall not, and shall use their best efforts to cause the officers, directors, employees, and agents of the Seller not to, (a) solicit, initiate or encourage the submission of proposals or offers from any person or entity for, or enter into any agreement or arrangement relating to, any acquisition or purchase of any or all of the Transferred Assets, or securities of the Seller, or any merger, consolidation, or business combination with the Seller or (b) participate in any negotiations regarding, or, except as required by legal process, furnish to any other person or entity any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate, or encourage, any effort or attempt by any other person or entity to do or seek any of the foregoing. In addition, until 11:59 p.m. on March 31, 1996, the Seller and the Partners agree that neither the Seller nor the Partners will enter into any agreement or consummate any transaction that would interfere with the consummation of the transactions contemplated by this Agreement. The Seller and the Partners shall promptly notify the Purchaser if any such proposal or offer described in this Section 4.4, or any inquiry or contact with any person or entity with respect thereto, is made. The notification under this Section 4.4 shall include the identity of the person or entity making such acquisition, offer or other proposal, the terms thereof, and any other information with respect thereto as the Purchaser may reasonably request.
4.5 NOTICE OF DEVELOPMENTS. From the date hereof to the Closing, the Seller and the Partners shall, immediately upon the Seller or the Partners becoming aware thereof, notify the Purchaser of any material problems or developments with respect to the business, operations, assets, or prospects of the Seller.
4.6 NOTICE OF BREACH. From the date hereof to the Closing, the Sellers and the Partners shall, immediately upon the Seller or the Partners becoming aware thereof, give detailed written notice to the Purchaser of the occurrence of, or the impending or threatened occurrence of, any event that would cause or constitute a breach, or would have caused or constituted a breach had such event occurred or been known to the Seller or the Partners prior to the date of this Agreement, of any of their respective covenants, agreements, representations, or warranties contained or referred to herein or in any document delivered in accordance with the terms hereof.
4.7 NOTICE OF LITIGATION. From the date hereof to the Closing, the Seller and the Partners shall, immediately upon the Seller or the Partners becoming aware thereof, notify the Purchaser of (a) any suit, action, or proceeding (including, without limitation, any Tax Action or proceeding involving a labor dispute or grievance or union recognition) to which the Seller becomes a party or which is threatened against the Seller, (b) any order or decree or any complaint praying for an order or decree restraining or enjoining the consummation of this Agreement or the transactions contemplated hereby, or (c) any notice from any tribunal of its intention to institute an investigation into, or to institute a suit or proceeding to restrain or enjoin the consummation of, this Agreement or the transactions contemplated hereby or to nullify or render ineffective this Agreement or such transactions if consummated.
4.8 CONTINUATION OF INSURANCE COVERAGE. From the date hereof to the Closing, the Seller shall keep (and the Partners shall cause the Seller to keep) in full force and effect insurance coverage for the Seller and its assets and operations comparable in amount and scope to the coverage now maintained covering the Seller and its assets and operations.
4.9 MAINTENANCE OF CREDIT TERMS. From the date hereof to the Closing, the Seller shall continue (and the Partners shall cause the Seller to continue) to effect sales and leases of its products in a manner consistent with past practices.
4.10 UPDATING INFORMATION. As of the Closing, the Seller and the Partners shall update all information set forth in the schedules to this Agreement.
4.11 INTERIM OPERATIONS OF THE SELLER.
(a) From the date hereof to the Closing, the Seller shall conduct (and the Partners shall cause the Seller to conduct) its business only in the ordinary course consistent with past practice, and the Seller shall not, unless the Purchaser gives its prior written approval, (i) except in the ordinary course of business, sell, pledge, dispose of, or encumber, or agree to sell, pledge, dispose of, or encumber, any of the Transferred Assets, or authorize any capital expenditure in excess of $10,000, (excluding the sale or purchase of pagers in the ordinary course of business) (ii) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership, or other business organization or division thereof, or enter into any contract, agreement, commitment, or arrangement with respect to any of the foregoing, (iii) incur any indebtedness for borrowed money, issue any debt securities, or enter into or modify any contract, agreement, commitment, or arrangement with respect thereto, (iv) enter into, amend, or terminate any employment or consulting agreement with any director, officer, consultant, or key employee of the System, enter into, amend, or terminate any employment or consulting agreement with any other person that relates to the operation of the System otherwise than in the ordinary
course of business, take any action intended to increase or decrease the number of persons employed by the System, or take any action with respect to the grant or payment of any severance or termination pay other than pursuant to policies or agreements of the Seller in effect on the date hereof, (v) enter into, extend, or renew any lease for office space used in connection with the operation of the System, except in the ordinary course of business or (vi) except as required by law, adopt, amend, or terminate any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment, or other employee benefit plan, agreement, trust, fund, or arrangement for the benefit or welfare of any officer, employee, or sales representative of the Seller, so as to create any liability under Article IV of ERISA to any entity, (vii) grant any increase in compensation to any director, officer, consultant, or key employee of the System, or (viii) grant any increase in compensation to any other employee or consultant of the System except in the ordinary course of business consistent with past practice.
(b) From the date hereof to the Closing, the Seller shall use (and the Partners shall cause the Seller to use) its best efforts to preserve intact the business organization of the System, to keep available in all material respects the services of its present officers and key employees, to preserve intact the System's banking relationships and credit facilities, to preserve the goodwill of those having business relationships with the System, and to comply with all applicable laws.
4.12 FINANCIAL STATEMENTS. From the date hereof until the Closing, as soon as available, and in any event within 45 days after the end of each calendar month beginning with August 1995, the Seller shall furnish to the Purchaser a balance sheet, and, statement of income of the System for such month prepared by the Seller as an internal management control in accordance with the generally accepted accounting principles and past practices applied in the preparation of the Financial Statements (except for the absence of notes to such monthly financial statements and subject to normal year-end adjustments and accruals required to be made in the ordinary course of business that are not materially adverse and are consistent with past practices). Such monthly financial statements shall fairly present the financial position and results of operations as of the indicated dates and for the indicated periods.
4.13 ASSIGNMENTS. From the date hereof until the Closing, the Seller and the Partners shall use their best efforts to obtain all necessary consents to the assignment by the Seller to the Purchaser of the Assumed Contracts, all of which consents are described on SCHEDULE 3.4 hereto.
4.14 LICENSES. From the date hereof until the Closing, the Seller and the Partners shall cooperate and assist fully in connection with Purchaser's efforts to obtain, prior to the Closing Date, all consents and authorizations that may be required in connection with the transfer of each of the Licenses listed on ANNEX 7 to SCHEDULE 1.1 hereto.
With the full cooperation and assistance of the Seller and the Partners as contemplated in Section 4.14 hereof, the Purchaser shall file with the FCC, the FAA, (if applicable) and with all state regulatory agencies, commissions, or other entities having jurisdiction over the System, applications for consent to transfer to the Purchaser of the Licenses, or any similar state authorizations, currently held by the Seller. The Purchaser shall use all commercially reasonable efforts to file and prosecute such applications so as to permit the Closing to occur. Approval of the aforementioned applications by the FCC, the FAA, if applicable and by any applicable state agencies, commissions, or other entities shall be by Final Order (and such approvals shall hereinafter collectively be referred to as the "Final Order"). As used in this Agreement, any such approval shall only be a Final Order if (a) the action of the subject governmental agency approving the application has not been reversed, stayed, enjoined, set aside, annulled, or suspended, (b) with respect to such approval, no timely request for stay, motion, or petition for reconsideration or rehearing, application, or request for review, or notice of appeal or other judicial petition for review is pending, and (c) the time for filing any such request, motion, petition, application, appeal, or notice, and for the entry of orders staying, reconsidering, or reviewing the subject governmental agency's own motion, shall have expired. Any action by a governmental authority approving the applications subject to conditions (other than conditions concerning notification of the consummation of this Agreement and other conditions that the FCC routinely attaches to grants of this type) shall not be deemed a Final Order until such time as the Purchaser notifies the Seller in writing of its willingness to accept such conditions. In addition, if prior to the date on which any such action would become a Final Order, the Purchaser does not elect to accept any such conditions, the Purchaser shall have the right to terminate this Agreement upon written notice to the Seller and the Shareholder and shall be relieved of all obligations hereunder as provided in Article 7 hereof.
6.1 CONDITIONS TO OBLIGATIONS OF THE PURCHASER AND PRONET. The obligations of the Purchaser and ProNet to consummate the transactions contemplated hereby are subject to the fulfillment of each of the following conditions:
(a) The representations and warranties of the Seller and the Partners contained in this Agreement shall be true and correct in all material respects at and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing; the Seller and the Partners shall have performed and complied in all material respects with all agreements required by this Agreement to be performed or
complied with by the Seller and the Partners at or prior to the Closing; and the Purchaser shall have received a certificate, dated as of the Closing Date, signed by the Partners to the foregoing effects.
(b) No action or proceeding shall have been instituted or threatened for the purpose or with the possible effect of enjoining or preventing the consummation of this Agreement or seeking damages on account thereof.
(c) The Purchaser shall have received an opinion of K. Patrick Meehan, counsel for the Seller and the Partners, dated as of the Closing Date, in the form attached hereto as EXHIBIT C.
(d) The Purchaser shall have received an opinion of David Kaufman, Brown, Nietert and Kaufman, Washington, D.C., FCC counsel for the Seller and the Partners, dated as of the Closing Date, in the form attached hereto as EXHIBIT D.
(e) Prior to the Closing, there shall not have occurred any material casualty or damage (whether or not insured) to any facility, property, asset, or equipment used in connection with the operation of the System; and the operation of the System shall have been conducted only in the ordinary course consistent with past practices.
(f) The FCC and all applicable state regulatory agencies, commissions, or other entities, by Final Order, shall have granted any required consent to the sale, transfer, and assignment of the Transferred Assets to the Purchaser and to the Purchaser's ownership and operation of the Transferred Assets (except the Licenses set forth in SCHEDULE 1.2).
(g) As of the Closing Date, the Seller shall have at least 12,000 pagers in service in the System and the Purchaser shall have received a certificate, dated as of the Closing Date, signed by the Partners setting forth the number and type (as provided in Appendix A hereto) of pagers in service in the System. "Pagers in service" shall be defined as a paging unit that is in service on the Closing Date and has no account receivable balance more than ninety (90) days old; provided that accounts set forth in Schedule 6.1(g) will qualify if the account has an established pattern of late, but regular payments.
(h) As of the Closing Date, the Seller's inventory shall have at least $50,000 of useable (including pagers needing repair) pagers valued pursuant to the value matrix as set forth in Schedule 1.1, and the Purchaser shall have received a certificate, dated as of the Closing Date, signed by the Partners to the foregoing effect.
(i) All material consents and approvals as noted on SCHEDULE 3.4 hereto shall have been obtained or waived.
(j) All necessary action (corporate or otherwise) shall have been taken by the Seller to authorize, approve, and adopt this Agreement and the consummation and performance of the transactions contemplated hereby, and the Purchaser shall have received a certificate, dated as of the Closing Date, signed by the Partners of the Seller to the foregoing effect.
(k) The Purchaser shall have received from the Seller a duly executed Bill of Sale.
(l) Each of the Partners and the Seller shall have entered into a Noncompetition Agreement (a "Noncompetition Agreement") with the Purchaser substantially in the forms attached hereto as EXHIBITS E and F, respectively.
(m) The Seller shall have duly executed and delivered to the Purchaser the License Agreement substantially in the form attached hereto as EXHIBIT G granting the Purchaser the right to the use of the name "Sun Paging" in the area presently served by the System.
(n) The Seller shall have delivered to the Purchaser assignments of the Real Estate Leases.
The decision of the Purchaser and ProNet to consummate the transactions contemplated hereby without the satisfaction of any of the preceding conditions shall not constitute a waiver of any of the Seller's or the Partners' respective representations, warranties, covenants, or indemnities herein.
6.2 CONDITIONS TO OBLIGATIONS OF THE SELLER AND THE PARTNERS. The obligations of the Seller and the Partners to consummate the transactions contemplated hereby are subject to the fulfillment of the following conditions:
(a) The representations and warranties of the Purchaser and ProNet contained in this Agreement shall be true and correct in all material respects at and as of the Closing with the same effect as though such representations and warranties had been made as of the Closing; all agreements to be performed hereunder by the Purchaser and ProNet at or prior to the Closing shall have been performed in all material respects; and the Seller and the Partners shall have received a certificate, dated as of the Closing Date, signed by an officer of the Purchaser and ProNet to the foregoing effects.
(b) The Purchaser shall have delivered to the Seller by wire transfer cash portion of the Purchase Price to be paid on the Closing Date in accordance with and as specified in Section 1.4 (B), 1.4 (C) and 1.4(E) hereof.
(c) Purchaser shall have deposited the Indemnification Funds with the Escrow Agent.
(d) The Deposit shall have been paid to the Seller.
(e) The Purchaser shall have delivered to the Seller an Assumption Agreement substantially in the form attached hereto as EXHIBIT B with respect to the Assumed Liabilities.
The decision of the Seller and the Partners to consummate the transactions contemplated hereby without the satisfaction of any of the preceding conditions shall not constitute a waiver of any of the Purchaser's or ProNet's respective representations, warranties, covenants, or indemnities herein.
7.1 TERMINATION. This Agreement may be terminated prior to the Closing by (a) the mutual consent of the Purchaser and ProNet and the Seller, (b) the Seller upon the failure of the Purchaser and ProNet to perform or comply in all material respects with each of its covenants or agreements contained herein prior to the Closing or if each representation or warranty of the Purchaser and ProNet hereunder shall not have been true and correct as of the time at which such representation or warranty was made, (c) the Purchaser and ProNet upon the failure of the Seller or the Partners to perform or comply in all material respects with each of its or his covenants or agreements contained herein prior to the Closing or if each representation or warranty of the Seller or the Partners hereunder shall not have been true and correct as of the time at which such representation or warranty was made, (d) the Purchaser and ProNet in accordance with the provisions of Article 5 hereof, and (e) the Seller or the Purchaser and ProNet if the Closing does not occur by June 30, 1996 provided, that no party may terminate this Agreement pursuant to (b), (c), or (d) above if such party is, at the time of any such attempted termination, in breach of any term hereof.
8.1 INDEMNIFICATION OF THE PURCHASER AND PRONET. The Seller and the Partners jointly and severally agree to indemnify and hold harmless the Purchaser and ProNet and each officer, director, employee, consultant, stockholder, and affiliate of the Purchaser and ProNet (collectively, the "Purchaser Indemnified Parties") from and against any and all damages, losses, claims, liabilities (including, without limitation, those liabilities not expressly assumed by the Purchaser as provided in Sections 1.3 and 9.2 hereof), demands, charges, suits, penalties, costs, and expenses (including court costs and reasonable attorneys' fees and expenses incurred in investigating and preparing for any litigation or proceeding) (collectively, "Purchaser Indemnified Costs") which any of the Indemnified Parties may sustain, or to which any of the Indemnified Parties may be subjected, arising out of any breach or default by the Seller or the Partners of or under any of the representations, warranties, covenants, agreements, or other provisions of this Agreement or any agreement or document executed in connection herewith.
8.2 INDEMNIFICATION OF THE SELLER AND THE PARTNERS. The Purchaser and ProNet agree to indemnify and hold harmless the Seller, the Partners, and each officer, director, employee, and consultant of the Seller (collectively, the "Seller Indemnified Parties" and collectively with the Purchaser Indemnified Parties, the "Indemnified Parties") from and against any and all damages, losses, claims, liabilities, demands, charges, suits, penalties, costs, and expenses (including court costs and reasonable attorney's fees and expenses incurred in the investigating and preparing for any litigation or proceeding) (collectively, the "Seller Indemnified Costs" and, collectively with the Purchaser Indemnified Costs, the "Indemnified Costs") which any of the Seller Indemnified Parties may sustain, or to which any of the Seller Indemnified Parties may be subjected, arising out of any breach or default by the Purchaser and ProNet under any of the representations, warranties, convenants, agreements, or other provisions of this Agreement or any agreement or document executed in connection herewith.
8.3 DEFENSE OF THIRD-PARTY CLAIMS. An Indemnified Party shall give prompt written notice to any entity or person who is obligated to provide indemnification hereunder (an "Indemnifying Party") of the commencement or assertion of any action, proceeding, demand, or claim by a third party (collectively, a "third-party action") in respect of which such Indemnified Party shall seek indemnification hereunder. Such notice shall specify the provision(s) of this Agreement from which such indemnification obligation arises. Any failure so to notify an Indemnifying Party shall not relieve such Indemnifying Party from any liability that it or he may have to such Indemnified Party under this Article 8 unless the failure to give such notice materially and adversely prejudices such Indemnifying Party; provided, however, such notice must be provided within eighteen (18) months after the Closing Date. The Indemnifying Parties shall have the right to assume control of the defense of, settle, or otherwise dispose of such third-party action on such terms as they deem appropriate; provided, however, that:
(a) The Indemnified Party shall be entitled, at his, her, or its own expense, to participate in the defense of such third-party action (provided, however, that the Indemnifying Parties shall pay the attorneys' fees of the Indemnified Party if (i) the employment of separate counsel shall have been authorized in writing by any such Indemnifying Party in connection with the defense of such third-party action, (ii) the Indemnifying Parties shall not have employed counsel reasonably satisfactory to the Indemnified Party to have charge of such third-party action, (iii) the Indemnified Party shall have reasonably concluded that there may be defenses available to such Indemnified
Party that are different from or additional to those available to the Indemnifying Parties, or (iv) the Indemnified Party's counsel shall have advised the Indemnified Party in writing, with a copy to the Indemnifying Parties, that there is a conflict of interest that could make it inappropriate under applicable standards of professional conduct
(b) The Indemnifying Parties shall obtain the prior written approval of the Indemnified Party before entering into or making any settlement, compromise, admission, or acknowledgment of the validity of such third- party action or any liability in respect thereof if, pursuant to or as a result of such settlement, compromise, admission, or acknowledgment, injunctive or other equitable relief would be imposed against the Indemnified Party or if, in the opinion of the Indemnified Party, such settlement, compromise, admission, or acknowledgment could have a material adverse effect on its business or, in the case of an Indemnified Party who is a natural person, on his or her assets or interests;
(c) No Indemnifying Party shall consent to the entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by each claimant or plaintiff to each Indemnified Party of a release from all liability in respect of such third-party action; and
(d) The Indemnifying Parties shall not be entitled to control (but shall be entitled to participate at their own expense in the defense of), and the Indemnified Party shall be entitled to have sole control over, the defense or settlement, compromise, admission, or acknowledgment of any third-party action (i) as to which the Indemnifying Parties fail to assume the defense within a reasonable length of time or (ii) to the extent the third-party action seeks an order, injunction, or other equitable relief against the Indemnified Party which, if successful, would materially adversely affect the business, operations, assets, or financial condition of the Indemnified Party; PROVIDED, HOWEVER, that the Indemnified Party shall make no settlement, compromise, admission, or acknowledgment that would give rise to liability on the part of any Indemnifying Party without the prior written consent of such Indemnifying Party.
The parties hereto shall extend reasonable cooperation in connection with the defense of any third-party action pursuant to this Article 8 and, in connection therewith, shall furnish such records, information, and testimony and attend such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested.
8.4 DIRECT CLAIMS. In any case in which an Indemnified Party seeks indemnification hereunder which is not subject to Section 8.2 hereof because no third-party action is involved, the Indemnified Party shall give prompt written notice to the Indemnifying Parties of any Indemnified Costs which such Indemnified Party claims are subject to indemnification under the terms hereof. Such notice shall specify the provision(s) of this Agreement from which such indemnification obligation arises. The failure of the Indemnified Party to exercise promptness in such notification shall not amount to a waiver of such claim unless the resulting delay materially prejudices the position of the Indemnifying Parties with respect to such claim; provided, however, such notice must be provided within eighteen (18) months after the Closing date.
8.5 LIMITATIONS. Notwithstanding the foregoing, the Indemnified Party shall be responsible for the first $25,000.00 of Indemnified Costs.
9.1 COLLATERAL AGREEMENTS, AMENDMENTS, AND WAIVERS. This Agreement (together with the documents delivered in connection herewith) supersedes all prior documents, understandings, and agreements, oral or written, relating to this transaction including specifically that certain letter of intent dated July 26, 1995, among the parties hereto and constitutes the entire understanding among the parties hereto with respect to the subject matter hereof. Any modification or amendment to, or waiver of, any provision of this Agreement (or any document delivered in connection herewith unless otherwise expressly provided therein) may be made only by an instrument in writing executed by the party against whom enforcement thereof is sought.
9.2 RISK OF LOSS - DAMAGE TO TRANSFERRED ASSETS. The parties hereto hereby agree that the risk of loss or damage to any of the Transferred Assets shall be upon the Seller prior to the Closing and upon the Purchaser thereafter.
9.3 PRORATIONS. All annual or periodic ad valorem fees, taxes, and assessments and similar charges imposed by taxing authorities on the Transferred Assets (collectively, "Property Taxes") shall be borne and paid (a) by the Seller for all full tax years or periods ending before the Closing Date and for that portion of any tax year or period ending on or after the Closing Date from the date of commencement of such year or period to the date immediately preceding the Closing Date and (b) by the Purchaser for all full tax years or periods beginning on or after the Closing Date and for that portion of any tax year or period ending on or after the Closing Date from and including the Closing Date to the final date of such year or period, regardless of when or by which party such Property Taxes are actually paid to the applicable taxing authority. In addition, all rents and other lease charges, power and utility charges, license or other fees, wages, salaries, and commissions, all Assumed Contracts, prepaid items and expenses, and similar items to be allocated between the Purchaser and the Seller shall be allocated between the Purchaser and the Seller effective as of 12:01 a.m. on the Closing Date. Such allocations shall be determined and payment accordingly made from one party to the other, as the case may be, on the Closing Date to the extent they are known and agreed to by the Purchaser and the Seller; otherwise such allocations shall be determined and payment made (effective as of 12:01 a.m. on the Closing Date) on the date 30 days thereafter. If there shall be any dispute in regard to the amounts due this Section 9.4, the same shall be determined by a nationally recognized accounting firm selected by the Purchaser and Seller and any such determination by such firm shall be binding and conclusive on the parties hereto. The charges of such firm shall be shared equally by the Purchaser and the Seller.
9.4 ALLOCATION OF PURCHASE PRICE. The parties hereto acknowledge that the transactions contemplated hereby must be reported in accordance with Section 1060 of the Code. Accordingly, the parties shall report such transactions for all purposes in accordance with the Purchase Price allocation set forth on EXHIBIT H hereto. It is specifically understood that $50,000 of the Purchase Price shall be allocated to the Noncompetition Agreements executed by the Seller and the Partners.
9.5 RECORDS. At the Closing, the Seller and the Partners will turn over and deliver to the Purchaser all files of the Seller relating to the Transferred Assets and/or the System, including, without limitation, all copies and originals of all Assumed Contracts, any and all operating manuals, third party warranties, and like materials and data in the Seller's or the Partners' possession relating to the design, construction, maintenance, and operation of facilities, improvements, and equipment included in the Transferred Assets and/or the System, and all appropriate books and records, accounting information, and operating information and data, current and historical, reasonably related to the Transferred Assets and/or the System; provided, however, the Seller shall not be obligated to deliver the financial books and records of the Partnership.
9.6 SELLER'S LIABILITIES. The Seller agrees to satisfy, pay and extinguish all of the liabilities of the Seller outstanding as of the Closing Date within 30 days following the Closing Date.
9.7 SUCCESSORS AND ASSIGNS. No rights or obligations of any party hereto under this Agreement may be assigned (except that the Purchaser or ProNet may assign its rights and obligations to any affiliate (as that term is defined in Rule 144 under the Securities Act) of the Purchaser or ProNet or to any successor entity to the Purchaser or ProNet whether pursuant to a sale of all or substantially all of the Purchaser's or ProNet's assets, the merger, consolidation, liquidation, or dissolution of the Purchaser or ProNet, or otherwise). Any assignment, dissolution, or liquidation in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section 9.8, the provisions of this Agreement (and, unless otherwise expressly provided therein, of any document delivered pursuant to this Agreement) shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and permitted assigns.
9.8 EXPENSES. Each of the parties hereto shall pay its or his own respective costs and expenses incurred in connection with this Agreement. The Seller and the Purchaser shall each pay one-half of any administrative, application, and filing costs incurred in connection with regulatory approvals described in Article 5 hereof.
9.9 INVALID PROVISIONS. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable from this Agreement, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.
9.10 WAIVER. No failure or delay on the part of any party in exercising any right, power, or privilege hereunder or under any of the documents delivered in connection with this Agreement shall operate as a waiver of such right, power, or privilege; nor shall any single or partial exercise of any such right, power, or privilege preclude any other or future exercise thereof or the exercise of any other right, power, or privilege.
9.11 NOTICES. Any notices required or permitted to be given under this Agreement (and, unless otherwise expressly provided therein, under any document delivered in connection with this Agreement) shall be given in writing and shall be deemed received (a) when personally delivered to the relevant party at such party's address as set forth below, (b) when confirmed if delivered by telefacsimile or similar device, or (c) if sent by mail, on the third day following the date when deposited in the United States mail, certified or registered mail, postage prepaid, to the relevant party at its or his address indicated below:
If to the Purchaser: Contact Communications Inc.
With a copy to: ProNet Inc.
If to the Seller Sun Paging Communications % American Mobilphone, Inc. Atten: Mr. Fred W. Schwarz
With a copy to: Palmer Wireless, Inc. Vice President & General Counsel 12800 University Drive, Suite #500
Each party may change its or his address for purposes of this Section 9.13 by proper notice to the other parties.
9.12 SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND COVENANTS. Regardless of any investigation at any time made by or on behalf of any party hereto or of any information any party may have in respect thereof, all covenants, agreements, representations, and warranties made hereunder or pursuant hereto or in connection with the transactions contemplated hereby shall survive the Closing for a period of eighteen (18) months from the Closing Date; provided, however, all representations and warranties with respect to taxes shall survive for the applicable statute of limitations..
9.13 PUBLIC ANNOUNCEMENT. No public announcement shall be made by any party with respect to the transactions contemplated hereby without the approval of the Purchaser unless otherwise required by law.
9.14 FURTHER ASSURANCES. From time to time hereafter, (a) at the request of the Purchaser, but without further consideration, the Seller and the Partners shall execute and deliver such other instruments of conveyance, assignment, transfer, and delivery and take such other action as the Purchaser may reasonably request in order more effectively to consummate the transactions contemplated hereby, and (b) at the request of the Seller or the Partners, but without further consideration, the Purchaser shall execute and deliver such other certificates, statements, and documents, and take such other action as the Seller or the Partners may reasonably request in order to more effectively consummate the transactions contemplated hereby.
9.15 NO THIRD-PARTY BENEFICIARIES. Except for the Indemnified Parties not a party to this Agreement, no person or entity not a party to this Agreement shall be deemed to be a third-party beneficiary hereunder or entitled to any rights hereunder.
9.16 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida.
9.17 HEADINGS. The headings, captions, and arrangements used in this Agreement are, unless specified otherwise, for convenience only and shall not be deemed to limit, amplify, or modify the terms of this Agreement or affect the meaning hereof.
9.18 SECTIONS; EXHIBITS. All references to "Sections", "Subsections", "Schedules", "Annexes", and "Exhibits" herein are, unless specifically indicated otherwise, references to sections, subsections, schedules, annexes, and exhibits of and to this Agreement. All schedules and exhibits attached hereto are made a part hereof for all purposes, the same as set forth herein verbatim, it being understood that if any exhibit attached hereto which is to be executed and delivered contains blanks, the same shall be completed correctly and in accordance with the terms and provisions contained and as contemplated herein prior to or at the time of the execution and delivery thereof.
9.19 NUMBER AND GENDER OF WORDS. Whenever herein the singular number is used, the same shall include the plural where appropriate, and words of any gender shall include each other gender where appropriate.
9.22 SPECIFIC PERFORMANCE. The parties hereto acknowledge and agree that, without limiting any other remedy available to the Purchaser at law or in equity, the Purchaser shall be able to specifically enforce the terms of this Agreement.
9.23 PRONET GUARANTEE. ProNet hereby agrees to guarantee the obligations of the Purchaser as set forth in this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in one or more counterparts (all of which shall constitute one and the same agreement) as of the day and year first above written.
By: /s/ Jackie R. Kimzey Jackie R. Kimzey, Chief Executive Officer
By: /s/ Jackie R. Kimzey Jackie R. Kimzey, Chief Executive Officer
By: /s/ Fred W. Schwarz American Mobilphone Inc.
By: /s/ Fred W. Schwarz
BILL OF SALE AND ASSIGNMENT
) KNOW ALL MEN BY THESE PRESENTS:
THAT Sun Paging Communications, a Florida general partnership ("Grantor"), in consideration of the payment by Contact Communications Inc., a Delaware corporation ("Grantee"), of the consideration specified in the Purchase Agreement (as hereinafter defined), the receipt and sufficiency of which are hereby acknowledged, does hereby sell, convey, transfer, assign, and deliver unto Grantee, pursuant to that certain Asset Purchase Agreement (the "Purchase Agreement") dated as of _____________, 1995, by and among Grantor, Palmer Communications Incorporated, American Mobilphone, Inc., ProNet Inc., and Grantee, all of Grantor's rights, titles, and interests in and to all of the assets, properties, contracts, leases (including, but not limited to, all of Grantor's interests as "tenant" or "lessee" under all real property leases), and agreements which are used in operation of the System (as defined in the Purchase Agreement), including, without limitation, the assets described on SCHEDULE 1 attached hereto but excluding the assets listed on SCHEDULE 2 hereto (collectively, the "Transferred Assets").
TO HAVE AND TO HOLD the Transferred Assets unto Grantee and its successors and assigns forever, and Grantor does hereby bind itself and its successors to warrant and forever defend the title to the Transferred Assets unto Grantee, its successors and assigns, against the claims and demands of all persons. The Grantor hereby further warrants to Grantee that it is conveying to Grantee good and indefeasible title to the Transferred Assets, free and clear of all liens, mortgages, security interests, charges, or encumbrances of any kind or character.
Grantor covenants and agrees, for the benefit of Grantee and its successors and assigns, without further consideration, and whenever and as often as required so to do by Grantee and its successors and assigns, to execute and deliver to Grantee such other instruments of conveyance, transfer, and assignment and take such other action as Grantee may require more fully and effectively to transfer, assign, and convey to and vest in Grantee and its successors and assigns, and to put Grantee and its successors and assigns in actual possession and operating control of, the Transferred Assets.
Nothing in this Bill of Sale and Assignment, express or implied, is intended or shall be construed to confer upon, or to give to, any person, firm, corporation, or other entity other than the Grantor, the Grantee, and their respective successors and assigns, any right or remedy under or by reason of this Bill of Sale and Assignment or any term, covenant, or condition hereof, and all the terms, covenants, conditions, promises, and agreements contained in this Bill of Sale and Assignment shall be for the sole and exclusive benefit of the Grantor, the Grantee, and their respective successors and assigns.
The terms and conditions of this Bill of Sale and Assignment shall be governed and construed in accordance with the laws of the State of Texas.
In the event that this Bill of Sale and Assignment conflicts with any terms contained in the Purchase Agreement, the Purchase Agreement shall control.
IN WITNESS WHEREOF, the undersigned has executed this Bill of Sale as of this __ day of ________________, 1995.
THIS ASSUMPTION AGREEMENT (the "Agreement") is made and entered into as of this __ day of ____________, 1995, by and between Contact Communications Inc., a Delaware corporation (the "Purchaser"), and Sun Paging Communications, a Florida general partnership (the "Seller").
W I T N E S S E T H
WHEREAS, concurrently with the execution and delivery hereof, the Seller has sold to the Purchaser substantially all of the assets and properties of the Seller that are used in the operation of the Seller's Florida area radio paging system pursuant to that certain Asset Purchase Agreement dated as of _____________, 1995, by and among the Purchaser, ProNet Inc., Palmer Communications Incorporated and American Mobilphone Inc. (the "Purchase
WHEREAS, pursuant to the Purchase Agreement, the Purchaser has agreed to assume certain liabilities and obligations of the Seller.
NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Purchaser hereby covenants and agrees with the Seller as follows:
1. Effective as of the date hereof, the Purchaser hereby agrees to assume and be solely responsible for the payment, performance, and discharge of all of the Seller's obligations and liabilities under the contracts, agreements, arrangements, leases, licenses, permits, and instruments listed on SCHEDULE 1 hereto , subject, however, to the terms and conditions of the Purchase Agreement.
2. Except as specifically provided in this Agreement, the Purchaser shall not be liable for and shall not assume any obligations or liabilities of the Seller (whether known or unknown, matured or unmatured, or fixed or contingent) not included within the Assumed Contracts, including, without limitation, (a) any claims for workers compensation, (b) any foreign, federal, state, county, or local taxes on income of the Seller whether arising before or after the date hereof, any foreign, federal, state, county, or local taxes, fees, and assessments of any kind of the Seller or for which the Seller has the obligation to collect from any other party, including, without limitation, sales, use, gross receipts, franchise, excise, payroll, including Social Security and unemployment, value-added, withholding, and any other taxes, whether arising before or after the date hereof, or any foreign, federal, state, county, or local taxes, including, without limitation, sales, use, gross receipts and value-added taxes, or any other fees, arising by reason of the purchase and sale of the Transferred Assets (as defined in the Purchase Agreement) by the Seller to Purchaser and the assumption of liabilities pursuant hereto, including any such taxes, fees, and assessments related the purchase and sale of the Transferred Assets and the assumption of liabilities payable by, or assessed against, Purchaser, or otherwise, (c) any liability for any violation by the Seller of any statutes, laws, regulations, or ordinances of any federal, state, or local government, including, without limitation, the failure to file or the improper filing of any and all tax returns and other reports or the failure to timely pay any and all taxes, fees, and assessments to any governmental unit, authority, or instrumentality by the Seller, (d) any liability for any breach of contract, negligence, or misconduct by the Seller or any of its agents, servants, or employees, (e) any liability of the Seller arising out of or pursuant to the Purchase Agreement (including, without limitation, any liability arising out of the Seller's employee severance policy), (f) any liability of the Seller relating to any litigation arising from any event, action, or omission, (g) any liability of the Seller relating to employee benefit plans maintained by the Seller, (h) any liability arising out of or incurred in respect of any transaction of the Seller, (i) any liability of the Seller to its Partners, whether in connection with the transactions contemplated by the Purchase Agreement or any subsequent liquidation and dissolution of the Seller, or otherwise, including, but not limited to, liabilities or obligations of the Seller to make distributions to the Partners or distributions in liquidation.
3. The Purchaser and the Seller hereby agree to execute and deliver any and all additional documents that the other may reasonably request in order to more fully effect the agreements set forth in this Agreement.
4. The undertakings, covenants, and agreements set forth herein shall be binding upon and inure to the benefit of the Purchaser and the Seller and their respective successors and assigns.
5. In the event that this Assumption Agreement conflicts with any terms contained in the Purchase Agreement, the Purchase Agreement shall control.
IN WITNESS WHEREOF, the Purchaser and the Seller have executed this Agreement as of the date first written above.
OPINION OF K. PATRICK MEEHAN
1. The Seller is a general partnership, duly organized, validly existing, and in good standing under the laws of the State of Florida.
2. The Seller has full power and authority to execute and deliver the Purchase Agreement, the Seller Non-Competition Agreement, the Bill of Sale and the License Agreement (collectively, the "Seller Transaction Documents") and to perform the obligations contemplated thereby. The execution and delivery by the Seller of each of the Seller Transaction Documents has been duly authorized by all necessary action on the part of the Seller. Each of the Seller Transaction Documents has been duly executed and delivered by the Seller and constitutes the legal, valid, and binding obligation of the Seller enforceable in accordance with its terms.
3. The Partners have duly executed and delivered the Purchase Agreement and the Noncompetition Agreements. The Purchase Agreement and the Partners Noncompetition Agreements constitute the legal, valid, and binding obligation of the Partners enforceable in accordance with their respective terms.
4. Neither the execution and delivery by the Seller of the Seller Transaction Documents, nor the performance by the Seller of its obligations thereunder violates or conflicts with, results in a breach of, or constitutes a default under the Seller's partnership agreement., any law, any judgment, decree, or order of any court or any other agency of government known to this firm that is applicable to the Seller or the Seller's property, or any material agreement known to this firm to which the Seller is a party or by which the Seller's property is bound.
5. Neither the execution and delivery by the Partners of the Purchase Agreement and the Noncompetition Agreements, nor the performance by the Partners of their obligations thereunder, violates or conflicts with, results in a breach of, or constitutes a default under any law, any judgment, decree, or order of any court or any other agency of government known to this firm that is applicable to the Shareholder or the Seller or their or its property, or any material agreement known to this firm to which the Partners or the Seller is a party, or by which their or its properties is bound.
6. No approvals or authorizations by, or filings or qualifications with, any state, federal, or local agency, authority, or body are required in connection with the execution, delivery, and performance of the Purchase Agreement or any other agreements or documents executed and delivered pursuant thereto by the Seller and/or the Partners, except such as have been duly obtained or made.
7. To our knowledge after inquiry, there is no action, suit, investigation, or proceeding that is pending or threatened against or affecting the Seller or the Partners in any court or before any governmental authority, arbitration board, or tribunal that (a) involves any of the transactions contemplated by the Purchase Agreement or (b) if decided adversely to the Seller or such Shareholder, would involve the possibility of materially and adversely affecting the Transferred Assets.
8. To our knowledge after inquiry, there are no pending or threatened condemnation or similar proceedings or assessments affecting the Transferred Assets or any part thereof and there are no such proceedings or assessments contemplated by any governmental authority.
9. To our knowledge after inquiry, neither the Seller nor the Shareholder has entered into any agreement pursuant to which any other individual or entity has obtained the right to acquire any or all of the Transferred Assets.
10. Upon the consummation by the Seller of the transactions contemplated by the Purchase Agreement, the Purchaser shall have duly and validly acquired all of the right, title, and interest in and to the Transferred Assets and the Transferred Assets will have been conveyed by proper and enforceable instruments of conveyance, and, to our knowledge after inquiry, all consents of third parties necessary for such conveyance to be valid and enforceable by the Purchaser against third parties will have been obtained.
11. To our knowledge after inquiry, the Seller does not currently sponsor or contribute to, or have any contract or other obligation to sponsor or contribute to, any employee benefit plan subject to ERISA.
OPINION OF SELLER'S FCC COUNSEL
1. The Seller and the Partners have complied in all respects with, and are not in violation in any respect of, the Communications Act of 1934, as amended, and the rules, regulations, policies, precedents and orders promulgated thereunder (collectively, the "Act"), by virtue of the licenses and authorizations issued or granted to the Seller by the FCC, as listed in Annex 7 to Schedule 1.1 of the Agreement (the "Licenses"), except as listed in SCHEDULE 3.8 to the Agreement.
2. The Licenses, which constitute all licenses, orders and other authorizations from the FCC which are necessary for the Seller's operation of the System, were duly issued by the FCC to the Seller and have not been sold, conveyed, pledged, assigned or transferred to any other party. There are no liens, charges, encumbrances or adverse claims with respect to the Licenses. All of the Licenses are in full force and effect and their grant to the Seller is "final," I.E., no longer subject to administrative reconsideration or review or to judicial review, whether on motion of the reviewing agency or otherwise. No License is subject to any condition or requirement not generally imposed by the FCC upon holders of authorizations in the same service. The Licenses were properly and validly obtained by the Seller in compliance with the Act. No party has valid grounds to contest the assignment of the Licenses as contemplated by the Agreement. No event has occurred with respect to any of the Licenses which permits, or after notice or lapse of time or both would permit, revocation or termination thereof or would result in any impairment of the rights of the holder of any License or the imposition of a forfeiture against the Seller or the Partners or any subsequent holder with respect to their operation of the System. The Seller and the Partners have received no pending notice of violation with respect to any of the Licenses. All Licenses are renewable by their terms, and the Licenses can be renewed without the need to pay any amounts other than routine FCC fees. No state regulatory agencies exercise any jurisdiction over the operation of the System.
3. The execution, delivery and performance of the Agreement by the Purchaser, the Seller and the Partners will not violate, conflict with or result in the breach of any term, condition or provision of, or require the consent of any other party to, any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental or regulatory official, body or authority which is applicable to the Seller or the Partners or any of their assets by virtue of the Licenses. All authorizations, approvals and consents of, and registrations and filings with and notices to, the FCC required in connection with the execution, delivery and performance of the Agreement (including the assignment of the Licenses from Seller to Purchaser) by the Seller and the Partners by virtue of the Licenses are in full force and effect and their grant is "final," other than certain post-closing informational filings that may be required by the Act (I.E., written notification to the FCC that the assignment has, in fact, been completed).
4. The Seller has obtained all necessary clearances from the Federal Aviation Administration ("FAA") for the construction of all radio towers associated with the System. The Seller and the Partners have complied in all respects with, and are not in violation in any respect of, all rules, regulations, policies, precedents or orders of the FAA with respect to such towers.
5. No judgments, decrees or orders have been issued by the FCC against the Seller or the Partners in connection with the Licenses or the System. No action, proceeding, inquiry, investigation, notice of apparent liability, order of forfeiture, show cause order, license revocation proceeding, formal complaint or informal complaint is currently pending or threatened by or before the FCC regarding the Licenses or the Systems, or (insofar as it relates to the Licenses or the Systems) regarding the Seller or the Partners, other than rulemaking proceedings of general applicability pertaining to the paging industry. All reports and other filings required under the Act with respect to the Licenses, the System, or (insofar as they relate to the Licenses or the System) the Seller have been made in a timely manner.
This Noncompetition Agreement (the "Agreement") is entered into as of __________, 1995, between Contact Communications Inc., a Delaware corporation (the "Company"), and Palmer Communications Incorporated (the "Partner").
W I T N E S S E T H
WHEREAS, concurrently herewith, Sun Paging Communications, a Florida general partnership ("Sun Paging"), is selling, transferring, and conveying to the Company, pursuant to that certain Asset Purchase Agreement (the "Purchase Agreement") dated as of , 1995, by and among the Company, Sun Paging, and the Partner, substantially all of the property and assets of Sun Paging that are used in the conduct of Sun Paging's radio paging system business (such property, assets, and business, including all affiliated networks, being hereinafter
WHEREAS, the Partner has been affiliated with Lewis Paging for a number of years and, as a principal shareholder and officer of Sun Paging, possesses valuable knowledge about the business and operations of Sun Paging; and
WHEREAS, the Company has requested that the Partner enter into this Agreement as an inducement to the Company to enter into and consummate the transactions contemplated by the Purchase Agreement;
NOW, THEREFORE, for and in consideration of the mutual covenants and promises herein contained, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. CONSIDERATION. The Partner has entered into this Agreement and made the covenants hereinafter set forth in order to induce the Company to consummate the transactions contemplated by the Purchase Agreement.
2. CONFIDENTIAL INFORMATION. The Partner acknowledges that the information, observations, and data obtained or possessed by him concerning the business affairs of the System will be the property of the Company and not the Partner. Therefore, the Partner agrees that he will not disclose to any person or use for his own account any of such information, observations, or data unless and to the extent that such information, observations, or data become generally known to and available for use by the public otherwise than as a result of the Partner's act or omission to act. The Partner agrees to deliver to the Company, at any time the Company may request, all memoranda, notes, plans, records, reports, and other documents (and copies thereof) relating to the conduct of the System of which it may then possess or have under its control.
3. NONCOMPETITION. The Partner agrees that it shall not, until 11:59 p.m. on the fifth (5th) anniversary of the date hereof:
a. directly or indirectly own, engage in, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or be connected as a stockholder, director, officer, employee, agent, partner, joint venturer, member, beneficiary, or otherwise with, any corporation, limited liability company, partnership, sole proprietorship, association, business, trust, or other organization, entity or individual which in any way competes with the Company in the sale or leasing of pagers or paging services in the Florida Area (as hereinafter defined); PROVIDED, HOWEVER, that the Partner may own, directly or indirectly, securities of any entity traded on any national securities exchange or listed on the National Association of Securities Dealers Automated Quotation System if the Partner does not, directly or indirectly, own 1% or more of any class of equity securities, or securities convertible into or exercisable or exchangeable for 1% or more of any class of equity securities,
b. aid, abet, or otherwise assist any individual, business or other organization or entity in canvassing, soliciting, or accepting any contracts for the sale or lease of pagers or paging services
c. directly or indirectly request or advise any present or future customers of the Company to cancel any contracts with the Company or curtail their dealings with the Company;
d. directly or indirectly request or advise any present or future service provider or financial resource of the System or the Company to withdraw, curtail, or cancel the furnishing of such service or resource to the Company;
e. directly or indirectly disclose or communicate to any other person, firm, or corporation:
(1) the names of past, present, or future customers of the
(2) any names of past, present, or future employees or other knowledge of or relating to the Company; or
f. directly or indirectly induce or attempt to influence any employee of the Company to terminate his or her employment.
As used herein, the "Florida Area" means that area described in the map attached hereto as Schedule 1.
4. AMENDMENTS. This Agreement may be amended or modified from time to time, but only by a written instrument executed by both parties hereto.
5. NOTICES. Any notices required or permitted hereunder shall be in writing and shall be deemed given (a) when personally delivered, (b) when confirmed if delivered by telefacsimile or similar device, or (c) when sent by registered or certified mail, return receipt requested, addressed to the other party at its or his address set forth below its or his signature to this Agreement, or at such other address as it or he may specify in writing in accordance with this Section 5.
6. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties hereto respecting the subject matter hereof and supersedes all prior discussions and understandings.
7. ASSIGNMENT; PARTIES BOUND. The Company may assign its rights and obligations hereunder to any party. The Partners may not assign any of its obligations hereunder. Any assignment in violation of the foregoing shall be null and void. Subject to the foregoing, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors, and permitted assigns.
8. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Texas (regardless of the laws that might otherwise govern under applicable Texas principles of conflicts of law) as to all matters, including but not limited to, matters of validity, construction, effect, performance, and remedies.
9. NON-WAIVER OF BREACH. A waiver by any party hereto of a particular breach or default in connection with any provision of this Agreement shall not be deemed a waiver of any subsequent default or breach of the same or any other provision of this Agreement.
10. INVALID PROVISION. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be severable, and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by such illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.
11. HEADINGS. The headings in this Agreement are for purposes of reference only and shall not be considered in construing this Agreement.
12. ATTORNEYS' FEES. If either party hereto brings any action, at law or in equity, to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover from the other party hereto reasonable attorneys' fees in addition to any other relief to which such party may be entitled.
13. ENFORCEMENT OF COVENANTS. The Partner agrees that a violation on his part of any covenant contained herein shall cause irreparable damage to the Company and, consequently, the Partner further agrees that the Company shall be entitled, as a matter of right, to an injunction restraining any further violation of such covenant by the Partner. Such right to an injunction shall be cumulative and in addition to all other remedies the Company may have, including, but not limited to, recovery of damages.
14. In the event that this Noncompetition Agreement conflicts with any terms contained in the Purchase Agreement, the Purchase Agreement shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
This Noncompetition Agreement (the "Agreement") is entered into as of __________, 1995, between Contact Communications Inc., a Delaware corporation (the "Company"), and American Mobilphone, Inc.(the "Partner").
W I T N E S S E T H
WHEREAS, concurrently herewith, Sun Paging Communications, a Florida general partnership ("Sun Paging"), is selling, transferring, and conveying to the Company, pursuant to that certain Asset Purchase Agreement (the "Purchase Agreement") dated as of , 1995, by and among the Company, Sun Paging, and the Partner, substantially all of the property and assets of Sun Paging that are used in the conduct of Sun Paging's radio paging system business (such property, assets, and business, including all affiliated networks, being hereinafter
WHEREAS, the Partner has been affiliated with Lewis Paging for a number of years and, as a principal shareholder and officer of Sun Paging, possesses valuable knowledge about the business and operations of Sun Paging; and
WHEREAS, the Company has requested that the Partner enter into this Agreement as an inducement to the Company to enter into and consummate the transactions contemplated by the Purchase Agreement;
NOW, THEREFORE, for and in consideration of the mutual covenants and promises herein contained, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. CONSIDERATION. The Partner has entered into this Agreement and made the covenants hereinafter set forth in order to induce the Company to consummate the transactions contemplated by the Purchase Agreement.
2. CONFIDENTIAL INFORMATION. The Partner acknowledges that the information, observations, and data obtained or possessed by him concerning the business affairs of the System will be the property of the Company and not the Partner. Therefore, the Partner agrees that he will not disclose to any person or use for his own account any of such information, observations, or data unless and to the extent that such information, observations, or data become generally known to and available for use by the public otherwise than as a result of the Partner's act or omission to act. The Partner agrees to deliver to the Company, at any time the Company may request, all memoranda, notes, plans, records, reports, and other documents (and copies thereof) relating to the conduct of the System of which it may then possess or have under its control.
3. NONCOMPETITION. The Partner agrees that it shall not, until 11:59 p.m. on the fifth (5th) anniversary of the date hereof:
a. directly or indirectly own, engage in, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or be connected as a stockholder, director, officer, employee, agent, partner, joint venturer, member, beneficiary, or otherwise with, any corporation, limited liability company, partnership, sole proprietorship, association, business, trust, or other organization, entity or individual which in any way competes with the Company in the sale or leasing of pagers or paging services in the Florida Area (as hereinafter defined); PROVIDED, HOWEVER, that the Partner may own, directly or indirectly, securities of any entity traded on any national securities exchange or listed on the National Association of Securities Dealers Automated Quotation System if the Partner does not, directly or indirectly, own 1% or more of any class of equity securities, or securities convertible into or exercisable or exchangeable for 1% or more of any class of equity securities,
b. aid, abet, or otherwise assist any individual, business or other organization or entity in canvassing, soliciting, or accepting any contracts for the sale or lease of pagers or paging services
c. directly or indirectly request or advise any present or future customers of the Company to cancel any contracts with the Company or curtail their dealings with the Company;
d. directly or indirectly request or advise any present or future service provider or financial resource of the System or the Company to withdraw, curtail, or cancel the furnishing of such service or resource to the Company;
e. directly or indirectly disclose or communicate to any other person, firm, or corporation:
(1) the names of past, present, or future customers of the
(2) any names of past, present, or future employees or other knowledge of or relating to the Company; or
f. directly or indirectly induce or attempt to influence any employee of the Company to terminate his or her employment.
As used herein, the "Florida Area" means that area described in the map attached hereto as Schedule 1.
4. AMENDMENTS. This Agreement may be amended or modified from time to time, but only by a written instrument executed by both parties hereto.
5. NOTICES. Any notices required or permitted hereunder shall be in writing and shall be deemed given (a) when personally delivered, (b) when confirmed if delivered by telefacsimile or similar device, or (c) when sent by registered or certified mail, return receipt requested, addressed to the other party at its or his address set forth below its or his signature to this Agreement, or at such other address as it or he may specify in writing in accordance with this Section 5.
6. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties hereto respecting the subject matter hereof and supersedes all prior discussions and understandings.
7. ASSIGNMENT; PARTIES BOUND. The Company may assign its rights and obligations hereunder to any party. The Partners may not assign any of its obligations hereunder. Any assignment in violation of the foregoing shall be null and void. Subject to the foregoing, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors, and permitted assigns.
8. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Texas (regardless of the laws that might otherwise govern under applicable Texas principles of conflicts of law) as to all matters, including but not limited to, matters of validity, construction, effect, performance, and remedies.
9. NON-WAIVER OF BREACH. A waiver by any party hereto of a particular breach or default in connection with any provision of this Agreement shall not be deemed a waiver of any subsequent default or breach of the same or any other provision of this Agreement.
10. INVALID PROVISION. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be severable, and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by such illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.
11. HEADINGS. The headings in this Agreement are for purposes of reference only and shall not be considered in construing this Agreement.
12. ATTORNEYS' FEES. If either party hereto brings any action, at law or in equity, to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover from the other party hereto reasonable attorneys' fees in addition to any other relief to which such party may be entitled.
13. ENFORCEMENT OF COVENANTS. The Partner agrees that a violation on his part of any covenant contained herein shall cause irreparable damage to the Company and, consequently, the Partner further agrees that the Company shall be entitled, as a matter of right, to an injunction restraining any further violation of such covenant by the Partner. Such right to an injunction shall be cumulative and in addition to all other remedies the Company may have, including, but not limited to, recovery of damages.
14. In the event that this Noncompetition Agreement conflicts with any terms contained in the Purchase Agreement, the Purchase Agreement shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
This Noncompetition Agreement (the "Agreement") is entered into as of __________, 1995, between Contact Communications Inc., a Delaware corporation (the "Company"), and Sun Paging Communications, a Florida general partnership ("Sun").
W I T N E S S E T H
WHEREAS, concurrently herewith Sun is selling, transferring, and conveying to the Company, pursuant to that certain Asset Purchase Agreement (the "Purchase Agreement") dated as of ___________, 1995, by and among the Company, Sun, Palmer Communications Incorporated, and American Mobilphone, Inc., substantially all of the property and assets that are used in the conduct of Sun 's radio paging system business (such property, assets, and business, including all affiliated networks, being hereinafter collectively called the "System");
WHEREAS, the Company has requested that Sun enter into this Agreement as an inducement to the Company to enter into and consummate the transactions contemplated by the Purchase Agreement;
NOW, THEREFORE, for and in consideration of the mutual covenants and promises herein contained, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. CONSIDERATION. Sun has entered into this Agreement and made the covenants hereinafter set forth in order to induce the Company to consummate the transactions contemplated by the Purchase Agreement.
2. CONFIDENTIAL INFORMATION. Sun acknowledges that the information, observations, and data obtained or possessed by it concerning the business affairs of the System (the "Confidential Information") will be the property of the Company and not Sun . Therefore, Sun agrees that it will not disclose to any person (other than the Company or any other person to whom such disclosure has been specifically authorized by the Company in writing) or use for its own account any of such Confidential Information unless and to the extent that any such Confidential Information is or becomes generally known to and available for use by the public otherwise than as a result of Sun's act or omission to act and except as specifically permitted by the terms of this Agreement or as otherwise required by law. In the event that Sun becomes legally compelled to disclose any of the Confidential Information, Sun shall provide the Company with prompt prior notice so that the Company may seek a protective order or other appropriate remedy. In the event that such protective order or other remedy is not obtained, Sun will furnish only that portion of the Confidential Information which it is legally required to disclose. Sun agrees to deliver to the Company, at any time the Company may request, all memoranda, notes, plans, records, reports, and other documents (and copies thereof) relating to the conduct of the System which it may then possess or have under its control.
3. NONCOMPETITION. Sun agrees that it shall not, until 11:59 p.m. on the fifth (5th) anniversary of the date hereof:
a. directly or indirectly own, engage in, manage, operate, join, control, or participate in the ownership, management, operation, or control of, or be connected as a stockholder, director, officer, employee, agent, partner, joint venturer, member, beneficiary, or otherwise with, any corporation, limited liability company, partnership, sole proprietorship, association, business, trust, or other organization, entity or individual which in any way competes with the Company in the sale or leasing of pagers or paging services in the Florida Area (as hereinafter defined); PROVIDED, HOWEVER, that Sun may own, directly or indirectly, securities of any entity traded on any national securities exchange or listed on the National Association of Securities Dealers Automated Quotation System if Sun does not, directly or indirectly, own 1% or more of any class of equity securities, or securities convertible into or exercisable or exchangeable for 1% or more of any class of equity securities, of
b. aid, abet, or otherwise assist any individual, business or other organization or entity in canvassing, soliciting, or accepting any contracts for the sale or leasing of pagers or paging services in the Florida Area;
c. directly or indirectly request or advise any present or future customers of the Company to cancel any contracts with the Company or curtail their dealings with the Company;
d. directly or indirectly request or advise any present or future service provider or financial resource of the System or the Company to withdraw, curtail, or cancel the furnishing of such service or resource to the Company;
e. directly or indirectly disclose or communicate to any other person, firm, or corporation:
(1) the names of past, present, or future customers of the
(2) any names of past, present, or future employees or other knowledge of or relating to the Company; or
f. directly or indirectly induce or attempt to influence any employee of the Company to terminate his or her employment.
As used herein, the "Florida Area" means that area described in the map attached hereto as Schedule 1.
4. AMENDMENTS. This Agreement may be amended or modified from time to time, but only by a written instrument executed by both parties hereto.
5. NOTICES. Any notices required or permitted hereunder shall be in writing and shall be deemed given (a) when personally delivered, or (b) when confirmed if delivered by telefacsimile or similar device, or (c) when sent by registered or certified mail, return receipt requested, addressed to the other party at its address set forth below its signature to this Agreement, or at such other address as it may specify in writing in accordance with this Section 5.
6. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties hereto respecting the subject matter hereof and supersedes all prior discussions and understandings.
7. ASSIGNMENT; PARTIES BOUND. The Company may assign its rights and obligations hereunder to any party. Sun may not assign any of its obligations hereunder. Any assignment in violation of the foregoing shall be null and void. Subject to the foregoing, this Agreement shall be binding upon the parties hereto and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, legal representatives, successors, and permitted assigns.
8. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Texas (regardless of the laws that might otherwise govern under applicable Texas principles of conflicts of law) as to all matters, including but not limited to, matters of validity, construction, effect, performance, and remedies.
9. NON-WAIVER OF BREACH. A waiver by any party hereto of a particular breach or default in connection with any provision of this Agreement shall not be deemed a waiver of any subsequent default or breach of the same or any other provision of this Agreement.
10. INVALID PROVISION. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be severable, and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by such illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision, there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.
11. HEADINGS. The headings in this Agreement are for purposes of reference only and shall not be considered in construing this Agreement.
12. ATTORNEYS' FEES. If either party hereto brings any action, at law or in equity, to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover from the other party hereto reasonable attorneys' fees in addition to any other relief to which such party may be entitled.
13. ENFORCEMENT OF COVENANTS. Sun agrees that a violation on its part of any covenant contained herein shall cause irreparable damage to the Company and, consequently, Sun further agrees that the Company shall be entitled, as a matter of right, to an injunction restraining any further violation of such covenant by Sun. Such right to an injunction shall be cumulative with any and all other remedies the Company may have, including, but not limited to, recovery of damages.
14. In the event that this Noncompetition Agreement conflicts with any terms contained in the Purchase Agreement, the Purchase Agreement shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
This License Agreement ("License Agreement") is made on the ___ day of _____________, 1995, by and between Sun Paging Communications, a Florida general partnership ("Licensor"), and Contact Communications Inc., a Delaware corporation ("Licensee").
A. Licensor and Licensee are parties to that certain Asset Purchase Agreement (the "Purchase Agreement"), dated as of _____________1995, with respect to the sale by Licensor to Licensee of substantially all of the property and assets of Licensor used in the conduct of Licensor's radio paging system business (the "System").
B. Licensor owns and uses certain trademarks and service marks as defined herein (the "Marks").
C. Licensee desires to obtain a license to use the Marks.
NOW, THEREFORE, the parties hereto, in consideration of the mutual agreements herein contained and promises herein expressed, and for other good and valuable consideration acknowledged by each of them to be satisfactory and adequate, do hereby agree as follows:
1. As used herein, "Marks" shall mean the trademark and service mark "Sun Paging".
2. "Licensed Territory" shall mean the Florida Area, as set forth in Schedule 1 hereto.
3. Licensor hereby grants to Licensee a paid-up, royalty-free, non- exclusive license to use the Marks in connection with the operation of the System and on or in connection with the goods and/or services sold by or under the System in the Licensed Territory for a period of five (5) years beginning on, and including, the date of the execution of this License.
4. Licensee shall have unlimited use of the Marks in the Licensed Territory and may use the Marks as fully as if Licensee were the owner of the Marks, and Licensee's right to use the Marks shall include, without limitation, use in packaging, labels, advertising and related materials, business cards, stationery, price lists, product catalogues and brochures, and the right to use the licensed Marks as part of a corporate name, partnership name or name of any other person; provided, however, that the nature and quality of all services rendered and goods sold by Licensee in connection with the Marks shall conform to the reasonable standards set by and under the control of Licensor. Licensee agrees to permit reasonable inspection of Licensee's operations by Licensor, and to supply Licensor with specimens of use of the Marks upon request, to permit Licensor to verify Licensee's compliance with the terms of the immediately preceding sentence.
5. Licensor hereby represents and warrants to Licensee that Licensor has the full corporate power and authority to grant the license set forth in paragraph 3 hereof and that Licensor has not granted or suffered any liens, restrictions, security interests, encumbrances, or licenses with respect to the Marks. Licensor expressly disclaims any representation or warranty as to the exclusivity of its rights to the use of the mark "Sun Paging, Inc.."
6. Licensee may, but shall not be required to, at its sole expense, take whatever action Licensee, in its sole discretion, deems necessary or advisable to protect its right to use the Marks in the Licensed Territory. Such action may include, without limitation, assuming responsibility at its own expense for the defense of any lawsuit challenging or affecting rights to the Marks, and/or instituting litigation at its own expense to protect its rights to the Marks. Should Licensee choose to take any action with respect to the Marks, Licensor shall comply with all reasonable requests for assistance in connection therewith. Any recovery as a result of such action shall belong solely to Licensee.
7. In the event Licensor decides not to take any action required to maintain or renew registration for the Marks, Licensee at its expense may take appropriate action to maintain or renew any such registration in the name of Licensor, and Licensor shall cooperate reasonably with Licensee, including, without limitation, by signing required documents, to allow Licensee to effect any such maintenance or renewal action provided that Licensor shall incur no liability to Licensee for its failure to maintain any registrations.
8. Licensee may assign or transfer its rights or obligations under this License Agreement, whether by operation of law or otherwise, without the consent of Licensor. Licensee shall also have the right to sublicense its right to use the Marks without the prior written consent of Licensor.
9. This License Agreement sets forth the entire agreement between the parties, and supersedes any and all prior agreements or understandings between the parties, pertaining to the subject matter hereof. This License Agreement may not be amended, modified or terminated, in whole or in part, except by an instrument in writing duly executed by the parties.
10. Licensor shall at all times do, execute, acknowledge and/or deliver or cause to be done, executed, acknowledged, or delivered such further acts, agreements, and assurances as the Licensee reasonably may require for the purposes of this License Agreement.
11. This License Agreement may be executed in any number of counterparts; and each of which, when so executed and delivered, shall be deemed an original, but such counterparts together shall constitute one and the same instrument.
12. This License Agreement shall inure to the benefit of and be binding upon Licensor, Licensee and their respective permitted successors and assigns.
13. In the event that this License Agreement conflicts with any terms contained in the Purchase Agreement, the Purchase Agreement shall control.
IN WITNESS WHEREOF, the parties hereto have duly executed this License Agreement on the date first above written.
* plus any amounts to be paid to the Purchaser due to an increase in the number of pagers, pursuant to APPENDIX A of the Purchase Agreement.
NORWEST BANK DEPOSITORY AGREEMENT-INDEMNIFICATION ESCROW
THE UNDERSIGNED Contact Communications Inc. ("Purchaser"), Sun Paging Communications ("Seller"), Palmer Communications Incorporated ("Palmer"), American Mobilphone, Inc. ("American", collectively with Palmer, the "Partners"), (collectively, the "Undersigned"), in order to designate Norwest Bank Texas, National Association, (the Depository") as the Depository for the Undersigned for the purposes and upon the terms and conditions herein set forth, do hereby represent and warrant to, and agree with each other and the Depository, as follows:
1. APPOINTMENT OF THE DEPOSITORY. The Depository is hereby appointed Depository for the Undersigned with respect to the "Property" as that term is herein defined.
2. THE PROPERTY. At the closing (the "Closing") of the transactions contemplated by that certain Asset Purchase Agreement dated as of November 10, 1995 (the "Purchase Agreement"), the Undersigned shall deposit with the Depository, as custodian and depository, the items described in Schedule A hereto, or in lieu thereof, have made provision in paragraph 22 for the deposit of items hereunder (such items being herein collectively called the "Property"), and direct that same be held and disposed of by the Depository as herein provided.
3. THE DEPOSITORY'S DUTIES AND AUTHORITY TO ACT. (a) Except as may be otherwise provided in paragraph 22, in which event the special instructions in said paragraph 22 shall be controlling, the Depository shall hold the Property in safekeeping and deliver the same or any part or parcel thereof, including the interest earned from investments made pursuant to paragraph 20 hereof, only (i) to one or more of the Undersigned in accordance with and upon the written instructions of each of the other of the Undersigned and/or (ii) in accordance with and upon the written instructions of all the Undersigned. (b) When instructions from more than one of the Undersigned are required, such instructions may be given by separate instruments of similar tenor. Any of the Undersigned may hereafter act through an agent or attorney-in-fact only if written evidence of authority in form and substance satisfactory to the Depository is furnished to the Depository and agreed to by the Depository. (c) The Depository may act upon any written notice, request, waiver, consent, certificate, receipt, authorization, power of attorney or other document which it in good faith believes to be genuine. (d) The Depository shall be deemed to have properly delivered any item of Property upon (i) placing the item in the United States mail in a suitable package or envelope with first class prepaid postage affixed, addressed to the addressee at such addressee's address as set forth in this Agreement or such other address as the Undersigned shall have furnished to the
Depository in writing; (ii) delivery in person at the Depository's offices; or (iii) delivery in any other manner pursuant to written instructions of the Undersigned. (e) In performing its duties under this Agreement, or upon the claimed failure to perform any of its duties hereunder, the Depository shall not be liable to anyone for damages, losses or expenses which may be incurred as a result of the Depository so acting or failing to so act; provided, however, the Depository shall not be relieved from liability for damages arising out of its proven gross negligence or willful misconduct under this Agreement. The Depository shall in no event incur any liability with respect to (i) any action taken or omitted to be taken in good faith upon advice of legal counsel given with respect to any questions relating to the duties and responsibilities of the Depository hereunder or (ii) any action taken or omitted to be taken in reliance upon any document delivered to the Depository and believed by it to be genuine and to have been signed or presented by the proper party or parties. (f) Payment of moneys hereunder shall be made by check or by wire transfer of immediately available funds in accordance with instructions contained in the applicable disbursement notice to the Depository.
4. OTHER AGREEMENTS. The Depository is not a party to, nor is it bound by, nor need it give consideration to the terms or provisions of, any other agreement or undertaking among the Undersigned or any of them, or between the Undersigned or any of them and other persons, or any agreement or undertaking which may be evidenced by or disclosed by the Property, it being the intention of the parties hereto that the Depository assent to and be obligated to give consideration only to the terms and provisions hereof. Unless otherwise provided in paragraph 22, the Depository shall have no duty to determine or inquire into the happening or occurrence of any event or contingency or the performance or failure of performance of any of the Undersigned with respect to arrangements or contracts with each other or with others, the Depository's sole duty hereunder being to hold the Property and to dispose of and deliver the same in accordance with instructions given to it as provided in paragraph 3.
(a) The Depository undertakes to perform such duties and only such duties as are specifically set forth in this Agreement and no implied covenants or obligations shall be read into this Agreement against the Depository. (b) If the Depository is required by the terms hereof to determine the occurrence of any event or contingency, the Depository shall, in making such determination, be liable only for its proven gross negligence or willful misconduct, as determined in light of all the circumstances, including the time and facilities available to it in the ordinary conduct of its business. In determining the occurrence of any such event or contingency the Depository may request from any of the Undersigned or any other person such reasonable additional evidence as the Depository in its sole discretion may deem necessary to determine any fact relating to the occurrence of such event or contingency, and may at any time inquire of and consult with others, including without limitation, any of the Undersigned, and the Depository shall not be liable for any damages resulting from its delay in acting hereunder pending its receipt and examination of additional evidence requested by it.
(c) Whenever the Depository is required by the terms hereof to take action upon the occurrence of any event or contingency, the time prescribed for such action shall in all cases be a reasonable time after written notice received by the Depository for the happening of such event or contingency, provided however, that this provision shall not be deemed to limit or reduce the time allowed the Depository for action as provided in paragraph 5(b).
6. LIMITATION ON LIABILITY. The Depository shall not be responsible or liable to the Undersigned or to any other person in any manner whatsoever for the sufficiency, correctness, genuineness, effectiveness or validity of any of the Property, or for the form or execution thereof, or for the identity or authority of any person executing or depositing the same. If any of the Undersigned are acting as agent for others, all of the Undersigned represent and warrant that each such agent is authorized to make and enter into this Agreement. This Agreement is a personal one between the Undersigned and the Depository. The Depository is authorized by each of the Undersigned to rely upon all representations, both actual and implied, of each of the Undersigned and all other persons relating to this Agreement and/or the Property, including without limitation representations as to marital status, authority to execute and deliver this Agreement, notifications, receipts or instructions hereunder, and relationships among persons, firms, corporations or other entities, including those authorized to receive delivery hereunder, and the Depository shall not be liable to any person in any manner by reason of such reliance. The duties of the Depository hereunder shall be only to the Undersigned, their respective successors, heirs, assigns, executors and administrators and to no other person, firm, corporation or other entity whatsoever.
7. TIME OF PERFORMANCE. Whenever under the terms hereof the time for performance of any provision shall fall on a date which is not a regular business day of the Depository, the performance thereof on the next succeeding regular business day of the Depository shall be deemed to be in full compliance. Whenever time is referred to in this Agreement, it shall be the time recognized by the Depository in the ordinary conduct of its normal business transactions.
8. DEATH, DISABILITY, ETC. OF THE UNDERSIGNED. The death, disability, bankruptcy, insolvency, reorganization or absence of any of the Undersigned shall not affect or prevent performance by the Depository of its obligations or its right to rely upon instructions received hereunder. However, in the event of the death, disability, bankruptcy, insolvency, reorganization or absence of any of the Undersigned, the Depository (without liability to any of the Undersigned) may refrain from taking any action required or requested hereunder.
9. EXAMINATION OF THE PROPERTY. Any of the Undersigned may examine the Property during the regular business hours of the Depository; such examination shall, however, be permitted only in the presence of an officer of the Depository.
10. REMEDIES OF THE DEPOSITORY. (a) As additional consideration for and as an inducement for the Depository to act hereunder, it is understood and agreed that in the event of any disagreement between the parties to this Agreement or in the event any other person or entity claims an interest in the Property or any part thereof, and such disagreement or claim results in adverse claims and demands being made by them or any of them in connection with or for any part of the Property, the Depository shall be entitled, at the option of the Depository, to refuse to comply with the instructions or demands of the parties to this Agreement, or any of such parties, so long as such disagreement or adverse claim shall continue. In such event, the Depository shall not be required to make delivery or other disposition of the Property. Anything herein to the contrary notwithstanding, the Depository shall not be or become liable to the Undersigned or any of them for the failure of the Depository to comply with the conflicting or adverse demands of the Undersigned or any of such parties or of any other persons or entities claiming an interest in the Property or any part thereof. The Depository shall be entitled to refrain and refuse to deliver or otherwise dispose of the Property or any part thereof or to otherwise act hereunder, as stated above, unless and until (i) the rights of the parties and all other persons and entities claiming an interest in the Property have been duly adjudicated in a court having jurisdiction of the parties and the Property or (ii) the parties to this Agreement and such other persons and entities have reached an agreement resolving their differences and have notified the Depository in writing of such agreement and have provided the Depository with indemnity satisfactory to it against any liability, claims or damages resulting from compliance by the Depository with such agreement. In addition to the foregoing, the Depository shall have the right to tender into the registry or custody of any court having jurisdiction, any part of or all of the Property. Upon such tender, the parties hereto agree that the Depository shall be discharged from all further duties under this Agreement; provided, however, that the filing of any such legal proceedings shall not deprive the Depository of its compensation hereunder earned prior to such filing and discharge of the Depository of its duties hereunder. (b) While any suit or legal proceeding arising out of or relating to this Agreement or the Property or the Undersigned is pending, whether the same be initiated by the Depository or by others, the Depository shall have the right at its option to stop all further performance of this Agreement and instructions received hereunder until all differences shall have been resolved by agreement or until the rights of all parties shall have been fully and finally adjudicated by the court. For purposes of any suit or legal proceeding arising out of or relating to this Agreement to which the Depository may be a party, the Undersigned hereby consent and submit to the jurisdiction of the appropriate court, whether Federal or state, sitting in Dallas County, Texas. The rights of the Depository under this paragraph are in addition to all other rights which it may have by law or otherwise.
11. RELIANCE ON COUNSEL. The Depository may from time to time consult with legal counsel of its own choosing in the event of any disagreement, or controversy, or question or doubt as to the construction of any of the provisions hereof or its duties hereunder, and it shall incur no liability and shall be fully protected in acting in good faith in accordance with the opinion or instructions of such counsel. Any such fees and expenses of such legal counsel shall be considered part of the fees and expenses of the Depository described below.
(a) The Undersigned hereby jointly and severally agree to pay the Depository for its ordinary services hereunder the fees determined in accordance with, and payable as specified in, the Schedule of Fees set forth in Exhibit "A", attached hereto. In addition, the Undersigned hereby jointly and severally agree to pay to the Depository its expenses incurred in connection with this Agreement, including, but not limited to, legal fees and expenses, in the event the Depository deems it necessary to retain counsel. Such expenses shall be paid to the Depository within 10 days following receipt by any of the Undersigned of a written statement setting forth such expenses. (b) The Undersigned jointly and severally agree that in the event any controversy arises under or in connection with this Agreement or the Property, or the Depository is made a party to or intervenes in any litigation pertaining to this Agreement or the Property, to pay to the Depository reasonable compensation for its extraordinary services and to reimburse the Depository for all costs and expenses associated with such controversy or litigation, including, but not limited to, legal fees and expenses. (c) As security for all fees and expenses of the Depository hereunder and any and all losses, claims, damages, liabilities and expenses incurred in connection with the acceptance of appointment hereunder or with the performance of its obligations under this Agreement and to secure the obligation of the Undersigned to indemnify the Depository as set forth in paragraph 21 hereof, the Depository is granted a security interest in and lien upon the Property, which security interest and lien shall be prior to all other security interests, liens or claims against the Property or any part thereof. Each of the Undersigned warrant and agree with the Depository that, unless otherwise expressly set forth in this Agreement, there is no security interest in the Property or any part thereof; no financing statement under the Uniform Commercial Code of any jurisdiction is on file in any jurisdiction claiming a security interest in or describing, whether specifically or generally, the Property or any part thereof; and the Depository shall have no responsibility at any time to ascertain whether or not any security interest exists in the Property or any part thereof or to file any financing statement under the Uniform Commercial Code of any jurisdiction with respect to the Property or any part thereof. (d) The Depository is authorized by the Undersigned to withhold from the Property, prior to distribution thereof and prior to termination of this Agreement, all fees and expenses to which the Depository is entitled hereunder. In addition, in the event any such fees and expenses are not paid to the Depository on or prior to the date such amounts are due, the Depository is hereby authorized and directed to pay such amounts owed to it from cash funds included in the Property or, if no cash funds are then included in the Property, to sell assets constituting part of the Property for the purpose of paying such amounts owed to it. (e) In the event fees and expenses of the Depository are to be paid pursuant to paragraph 22 hereof, it is understood and agreed by the Undersigned that such fees and expenses are in addition to those described above and that such fees and expenses shall be subject to periodic review and modification by the Depository as determined by the Depository in its sole discretion.
13. EFFECTIVE DATE. The effective date of this Agreement shall be the date on which it is accepted by the Depository unless otherwise provided in paragraph 22.
14. TERMINATION AND RESIGNATION. Unless sooner terminated as hereinafter provided, this Agreement shall terminate without action of any party when all of the terms hereof shall have been fully performed. Either the Depository or the Undersigned may terminate this Agreement upon thirty (30) days written notice (i) signed by the Depository and delivered to each of the Undersigned or (ii) signed by each of the Undersigned and delivered to the Depository. Upon termination of this Agreement, the Depository shall deliver the Property in accordance with the written instructions delivered by the Undersigned pursuant to paragraph 3(a) hereof. All fees and expenses owed to the Depository hereunder shall be paid in full prior to such delivery of the Property, and the Depository is hereby authorized and directed by the Undersigned to withhold release or distribution of the Property until such time as the Depository has received payment in full of such fees and expenses. The Depository is authorized and directed to deduct such fees and expenses from the Property prior to release or distribution thereof.
15. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, and such counterparts shall constitute and be one and the same instrument.
16. ASSIGNMENT OF INTERESTS. None of the Undersigned shall assign or attempt to assign or transfer his or its interest hereunder or any part thereof. Any such assignment or attempted assignment by any one or more of the Undersigned shall be in direct conflict with this Agreement and the Depository shall not be bound thereby.
17. AMENDMENTS. This Agreement cannot be amended or modified except by another agreement in writing signed by all the parties hereto or by their respective successors in interest.
18. HEADINGS. The paragraph headings contained herein are for convenience of reference only and are not intended to define, limit or describe the scope or intent of any provision of this agreement.
19. GOVERNING LAW. This Agreement shall be deemed to have been made and shall be construed and interpreted in accordance with the laws of the State of Texas.
20. INVESTMENT OF PROPERTY; WITHHOLDING. (a) The Depository shall invest cash balances each day in such money market or other short-term investment funds as shall be specified in writing by an Authorized Representative on Exhibit "B" [Disclosure and Direction] attached hereto. Such money market or short-term investment funds may include any open- end or closed-end management investment trust or investment company registered under the Investment Company Act of 1940, as amended, for which the Depository or one of its affiliates acts as investment advisor, custodian, transfer agent, registrar, sponsor, distributor, manager or otherwise, and any fees paid to the Depository or its affiliate by such fund shall be in addition to the fees and expenses owed to the Depository under this Agreement. (b) The Depository shall not be responsible or liable for determination or payment of any taxes assessed against the Property or the income therefrom nor for the preparation or filing of any tax returns other than withholding required by statute or treaty. Each of the Undersigned agree to provide the Depository any information necessary to perform any such required withholding and the Depository shall be entitled to rely on such information. The Depository will establish the account holding the Property under the TIN of ________________; if Depository is responsible for tax reporting as set forth in paragraph
22, it will be rendered under the aforementioned TIN. A W-9 certifying to the party's withholding status in the form set forth on Exhibit "C" attached hereto will be completed at closing. (c) The Depository may make any and all investments through its own bond or investment department. The Depository shall not be held liable or responsible for the quality or diversity of the assets constituting the Property or for any loss or depreciation in the value of such assets or any loss resulting from any investment made by the Depository in accordance with the terms of this Agreement. If the Depository is required to sell or otherwise redeem or liquidate any Property prior to its maturity, the Undersigned agree that the Depository shall not be personally liable for any loss to the Property (including either principal or income) or other costs incurred as a result of any such early redemption or liquidation.
21. INDEMNIFICATION AND HOLD HARMLESS. The Undersigned hereby agree to indemnify and hold the Depository and its directors, employees, officers, agents, successors and assigns harmless from and against any and all losses, claims, damages, liabilities and expenses, including without limitation, reasonable costs of investigation and counsel fees and expenses which may be imposed on the Depository or incurred by it in connection with its acceptance of this appointment as the Depository hereunder or the performance of its duties hereunder. Such indemnity includes, without limitation, all losses, damages, liabilities and expenses (including counsel fees and expenses) incurred in connection with any litigation (whether at the trial or appellate levels) arising from this Escrow Agreement or involving the subject matter hereof. The indemnification provisions contained in this paragraph 21 are in addition to any other rights any of the indemnified parties may have by law or otherwise and shall survive the termination of this Agreement or the resignation or removal of the Depository.
IN WITNESS WHEREOF, the parties hereto have caused this Depository Agreement - Indemnification Escrow to be executed this _____________day of _______________, 199__.
Title: Vice President and General Counsel
The Depository hereby acknowledges receipt of the Property described in Schedule A hereof and hereby accepts the same as Depository hereunder, subject to the terms and conditions set forth above, this ___________day of __________, 199__.
Norwest Bank Texas, National Association,
Schedule A - Description of Property Exhibit A - Schedule of Fees Exhibit B - Disclosure and Direction (Investments) Exhibit C - Withholding Form
(Description of the "Property" as that term is defined in paragraph 2 of the Agreement) In the event the property is other than cash, securities or negotiable instruments, the following provisions shall apply: (i) Depository makes no warranty as to the suitability for any particular purpose of the Property deposited with Depository hereunder, or (ii) Depository makes no warranty that the facilities of the Depository are suitable for the deposit of the Property, or (ii) Depository shall not be liable for any deterioration or destruction of the Property while in the possession of Depository, except for the gross negligence or willful misconduct of the Depository, or (iv) Depository has no duty to determine if any Property deposited hereunder is in fact the property that is required to be deposited hereunder pursuant to any agreement of the Undersigned.
The following person(s) are designated as Authorized Representative as that term is defined in the Agreement and specimen signatures are shown:
By: Mark A. Solls, Vice President Signature
Out of pocket expenses such as, but not limited to, postage, courier, insurance, long distance telephone, stationery, travel, legal or accounting, etc., will be billed at cost.
The initial and administration fee are due at closing.
These fees do not include extraordinary services which will be priced according to time and scope of duties.
It is acknowledged that the Schedule of Fees shown above are acceptable for the services mutually agreed upon and the Undersigned authorize the Depository to perform said services.
BY: Mark A. Solls, Vice President and General Counsel
TO DEPOSITORY AGREEMENT - INDEMNIFICATION ESCROW
a. CLAIMS AGAINST AND PAYMENTS FROM ESCROW.
(i) Claims against the Property may be made by Purchaser, on its own behalf or on behalf of any other Purchaser Indemnified Party (as defined in the Purchase Agreement), for indemnification of any Purchaser Indemnified Cost (as defined in the Purchase Agreement).
(ii) Purchaser shall promptly notify Seller and the Depository in writing of any sums which Purchaser claims are subject to indemnification under the Purchase Agreement. Failure of Purchaser to exercise promptness in such notification shall not amount to a waiver of such claim unless the resulting delay materially prejudices the position of the Seller with respect to such claim. Such notice shall consist of a description of the claim and specify each Indemnified Party and the amount (which may be estimated) of the claim in United States dollars.
(iii) The Seller may contest the claims specified in paragraph 22(a)(ii) (or any portion thereof) by giving the Depository and Purchaser written notice of such contest within fifteen days after receipt by the Seller of a notice from Purchaser under paragraph 22(a)(ii), which notice of contest shall include a statement of the grounds of such contest and shall state the amount of any such claim by Purchaser that the Seller do not dispute.
(iv) Payment of any claim for indemnification (or portion thereof) to which the Property is subject shall become due and payable by the Depository upon receipt of written authorization executed by the Undersigned.
b. RELEASE OF FUNDS. On the 90th, 180th and 270th day following the Closing, the Depository shall release to the Seller the lesser of (i) $25,000, or (ii) $25,000 less the portion of the Property subject to claims by Purchaser. Payment of Property under this Section 22(b) by the Depository shall be pursuant to written instructions executed by the Undersigned.
c. Distribution. Depository on or before the above described dates in Section 22(b) shall distribute to Seller all income earned on the Property.
d. NOTICES. All notices, consents, or other communications hereunder shall be in writing and shall be sufficient if delivered personally, sent by facsimile or similar device, or sent by registered or certified mail, or via express mail service, postage prepaid, addressed as follows, or to such other address as any party shall designate in a subsequent notice:
To Buyer: Contact Communications Inc.
With A Copy To: ProNet Inc.
To Sellers: Sun Paging Communications % American Mobilphone, Inc. Atten: Mr. Fred W. Schwarz
With A Copy To: Palmer Wireless, Inc. Vice President & General Counsel 12800 University Drive, Suite #500
To Depository: Norwest Bank Texas, N.A. Atten: Sherri Hewett, Vice President
Any such notice shall be deemed sent when received at the address or fax number so designated.
e. ALLOCATION OF DEPOSITORY'S FEES. The Undersigned, as among themselves, agree that all fees and expenses charged by or payable to the Depository shall be borne fifty percent by the Purchaser and fifty percent by the Sellers.
f. ALLOCATION OF INDEMNIFICATION LIABILITIES. The Undersigned, as among themselves, agree that, in the event of any dispute resulting in litigation over entitlement to or distribution of the Property, the non-prevailing party(ies) shall bear 100 percent of any and all losses, claims, damages, liabilities and expenses of the Depository for which the Undersigned may be jointly and severally liable under the terms of this Agreement.
THE UNDERSIGNED Contact Communications Inc. ("Purchaser"), Sun Paging Communications ("Seller"), Palmer Communications Incorporated ("Palmer"), American Mobilphone, Inc. ("American", collectively with Palmer, the "Partners"), (collectively, the "Undersigned"), in order to designate NationsBank of Texas, National Association, (the "Depository") as the Depository for the Undersigned for the purposes and upon the terms and conditions herein set forth, do hereby represent and warrant to, and agree with each other and the Depository, as follows:
1. APPOINTMENT OF THE DEPOSITORY. The Depository is hereby appointed Depository for the Undersigned with respect to the "Property" as that term is herein defined.
2. THE PROPERTY. Concurrently with the execution and delivery hereof, the Undersigned have deposited with the Depository, as custodian and depository, the items described in Schedule A hereto, or in lieu thereof, have made provision in paragraph 22 for the deposit of items hereunder (such items being herein collectively called the "Property"), and direct that same be held and disposed of by the Depository as herein provided.
3. THE DEPOSITORY'S DUTIES AND AUTHORITY TO ACT. (a) Except as may be otherwise provided in paragraph 22, in which event the special instructions in said paragraph 22 shall be controlling, the Depository shall hold the Property in safekeeping and deliver the same or any part or parcel thereof, including the interest earned from investments made pursuant to paragraph 20 hereof, only (i) to one or more of the Undersigned in accordance with and upon the written instructions of each of the other of the Undersigned and/or (ii) in accordance with and upon the written instructions of all the Undersigned. (b) When instructions from more than one of the Undersigned are required, such instructions may be given by separate instruments of similar tenor. Any of the Undersigned may hereafter act through an agent or attorney-in-fact only if written evidence of authority in form and substance satisfactory to the Depository is furnished to the Depository and agreed to by the Depository. (c) The Depository may act upon any written notice, request, waiver, consent, certificate, receipt, authorization, power of attorney or other document which it in good faith believes to be genuine. (d) The Depository shall be deemed to have properly delivered any item of Property upon (i) placing the item in the United States mail in a suitable package or envelope with first class prepaid postage affixed, addressed to the addressee at such addressee's address as set forth in this Agreement or such other address as the Undersigned shall have furnished to the Depository in writing; (ii) delivery in person at the Depository's offices; or (iii) delivery in any other manner pursuant to written instructions of the Undersigned.
(e) In performing its duties under this Agreement, or upon the claimed failure to perform any of its duties hereunder, the Depository shall not be liable to anyone for damages, losses or expenses which may be incurred as a result of the Depository so acting or failing to so act; provided, however, the Depository shall not be relieved from liability for damages arising out of its proven gross negligence or willful misconduct under this Agreement. The Depository shall in no event incur any liability with respect to (i) any action taken or omitted to be taken in good faith upon advice of legal counsel given with respect to any questions relating to the duties and responsibilities of the Depository hereunder or (ii) any action taken or omitted to be taken in reliance upon any document delivered to the Depository and believed by it to be genuine and to have been signed or presented by the proper party or parties. (f) Payment of moneys hereunder shall be made by check or by wire transfer of immediately available funds in accordance with instructions contained in the applicable disbursement notice to the Depository.
4. OTHER AGREEMENTS. The Depository is not a party to, nor is it bound by, nor need it give consideration to the terms or provisions of, any other agreement or undertaking among the Undersigned or any of them, or between the Undersigned or any of them and other persons, or any agreement or undertaking which may be evidenced by or disclosed by the Property, it being the intention of the parties hereto that the Depository assent to and be obligated to give consideration only to the terms and provisions hereof. Unless otherwise provided in paragraph 22, the Depository shall have no duty to determine or inquire into the happening or occurrence of any event or contingency or the performance or failure of performance of any of the Undersigned with respect to arrangements or contracts with each other or with others, the Depository's sole duty hereunder being to hold the Property and to dispose of and deliver the same in accordance with instructions given to it as provided in paragraph 3.
(a) The Depository undertakes to perform such duties and only such duties as are specifically set forth in this Agreement and no implied covenants or obligations shall be read into this Agreement against the Depository. (b) If the Depository is required by the terms hereof to determine the occurrence of any event or contingency, the Depository shall, in making such determination, be liable only for its proven gross negligence or willful misconduct, as determined in light of all the circumstances, including the time and facilities available to it in the ordinary conduct of its business. In determining the occurrence of any such event or contingency the Depository may request from any of the Undersigned or any other person such reasonable additional evidence as the Depository in its sole discretion may deem necessary to determine any fact relating to the occurrence of such event or contingency, and may at any time inquire of and consult with others, including without limitation, any of the Undersigned, and the Depository shall not be liable for any damages resulting from its delay in acting hereunder pending its receipt and examination of additional evidence requested by it. (c) Whenever the Depository is required by the terms hereof to take action upon the occurrence of any event or contingency, the time prescribed for such action shall in all cases be a reasonable time after written notice received by the Depository for the happening of such event or contingency, provided however, that this provision shall not be deemed to limit or reduce the time allowed the Depository for action as provided in paragraph 5(b).
6. LIMITATION ON LIABILITY. The Depository shall not be responsible or liable to the Undersigned or to any other person in any manner whatsoever for the sufficiency, correctness, genuineness, effectiveness or validity of any of the Property, or for the form or execution thereof, or for the identity or authority of any person executing or depositing the same. If any of the Undersigned are acting as agent for others, all of the Undersigned represent and warrant that each such agent is authorized to make and enter into this Agreement. This Agreement is a personal one between the Undersigned and the Depository. The Depository is authorized by each of the Undersigned to rely upon all representations, both actual and implied, of each of the Undersigned and all other persons relating to this Agreement and/or the Property, including without limitation representations as to marital status, authority to execute and deliver this Agreement, notifications, receipts or instructions hereunder, and relationships among persons, firms, corporations or other entities, including those authorized to receive delivery hereunder, and the Depository shall not be liable to any person in any manner by reason of such reliance. The duties of the Depository hereunder shall be only to the Undersigned, their respective successors, heirs, assigns, executors and administrators and to no other person, firm, corporation or other entity whatsoever.
7. TIME OF PERFORMANCE. Whenever under the terms hereof the time for performance of any provision shall fall on a date which is not a regular business day of the Depository, the performance thereof on the next succeeding regular business day of the Depository shall be deemed to be in full compliance. Whenever time is referred to in this Agreement, it shall be the time recognized by the Depository in the ordinary conduct of its normal business transactions.
8. DEATH, DISABILITY, ETC. OF THE UNDERSIGNED. The death, disability, bankruptcy, insolvency, reorganization or absence of any of the Undersigned shall not affect or prevent performance by the Depository of its obligations or its right to rely upon instructions received hereunder. However, in the event of the death, disability, bankruptcy, insolvency, reorganization or absence of any of the Undersigned, the Depository (without liability to any of the Undersigned) may refrain from taking any action required or requested hereunder.
9. EXAMINATION OF THE PROPERTY. Any of the Undersigned may examine the Property during the regular business hours of the Depository; such examination shall, however, be permitted only in the presence of an officer of the Depository.
10. REMEDIES OF THE DEPOSITORY. (a) As additional consideration for and as an inducement for the Depository to act hereunder, it is understood and agreed that in the event of any disagreement between the parties to this Agreement or in the event any other person or entity claims an interest in the Property or any part thereof, and such disagreement or claim results in adverse claims and demands being made by them or any of them in connection with or for any part of the Property, the Depository shall be entitled, at the option of the Depository, to refuse to comply with the instructions or demands of the parties to this Agreement, or any of such parties, so long as such disagreement or adverse claim shall continue. In such event, the Depository shall not be required to make delivery or other disposition of the Property.
Anything herein to the contrary notwithstanding, the Depository shall not be or become liable to the Undersigned or any of them for the failure of the Depository to comply with the conflicting or adverse demands of the Undersigned or any of such parties or of any other persons or entities claiming an interest in the Property or any part thereof. The Depository shall be entitled to refrain and refuse to deliver or otherwise dispose of the Property or any part thereof or to otherwise act hereunder, as stated above, unless and until (i) the rights of the parties and all other persons and entities claiming an interest in the Property have been duly adjudicated in a court having jurisdiction of the parties and the Property or (ii) the parties to this Agreement and such other persons and entities have reached an agreement resolving their differences and have notified the Depository in writing of such agreement and have provided the Depository with indemnity satisfactory to it against any liability, claims or damages resulting from compliance by the Depository with such agreement. In addition to the foregoing, the Depository shall have the right to tender into the registry or custody of any court having jurisdiction, any part of or all of the Property. Upon such tender, the parties hereto agree that the Depository shall be discharged from all further duties under this Agreement; provided, however, that the filing of any such legal proceedings shall not deprive the Depository of its compensation hereunder earned prior to such filing and discharge of the Depository of its duties hereunder. (b) While any suit or legal proceeding arising out of or relating to this Agreement or the Property or the Undersigned is pending, whether the same be initiated by the Depository or by others, the Depository shall have the right at its option to stop all further performance of this Agreement and instructions received hereunder until all differences shall have been resolved by agreement or until the rights of all parties shall have been fully and finally adjudicated by the court. For purposes of any suit or legal proceeding arising out of or relating to this Agreement to which the Depository may be a party, the Undersigned hereby consent and submit to the jurisdiction of the appropriate court, whether Federal or state, sitting in Dallas County, Texas. The rights of the Depository under this paragraph are in addition to all other rights which it may have by law or otherwise.
11. RELIANCE ON COUNSEL. The Depository may from time to time consult with legal counsel of its own choosing in the event of any disagreement, or controversy, or question or doubt as to the construction of any of the provisions hereof or its duties hereunder, and it shall incur no liability and shall be fully protected in acting in good faith in accordance with the opinion or instructions of such counsel. Any such fees and expenses of such legal counsel shall be considered part of the fees and expenses of the Depository described below.
(a) The Undersigned hereby jointly and severally agree to pay the Depository for its ordinary services hereunder the fees determined in accordance with, and payable as specified in, the Schedule of Fees set forth in Exhibit "A", attached hereto. In addition, the Undersigned hereby jointly and severally agree to pay to the Depository its expenses incurred in connection with this Agreement, including, but not limited to, legal fees and expenses, in the event the Depository deems it necessary to retain counsel. Such expenses shall be paid to the Depository within 10 days following receipt by any of the Undersigned of a written statement setting forth such expenses.
(b) The Undersigned jointly and severally agree that in the event any controversy arises under or in connection with this Agreement or the Property, or the Depository is made a party to or intervenes in any litigation pertaining to this Agreement or the Property, to pay to the Depository reasonable compensation for its extraordinary services and to reimburse the Depository for all costs and expenses associated with such controversy or litigation, including, but not limited to, legal fees and expenses. (c) As security for all fees and expenses of the Depository hereunder and any and all losses, claims, damages, liabilities and expenses incurred in connection with the acceptance of appointment hereunder or with the performance of its obligations under this Agreement and to secure the obligation of the Undersigned to indemnify the Depository as set forth in paragraph 21 hereof, the Depository is granted a security interest in and lien upon the Property, which security interest and lien shall be prior to all other security interests, liens or claims against the Property or any part thereof. Each of the Undersigned warrant and agree with the Depository that, unless otherwise expressly set forth in this Agreement, there is no security interest in the Property or any part thereof; no financing statement under the Uniform Commercial Code of any jurisdiction is on file in any jurisdiction claiming a security interest in or describing, whether specifically or generally, the Property or any part thereof; and the Depository shall have no responsibility at any time to ascertain whether or not any security interest exists in the Property or any part thereof or to file any financing statement under the Uniform Commercial Code of any jurisdiction with respect to the Property or any part thereof. (d) The Depository is authorized by the Undersigned to withhold from the Property, prior to distribution thereof and prior to termination of this Agreement, all fees and expenses to which the Depository is entitled hereunder. In addition, in the event any such fees and expenses are not paid to the Depository on or prior to the date such amounts are due, the Depository is hereby authorized and directed to pay such amounts owed to it from cash funds included in the Property or, if no cash funds are then included in the Property, to sell assets constituting part of the Property for the purpose of paying such amounts owed to it. (e) In the event fees and expenses of the Depository are to be paid pursuant to paragraph 22 hereof, it is understood and agreed by the Undersigned that such fees and expenses are in addition to those described above and that such fees and expenses shall be subject to periodic review and modification by the Depository as determined by the Depository in its sole discretion.
13. EFFECTIVE DATE. The effective date of this Agreement shall be the date on which it is accepted by the Depository unless otherwise provided in paragraph 22.
14. TERMINATION AND RESIGNATION. Unless sooner terminated as hereinafter provided, this Agreement shall terminate without action of any party when all of the terms hereof shall have been fully performed. Either the Depository or the Undersigned may terminate this Agreement upon thirty (30) days written notice (i) signed by the Depository and delivered to each of the Undersigned or (ii) signed by each of the Undersigned and delivered to the Depository. Upon termination of this Agreement, the Depository shall deliver the Property in accordance with the written instructions delivered by the Undersigned pursuant to paragraph 3(a) hereof. All fees and expenses owed to the Depository hereunder shall be paid in full prior to such delivery of the Property, and the authorized and directed by the Undersigned to withhold release or distribution of the Property until such time as the Depository has received payment in full of such fees and expenses. The Depository is authorized and directed to deduct such fees and expenses from the Property prior to release or distribution thereof.
15. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, and such counterparts shall constitute and be one and the same instrument.
16. ASSIGNMENT OF INTERESTS. None of the Undersigned shall assign or attempt to assign or transfer his or its interest hereunder or any part thereof. Any such assignment or attempted assignment by any one or more of the Undersigned shall be in direct conflict with this Agreement and the Depository shall not be bound thereby.
17. AMENDMENTS. This Agreement cannot be amended or modified except by another agreement in writing signed by all the parties hereto or by their respective successors in interest.
18. HEADINGS. The paragraph headings contained herein are for convenience of reference only and are not intended to define, limit or describe the scope or intent of any provision of this agreement.
19. GOVERNING LAW. This Agreement shall be deemed to have been made and shall be construed and interpreted in accordance with the laws of the State of Texas.
20. INVESTMENT OF PROPERTY; WITHHOLDING. (a) The Depository shall invest cash balances each day in such money market or other short-term investment funds as shall be specified in writing by an Authorized Representative on Exhibit "B" [Disclosure and Direction] attached hereto. Such money market or short-term investment funds may include any open- end or closed-end management investment trust or investment company registered under the Investment Company Act of 1940, as amended, for which the Depository or one of its affiliates acts as investment advisor, custodian, transfer agent, registrar, sponsor, distributor, manager or otherwise, and any fees paid to the Depository or its affiliate by such fund shall be in addition to the fees and expenses owed to the Depository under this Agreement. (b) The Depository shall not be responsible or liable for determination or payment of any taxes assessed against the Property or the income therefrom nor for the preparation or filing of any tax returns other than withholding required by statute or treaty. Each of the Undersigned agree to provide the Depository any information necessary to perform any such required withholding and the Depository shall be entitled to rely on such information. The Depository will establish the account holding the Property under the TIN of ________________; if Depository is responsible for tax reporting as set forth in paragraph 22, it will be rendered under the aforementioned TIN. A W-9 certifying to the party's withholding status in the form set forth on Exhibit "C" attached hereto will be completed at closing.
(c) The Depository may make any and all investments through its own bond or investment department. The Depository shall not be held liable or responsible for the quality or diversity of the assets constituting the Property or for any loss or depreciation in the value of such assets or any loss resulting from any investment made by the Depository in accordance with the terms of this Agreement. If the Depository is required to sell or otherwise redeem or liquidate any Property prior to its maturity, the Undersigned agree that the Depository shall not be personally liable for any loss to the Property (including either principal or income) or other costs incurred as a result of any such early redemption or liquidation.
21. INDEMNIFICATION AND HOLD HARMLESS. The Undersigned hereby agree to indemnify and hold the Depository and its directors, employees, officers, agents, successors and assigns harmless from and against any and all losses, claims, damages, liabilities and expenses, including without limitation, reasonable costs of investigation and counsel fees and expenses which may be imposed on the Depository or incurred by it in connection with its acceptance of this appointment as the Depository hereunder or the performance of its duties hereunder. Such indemnity includes, without limitation, all losses, damages, liabilities and expenses (including counsel fees and expenses) incurred in connection with any litigation (whether at the trial or appellate levels) arising from this Escrow Agreement or involving the subject matter hereof. The indemnification provisions contained in this paragraph 21 are in addition to any other rights any of the indemnified parties may have by law or otherwise and shall survive the termination of this Agreement or the resignation or removal of the Depository.
IN WITNESS WHEREOF, the parties hereto have caused this Depository Agreement - Escrow to be executed this _____________day of _______________, 199__.
Mark A. Solls Dallas, Texas 75240 Title: Vice President and General Counsel (214) 687-2000 (214) 774-0640 Company TIN: Telephone # Fax #
--------------------------- Telephone # Fax #
----------------------------- Telephone # Fax #
----------------------------- Telephone # Fax #
The Depository hereby acknowledges receipt of the Property described in Schedule A hereof and hereby accepts the same as Depository hereunder, subject to the terms and conditions set forth above, this ___________day of __________, 199__.
NationsBank of ___________, National Association,
Schedule A - Description of Property Exhibit A - Schedule of Fees Exhibit B - Disclosure and Direction (Investments) Exhibit C - Withholding Form
(Description of the "Property" as that term is defined in paragraph 2 of the Agreement) In the event the property is other than cash, securities or negotiable instruments, the following provisions shall apply: (i) Depository makes no warranty as to the suitability for any particular purpose of the Property deposited with Depository hereunder, or (ii) Depository makes no warranty that the facilities of the Depository are suitable for the deposit of the Property, or (ii) Depository shall not be liable for any deterioration or destruction of the Property while in the possession of Depository, except for the gross negligence or willful misconduct of the Depository, or (iv) Depository has no duty to determine if any Property deposited hereunder is in fact the property that is required to be deposited hereunder pursuant to any agreement of the Undersigned.
The following person(s) are designated as Authorized Representative as that term is defined in the Agreement and specimen signatures are shown:
By: Mark A. Solls, Vice President Signature
Out of pocket expenses such as, but not limited to, postage, courier, insurance, long distance telephone, stationery, travel, legal or accounting, etc., will be billed at cost.
The initial and administration fee are due at closing.
These fees do not include extraordinary services which will be priced according to time and scope of duties.
It is acknowledged that the Schedule of Fees shown above are acceptable for the services mutually agreed upon and the Undersigned authorize the Depository to perform said services.
BY: Mark A. Solls, Vice President and General Counsel
(a) INVESTMENT AND REINVESTMENT. All proceeds, interest and other payments or distributions made upon or with respect to any investments made pursuant to the provisions hereof (collectively, the "Accrued Earnings") shall be reinvested in the manner provided in paragraph 20. As used herein, the term "Property" shall mean the Deposits (as hereinafter defined) and Accrued Earnings.
(b) DEPOSIT OF FUNDS. Concurrently herewith and pursuant to the terms of that certain Asset Purchase Agreement dated as of November 10, 1995, by and among the Undersigned (the "Asset Purchase Agreement"). Purchaser is depositing with the Depository the sum of $50,000.00 in cash (the "Deposits").
(c) DISBURSEMENT OF THE PROPERTY. The Property shall be held and disbursed by the Depository as follows:
(i) UPON THE CLOSING. If the Closing of the transactions contemplated by the Asset Purchase Agreement occurs on or before June 30, 1996 (the "Target Date"), then upon receipt of written instructions from the Undersigned, the Depository shall disburse the Deposits to the Seller as a credit against the purchase price of the assets of the Company as referenced in the Asset Purchase Agreement and shall disburse the Accrued Earnings to the Purchaser.
(A) If the Closing of the Transactions contemplated by the Asset Purchase Agreement does not occur by the Target Date due to Purchaser's breach of the Asset Purchase Agreement, then, upon receipt of written instructions from the Undersigned, the Depository shall disburse the Property to the Seller.
(B) If the Closing of the transactions contemplated by the Asset Purchase Agreement does not occur by the Target Date due to any reason other than those set forth in paragraph 22(c)(ii)(A), then upon receipt of written instructions from the Undersigned, the Depository shall disburse the Property to the Purchaser.
(d) NOTICES. All notices, consents, or other communications hereunder shall be in writing and shall be sufficient if delivered personally, sent by facsimile or similar device, or sent by registered or certified mail, or via express mail service, postage prepaid, addressed as follows, or to such other address as any party shall designate in a subsequent notice:
To Purchaser: CONTACT COMMUNICATIONS INC.
With A Copy To: PRONET INC.
To Seller: SUN PAGING COMMUNICATIONS % American Mobilphone, Inc.
With A Copy To: PALMER COMMUNICATIONS, INC. Vice President & General Counsel 12800 University Drive, Suite #500
To Depository: NATIONSBANK OF TEXAS, N.A. 901 Main Street, 18th Floor
Any such notice shall be deemed sent when received at the address or fax number so designated.
(e) ALLOCATION OF DEPOSITORY'S FEES. The Undersigned, as among themselves, agree that all fees and expenses charged by or payable to the Depository shall be born fifty percent by the Purchaser and fifty percent by the Seller.
(f) ALLOCATION OF INDEMNIFICATION LIABILITIES. The Undersigned, as among themselves, agree that, in the event of any dispute resulting in litigation over entitlement to our distribution of the Property, the non-prevailing party(ies) shall bear 100 percent of any and all losses, claims, damages, liabilities and expenses of the Depository for which the Undersigned may be jointly and severally liable under the terms of this Agreement. | 8-K | EX-10.3 | 1996-01-16T00:00:00 | 1996-01-16T13:01:34 |
0000892569-96-000031 | 0000892569-96-000031_0005.txt | <DESCRIPTION>SECOND AMENDMENT TO SENIOR SECURED CREDIT AGRMNT.
THIS SECOND AMENDMENT TO SENIOR SECURED CREDIT AGREEMENT, SECOND AMENDMENT TO GUARANTY AND FIRST AMENDMENT TO WARRANTS ("Amendment") is made and entered into as of March 31, 1995, by and among AURORA ELECTRONICS GROUP, INC., a California corporation ("Borrower"), AURORA ELECTRONICS, INC., a Delaware corporation ("Parent") and BANQUE PARIBAS as Agent ("Agent") on behalf of itself, BANQUE INDOSUEZ, UNION BANK and each other lender which may hereafter execute and deliver an instrument of assignment pursuant to Section 11.10 of the Senior Secured Credit Agreement (any one individually, a "Lender" and collectively, "Lenders").
A. Borrower, Lenders and Agent have entered into that certain Senior Secured Credit Agreement dated as of May 12, 1994 as amended by that First Amendment to Senior Secured Credit Agreement and First Amendment to Guaranty dated as of December 27, 1994 (as such may be further amended, modified, supplemented or restated, the "Credit Agreement"), pursuant to which Lenders made certain credit facilities available to Borrower. In consideration for and an inducement for the extension of such credit facilities, Parent guaranteed the obligations of Borrower and undertook separate obligations pursuant to the terms of that Guaranty Agreement of Parent made as of May 12, 1994 in favor of Agent and Lenders, as amended by that First Amendment to Senior Secured Credit Agreement and First Amendment to Guaranty dated as of December 27, 1994 (as such may be further amended, modified, supplemented or restated, the "Parent Guaranty").
B. Pursuant to the requirements of the Credit Agreement, the Warrants were issued in favor of each of Lenders.
C. Borrower and Parent have requested that the Credit Agreement, the Parent Guaranty and the Warrants be modified as set forth herein.
D. Lenders and Agent are willing to accommodate Borrower's and Parent's requests but only on the terms and subject to the conditions specified herein.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants herein set forth, and intending to be legally bound, the parties hereto agree as follows:
1. DEFINITIONS. Unless otherwise defined herein, all terms defined in the Credit Agreement have the same meaning when used herein. The following definitions shall have the following meanings:
"FACILITY-A RESERVE" shall be zero dollars ($0.00), provided, however, that on such date as all Lenders, in their sole and absolute discretion, shall provide written notice to Borrower stating that Facility-C is again available, the Facility-A Reserve means the followings amounts during the following periods:
provided, further, that each such amount listed in the foregoing proviso shall be reduced by the amount by which Borrower shall have demonstrated to the satisfaction of Requisite Lenders amounts have been paid after the Closing Date to reduce the principal amount outstanding under the 9 1/4% Subordinated Debt."
"7% SUBORDINATED DEBT PRINCIPAL PAYMENT DATE" shall mean any or all of September 30, 1995, September 30, 1996 and September 30, 1997."
2. AMENDMENTS TO CREDIT AGREEMENT.
a. 7% SUBORDINATED DEBT RESTRUCTURING. Section 5.12 of the Credit Agreement is deleted in its entirety and replaced with the following:
"5.12 RESTRUCTURING OF SUBORDINATED DEBT. Prior to each 7% Subordinated Debt Principal Payment Date, Borrower shall provide evidence satisfactory to Requisite Lenders that either (a) Parent has restructured its 7% Subordinated Debt such that the principal payment due on such 7% Subordinated Debt Principal Payment Date is either canceled or rescheduled to fall due not earlier than 180 days following the Final Payment Date, (b) the holders of the 7% Subordinated Debt shall have caused that portion of the principal
such 7% Subordinated Debt Principal Payment Date to be converted into Stock of Parent, or (c) Parent shall have prepaid the principal amount falling due on such 7% Subordinated Debt Principal Payment Date with the net proceeds of the issuance of Parent's Stock or additional Indebtedness of Parent (i) which is subordinate in time and right of payment at least to the same extent as the 7% Subordinated Debt, (ii) the first scheduled principal repayment of which shall be at least 180 days following the Final Payment Date and (iii) the interest rate, amortization and other terms of which are satisfactory to Requisite Lenders. The parties hereto understand and agree that Agent and Lenders have priced the Facilities on the assumption that Borrower and Parent will comply with the requirements of this Section 5.12 and that in the event Borrower or Parent fails to comply with these requirements the risk to Agent and Lenders will be substantially increased and that such failure will constitute an Event of Default hereunder. In recognition of such substantially increased risk, the Warrants to be issued on the Closing Date shall become exercisable only in the event Borrower and Parent fail to comply with the requirements of this Section 5.12. The parties hereto have specifically negotiated the number of Subject Shares (as defined in the Warrants) and the Stock Purchase Price (as defined in the Warrants) both to compensate Agent and Lenders for such increased risk and to act as liquidated damages for the breach of the requirements of this Section 5.12. The parties acknowledge and agree that the calculation of damages for the breach of this Section 5.12 would be difficult or impossible to ascertain and the Warrants bear a reasonable relationship to such damages by providing Agent and Lenders a vehicle which, under certain circumstances, could permit Agent and Lenders to obtain funds from sale of the Subject Shares equal to either (y) an amount sufficient to purchase the 7% Subordinated Debt at par in the event there is an acceleration, demand or other enforcement action in respect of the 7% Subordinated Debt or (z) an amount sufficient to purchase that portion of the 7% Subordinated Debt which shall not have been paid on a 7% Subordinated Debt Principal Payment Date in the event there is not an acceleration, demand or other enforcement action in respect of the 7% Subordinated Debt."
3. AMENDMENTS TO PARENT GUARANTY.
a. 7% SUBORDINATED DEBT RESTRUCTURING. Section 6.10 of the Parent Guaranty is deleted in its entirety and replaced with the following:
"6.10 RESTRUCTURING OF SUBORDINATED DEBT. Prior to each 7% Subordinated Debt Principal Payment Date, Guarantor shall provide evidence satisfactory to Requisite Lenders that either (a) Guarantor has restructured its 7% Subordinated Debt such that the principal payment due on such 7% Subordinated Debt Principal Payment Date is either canceled or rescheduled to fall due not earlier than 180 days following the Final Payment Date, (b) the holders of the 7% Subordinated Debt shall have caused that portion of the principal falling due on
such 7% Subordinated Debt Principal Payment Date to be converted into Stock of Guarantor, or (c) Guarantor shall have prepaid the principal amount falling due on such 7% Subordinated Debt Principal Payment Date with the net proceeds of the issuance of Guarantor's Stock or additional Indebtedness of Guarantor (i) which is subordinate in time and right of payment at least to the same extent as the 7% Subordinated Debt, (ii) the first scheduled principal repayment of which shall be at least 180 days following the Final Payment Date and (iii) the interest rate, amortization and other terms of which are satisfactory to Requisite Lenders. The parties hereto understand and agree that Agent and Lenders have priced the Facilities on the assumption that Borrower and Guarantor will comply with the requirements of this Section 6.10 and that in the event Borrower or Guarantor fails to comply with these requirements the risk to Agent and Lenders will be substantially increased and that such failure will constitute an Event of Default hereunder. In recognition of such substantially increased risk, the Warrants to be issued on the Closing Date shall become exercisable only in the event Borrower and Guarantor fail to comply with the requirements of this Section 6.10. The parties hereto have specifically negotiated the number of Subject Shares (as defined in the Warrants) and the Stock Purchase Price (as defined in the Warrants) both to compensate Agent and Lenders for such increased risk and to act as liquidated damages for the breach of the requirements of this Section 6.10. The parties acknowledge and agree that the calculation of damages for the breach of this Section 6.10 would be difficult or impossible to ascertain and the Warrants bear a reasonable relationship to such damages by providing Agent and Lenders a vehicle which, under certain circumstances, could permit Agent and Lenders to obtain funds from sale of the Subject Shares equal to either (y) an amount sufficient to purchase the 7% Subordinated Debt at par in the event there is an acceleration, demand or other enforcement action in respect of the 7% Subordinated Debt or (z) an amount sufficient to purchase that portion of the 7% Subordinated Debt which shall not have been paid on a 7% Subordinated Debt Principal Payment Date in the event there is not an acceleration, demand or other enforcement action in respect of the 7% Subordinated Debt."
4. AMENDMENTS TO WARRANTS. Each of the Warrants shall be amended as follows:
a. Each of the Warrants is amended to delete the date "April 1, 1995" wherever it appears therein and to substitute therefor the date "October 1, 1995." In addition, each of the Warrants is amended to delete the date "March 31, 1995" wherever it appears therein and to substitute therefor the date "September 30, 1995."
b. The second paragraph of the text of each of the Warrants is deleted in its entirety and substituted with the following paragraphs:
"This Warrant has been issued pursuant to the requirements of that certain Senior Secured Credit Agreement dated as of May 12, 1994
Group, Inc., Banque Paribas as agent, and the lenders named therein, as amended (the "Credit Agreement").
"The Stock Purchase Price shall be equal to fifty percent (50%) of the Fair Market Value (as defined in Section 2.2 below) of the Common Stock calculated as of the date of Holder's exercise. The number of shares constituting the "Subject Shares" which shall be issuable at any time shall be
(a) in the event any amount shall be due and owing under the 7% Subordinated Debt (as defined in the Credit Agreement, hereinafter the "7% Subordinated Debt") and there shall have been an acceleration, demand for payment or other enforcement action by any holder of the 7% Subordinated Debt (whether or not the default upon which such acceleration, demand or other enforcement action shall have been waived or cured) (an "Acceleration"), the number of shares of Common Stock calculated by dividing (i) the balance of principal and accrued and unpaid interest outstanding under the 7% Subordinated Debt by (ii) the Stock Purchase Price, in each case (i) and (ii) as of the date of Holder's exercise of its
(b) in the event any amount shall be due and owing under the 7% Subordinated Debt and there shall NOT have been an Acceleration, the number of shares calculated by dividing (i) the amount past due for principal and interest under the 7% Subordinated Debt by (ii) the Stock Purchase Price, in each case (i) and (ii) as of the date of Holder's exercise of its rights hereunder.
The exercise of rights under this Warrant for the full number of Subject Shares issuable upon exercise of this Warrant shall not preclude the subsequent exercise of rights under this Warrant in respect of that additional number of Subject Shares issuable pursuant to this Warrant at any later time; provided, however, that in calculating the number of Subject Shares issuable pursuant to this Warrant in any such subsequent exercise, the amount of principal and interest in respect of the 7% Subordinated Debt which shall have formed the basis for a calculation of Subject Shares in any prior exercise of rights hereunder shall be excluded from the calculation of Subject Shares for any subsequent exercise of rights hereunder.
If on October 1, 1997, the covenant set forth in Section 5.12 of the Credit Agreement has been fully complied with, then this Warrant shall be null and void and the Company shall be under no obligation to issue shares of Common stock hereunder."
c. Section 4.4 of each of the Warrants is deleted in its entirety and substituted with the following paragraph:
"4.4 ADJUSTMENT FOR SHORTFALL. Whether or not there has been an Acceleration, in the event Holder at any time exercises its rights hereunder and at such time the product of (a) the number of Subject Shares and (b) the Stock Purchase Price (the "Warrant Value") is less than one million two hundred ninety thousand dollars ($1,290,000) (such amount being referred to herein as the "Threshold Value"), then, at the option of the Company, either (x) the number of Subject Shares shall be increased by a number of shares of Common Stock equal to: (i) the difference between the Threshold Value and the Warrant Value, divided by (ii) the Stock Purchase Price, or (y) the Company shall pay to the Holder an amount in cash equal to the Holder's Percentage times the difference between the Threshold Value and the Warrant Value; provided, however, that unless the Company exercises its foregoing option to pay cash by paying cash to the Holder by that date 30 days following the date any principal amount becomes due and is unpaid under the 7% Subordinated Debt, the option to pay cash shall terminate and the number of Subject Shares shall on such date automatically be increased as set forth in clause (x) above."
d. Nothing in this Amendment shall be construed to cause there to be any amendment to the warrants issued to Banque Paribas and to Indosuez issued pursuant to the Banque Paribas Side Letter, the Indosuez Side Letter or the First Amendment.
5. LIMITED AMENDMENT; FULL FORCE AND EFFECT. The amendments set forth in this Amendment shall be limited precisely as written and shall not be deemed (a) to be an amendment or waiver of any other term or condition of the Credit Agreement, the Parent Guaranty or the Warrants, to prejudice any right or remedy which Agent or Lenders may now have or may have in the future under or in connection with the Credit Agreement, the Parent Guaranty or the Warrants or (b) to be a consent to any future amendment. Except as expressly amended hereby, the Credit Agreement, the Parent Guaranty and the Warrants shall continue in full force and effect.
6. BORROWER'S REPRESENTATIONS AND WARRANTIES. In order to induce Agent and Lenders to enter into this Amendment and to amend the Credit Agreement, Borrower and Guarantor each represent and warrant to each Lender and Agent as follows:
a. CORPORATE POWER AND AUTHORITY. Borrower and Parent have all requisite corporate power and authority to enter into this Amendment and to carry out the transactions contemplated by, and perform their respective obligations under the Credit Agreement, the Parent Guaranty and the Warrants, each as amended by this Amendment (the "Amended Agreements"). The Certificate of Incorporation of Parent and the Articles of Incorporation of Borrower and Bylaws of each of Borrower and Parent have not been amended since May 12, 1994 other than the Certificate of Amendment of Restated Certificate of Incorporation filed with the Delaware Secretary of State on March 29, 1995 and attached hereto as Exhibit A.
b. AUTHORIZATION OF AGREEMENTS. The execution and delivery of this Amendment and the performance of the Amended Agreements have been duly authorized by all necessary corporate action on the part of the Borrower and Parent, as applicable.
c. NO CONFLICT. The execution and delivery by the Borrower and Parent of this Amendment and the performance by the Borrower and Parent of the Amended Agreements do not and will not contravene (i) any law or regulation binding on or affecting Borrower, Parent or any of their respective Subsidiaries, (ii) the Certificate of Incorporation of Parent or Articles of Incorporation of Borrower or Bylaws of any of either of them, (iii) any order, judgment or decree of any court of other agency of government binding on either of Borrower, Parent, or any of their respective Subsidiaries or (iv) any contractual restriction binding on or affecting Borrower, Parent or any of their respective Subsidiaries.
d. GOVERNMENTAL CONSENTS. The execution and delivery by Borrower and Parent of this Amendment and the performance by Borrower and Parent of the Amended Agreements, as applicable, do not and will not require any authorization or approval of, or other action by, or notice to or filing with any governmental authority or regulatory body.
e. BINDING OBLIGATION. This Amendment and the Amended Agreements have been duly executed and delivered by Borrower and Parent and are the binding obligations of Borrower and Parent, enforceable against them in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors' rights.
f. ABSENCE OF DEFAULT AND MODIFICATION OF AGREEMENTS WITH OTHER CREDITORS. No event has occurred and is continuing or will result from the consummation of the transactions contemplated by this Amendment that would constitute an Event of Default as defined in either the Credit Agreement or the Parent Guaranty. Neither Borrower nor Parent has modified any agreement with any creditor of Borrower or Parent, other than by this Amendment, unless Borrower or Parent has disclosed the terms of such modification to Lenders in writing.
7. LENDERS' REPRESENTATIONS AND WARRANTIES. Each Lender hereby represents to Borrower, Parent, each other Lender and Agent that it has the full right and power to amend each of the Amended Documents and continues to possess all rights of the Holder (as defined in each Warrant) under the Warrant issued in such Lender's favor.
8. CONDITIONS PRECEDENT. This Amendment shall be deemed effective as of March 31, 1995 (the "Second Amendment Effective Date") upon satisfaction of all of the following conditions precedent prior to April 14, 1995:
a. CORPORATE DOCUMENTS OF BORROWER. Agent and Lenders shall each have received a certificate of a responsible officer of Borrower as to the of the Board of Directors of Borrower authorizing Borrower to enter into this Amendment and such other corporate documents as Agent shall reasonably request, all in form and substance satisfactory to Agent.
b. CORPORATE DOCUMENTS OF PARENT. Agent and Lenders shall each have received a certificate of a responsible officer of Parent as to the effectiveness of resolutions of the Board of Directors of Parent authorizing Parent to enter into this Amendment and such other corporate documents as Lender shall reasonably request.
c. COST REIMBURSEMENT. All costs incurred by Agent incurred in connection with the negotiation of this Agreement and Borrower's satisfaction of the conditions precedent to the effectiveness hereof, together with all outstanding reimbursable costs required to be paid under the Credit Agreement as of such effective date, including, without limitation, the legal fees of Cooley Godward Castro Huddleson & Tatum, shall have been paid in full.
d. UPDATE OF REPRESENTATIONS AND WARRANTIES. Agent and Lenders shall each have received a certificate of responsible officers of Borrowers and Parent certifying that the representations and warranties in Section 4 of the Credit Agreement and Section 5 of the Parent Guaranty continue to be true and complete in all material respects as of the date hereof after giving effect to this Amendment (except to the extent such specifically relate to another date or as specifically described therein and expressly approved by Requisite Lenders).
e. APPROVAL OF LENDERS. Agent shall have received from Requisite Lenders written approval of this Amendment in form satisfactory to Agent.
f. DISPUTE RELATING TO 7% SUBORDINATED DEBT. Borrower and Parent shall have provided to Agent and each Lender the certificate of a responsible officer of each of Borrower and Parent attaching a true and complete list of all documents in their possession regarding the disputes between Parent and/or Borrower on the one hand and the holders of the 7% Subordinated Debt on the other hand, which represents a list of all material documents evidencing awards, findings and decisions made as of the date hereof by the arbitrator of the disputes.
g. OTHER DOCUMENTS. Agent and Lenders shall have received such other documents, information and items from Borrower and Parent as they shall reasonably request.
a. Each of Borrower and Parent hereby acknowledge and agree that: (1) it has no claim or cause of action against Lender or any parent, subsidiary or affiliate of Lender, or any of Lender's officers, directors, employees, attorneys or other representatives or agents (all of which parties other than Lender being, collectively, "Lender's Agents") in connection with the Credit Agreement, the loans thereunder or the transactions contemplated therein and herein; (2) it has no offset or defense against any of its respective contracts in favor of Lender; and (3) it recognizes that Lender has heretofore properly performed and satisfied in a timely manner all of its obligations to and contracts with Borrower.
b. Although Lender regards its conduct as proper and does not believe Borrower to have any claim, cause of action, offset or defense against Lender or any of Lender's Agents in connection with the Credit Agreement, the loans thereunder or the transactions contemplated therein, Lender wishes and Borrower agrees to eliminate any possibility that any past conditions, acts, omissions, events, circumstances or matters could impair or otherwise affect any rights, interests, contracts or remedies of Lender. Therefore, Borrower unconditionally releases and waives (1) any and all liabilities, indebtedness and obligations, whether known or unknown, of any kind Lender or of any of Lender's Agents to Borrower, except the obligations remaining to be performed by Lender as expressly stated in the Credit Agreement, this Amendment and the other Loan Documents executed by Lender; (2) any legal, equitable or other obligations or duties, whether known or unknown, of Lender or of any of Lender' Agents to Borrower (and any rights of Borrower against Lender) besides those expressly stated in the Credit Agreement, this Amendment and the other Loan Documents; (3) any and all claims under any oral or implied agreement, obligation or understanding with Lender or any of Lender's Agents, whether known or unknown, which is different from or in addition to the express terms of the Credit Agreement, this Amendment or any of the other Loan Documents; and (4) all other claims, causes of action or defenses of any kind whatsoever (if any), whether known or unknown, which Borrower might otherwise have against Lender or any of Lender's Agents, on account of any condition, act, omission, event, contract, liability, obligation, indebtedness, claim, cause of action, defense, circumstance or matter of any kind whatsoever which existed, arose or occurred at any time prior to the execution and delivery of this Amendment or which could arise concurrently with the effectiveness of this Amendment.
c. Each of Borrower and Parent agree that it understands the meaning and effect of Section 1542 of the California Civil Code, which provides:
Section 1542. Certain Claims Not Affected by General Release. A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.
EACH OF BORROWER AND PARENT AGREE TO ASSUME THE RISK OF ANY AND ALL UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS WHICH ARE RELEASED BY THIS AMENDMENT IN FAVOR OF LENDER AND LENDER'S AGENTS, AND EACH OF BORROWER AND PARENT HEREBY WAIVE AND RELEASE ALL RIGHTS AND BENEFITS WHICH IT MIGHT OTHERWISE HAVE UNDER THE AFOREMENTIONED SECTION 1542 OF THE CALIFORNIA CIVIL CODE WITH REGARD TO THE RELEASE OF SUCH UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES
CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS. TO THE EXTENT (IF ANY) WHICH ANY SUCH LAWS MAY BE APPLICABLE, EACH OF BORROWER AND PARENT WAIVE AND RELEASE (TO THE MAXIMUM EXTENT PERMITTED BY LAW) ANY RIGHT OR DEFENSE WHICH IT MIGHT OTHERWISE HAVE UNDER ANY OTHER LAW OF ANY APPLICABLE JURISDICTION WHICH MIGHT LIMIT OR RESTRICT THE EFFECTIVENESS OR SCOPE OF ANY OF ITS WAIVERS OR RELEASES UNDER THIS AMENDMENT.
10. GUARANTOR CONSENT AND ACKNOWLEDGEMENT. Each party listed on the signature pages hereto as a "Guarantor" hereby consents to this Amendment and agrees that its guarantee of the Obligations of the Borrower under the Credit Agreement shall continue in full force and effect, shall be valid and enforceable and shall not be impaired or otherwise affected by the execution of this Amendment or any other document or instrument delivered in connection herewith.
11. FULL FORCE AND EFFECT; ENTIRE AGREEMENT. Except to the extent expressly provided in this Amendment, the terms and conditions of the Credit Agreement and the Parent Guaranty shall remain in full force and effect. This Amendment and the other Loan Documents constitute and contain the entire agreement of the parties hereto and supersede any and all prior agreements, negotiations, correspondence, understandings and communications between the parties, whether written or oral, respecting the subject matter hereof. The parties hereto further agree that the Loan Documents comprise the entire agreement of the parties thereto and supersede any and all prior agreements, negotiations, correspondence, understandings and other communications between the parties thereto, whether written or oral respecting the extension of credit by Lender to Borrower and/or its Affiliates.
a. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS. On and after the First Amendment Effective Date, each reference in the Credit Agreement, the Parent Guaranty or the Warrants to "this Agreement," "hereunder," "hereof," "herein" or words of like import referring to the Credit Agreement, the Parent Guaranty or the Warrants and each reference in the Loan Documents to the "Credit Agreement," the "Parent Guaranty," the "Warrants, "thereunder," "thereof" or words of like import referring to the Credit Agreement, the Parent Guaranty or the Warrants shall mean and be a reference to the Amended Agreements.
b. FEES AND EXPENSES. Borrower acknowledges that all costs, fees and expenses as described in Section 10.1 of the Credit Agreement incurred by the Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of the Borrower.
c. HEADINGS. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect.
d. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
e. COUNTERPARTS. This Amendment may be executed in counterparts, each of which when so executed shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document.
WITNESS the due execution hereof by the respective duly authorized officer of the undersigned as of the date first written above.
BORROWER AURORA ELECTRONICS GROUP, INC. | 10-K | EX-10.17.2 | 1996-01-16T00:00:00 | 1996-01-16T16:30:17 |
0000912057-96-000529 | 0000912057-96-000529_0007.txt | Ben Zinkin asked me to provide you with a summary of the applicable terms of the New Line/Savoy deal as relates to Kushner Locke and "Pinocchio". These are as follows:
1. PRODUCTION/POST-PRODUCTION. In connection with production and post- production of "Pinocchio", New Line and Savoy share all of Savoy's creative, business, administrative and other controls, with New Line having the right to break any deadlock. New Line has the right to take any reasonable actions it deems necessary on Savoy's behalf if Savoy fails to cooperate as reasonably required by New Line after reasonable notice thereof. New Line has the right to exercise all of Savoy's cutting rights with respect to "Pinocchio", including final cutting rights.
2. EXERCISE OF DISTRIBUTION RIGHTS. New Line has been granted all of Savoy's distribution rights in "Pinocchio" (including ancillary rights). With respect to those worldwide ancillary rights which Kushner Locke and Savoy have agreed to "coordinate" with Savoy having the last word, New Line has succeeded to these rights. New Line has acknowledged that a number of licenses are already in place, and New Line has agreed not to exploit its rights in contravention of these licenses. I understand that David Imhoff, our head of merchandising, has been in touch with your merchandising department.
3. REMAKES/SEQUELS. New Line has been granted Savoy's rights in remakes/sequels to "Pinocchio".
4. SUMS PAYABLE TO SAVOY. To the extent that Kushner Locke is to repay Savoy for any advances made by Savoy to or on Kushner Locke's behalf, such sums, prior to delivery to New Line, should be paid to Savoy. After delivery to New Line, they should be paid to New Line.
Please feel free to call me with any questions. My phone number is 310/967- 6793. | 10-K | EX-10.41 | 1996-01-16T00:00:00 | 1996-01-16T16:18:17 |
0000950130-96-000134 | 0000950130-96-000134_0006.txt | OFFER TO EXCHANGE EACH OUTSTANDING SHARE OF COMMON STOCK (INCLUDING THE ASSOCIATED COMMON STOCK PURCHASE RIGHTS)
TWO-THIRDS OF A SHARE OF COMMON STOCK
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON , 1996, UNLESS THE OFFER IS EXTENDED. SHARES WHICH ARE TENDERED PURSUANT TO THE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION OF THE OFFER.
Enclosed for your consideration are the Prospectus dated January , 1996 (the "Prospectus") and the related Letter of Transmittal (which together constitute the "Offer") in connection with the offer by Wells Fargo & Company, a Delaware corporation ("Wells Fargo"), to exchange two-thirds of a share of common stock, par value $5.00 per share, of Wells Fargo (the "Wells Fargo Common Stock") for each outstanding share of Common Stock, par value $2.00 per share (each, a "Share" and collectively, the "Shares"), of First Interstate Bancorp, a Delaware corporation ("First Interstate"), including the associated common stock purchase rights (each, a "Right" and collectively, the "Rights") issued pursuant to the Rights Agreement, dated as of November 21, 1988, between First Interstate and First Interstate Bank of California, as successor Rights Agent (the "Shares"), upon the terms and subject to the conditions set forth in the Offer.
Stockholders whose certificates evidencing Shares ("Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (as defined in the Prospectus) or who cannot complete the procedure for delivery by book-entry transfer to the Exchange Agent's account at a Book-Entry Transfer Facility (as defined in "The Offer--Exchange of Shares; Delivery of Wells Fargo Common Stock" in the Prospectus) on a timely basis and who wish to tender their Shares must do so pursuant to the guaranteed delivery procedure described in "The Offer-- Procedure for Tendering" in the Prospectus. See Instruction 2 of the Letter of Transmittal. Delivery of documents to a Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedures does not constitute delivery to the Exchange Agent.
THIS MATERIAL IS BEING FORWARDED TO YOU AS THE BENEFICIAL OWNER OF SHARES HELD BY US FOR YOUR ACCOUNT BUT NOT REGISTERED IN YOUR NAME. WE ARE THE HOLDER OF RECORD OF SHARES HELD BY US FOR YOUR ACCOUNT. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish to have us tender on your behalf any or all of the Shares held by us for your account, upon the terms and subject to the conditions set forth in the Offer.
1. Wells Fargo is offering to acquire each outstanding Share in exchange for two-thirds of a share of Wells Fargo Common Stock.
2. The Offer is being made for all of the outstanding Shares.
3. The Offer and withdrawal rights will expire at 12:00 Midnight, New York City time, on , 1996, unless the Offer is extended.
4. The Offer is conditioned upon, among other things, the Minimum Tender Condition, the Wells Fargo Stockholder Approval Condition, the Rights Plan and DGCL 203 Condition, the FIB/FBS Merger Agreement Condition and the Regulatory Approval Condition (in each case as defined in the Prospectus). See "The Offer--Minimum Tender Condition," "--Wells Fargo Stockholder Approval Condition," "--Rights Plan and DGCL 203 Condition," "--FIB/FBS Merger Agreement Condition," "--Regulatory Approval Condition" and "-- Certain Other Conditions of the Offer" in the Prospectus.
5. Tendering stockholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, stock transfer taxes on the transfer of Shares pursuant to the Offer.
The Offer is made solely by the Prospectus dated January , 1996 and the related Letter of Transmittal and any amendments or supplements thereto and is being made to all holders of Shares. The Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of Shares in any jurisdiction in which the making or acceptance thereof would not be in compliance with the laws of such jurisdiction. However, Wells Fargo may, in its sole discretion, take such action as it may deem necessary to make the Offer in any such jurisdiction and extend the Offer to holders of Shares in such jurisdiction. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Wells Fargo by CS First Boston Corporation or Montgomery Securities, as Dealer Managers, or one or more registered brokers or dealers licensed under the laws of such jurisdiction.
If you wish to have us tender any or all of your Shares, please so instruct us by completing, executing, detaching and returning to us the instruction form contained in this letter. An envelope in which to return your instructions to us is enclosed. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise indicated in such instruction form. PLEASE FORWARD YOUR INSTRUCTIONS TO US AS SOON AS POSSIBLE TO ALLOW US AMPLE TIME TO TENDER SHARES ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE OFFER.
INSTRUCTIONS WITH RESPECT TO THE OFFER TO EXCHANGE EACH OUTSTANDING SHARE OF COMMON STOCK
(INCLUDING THE ASSOCIATED COMMON STOCK PURCHASE RIGHTS)
TWO-THIRDS OF A SHARE OF COMMON STOCK
The undersigned acknowledge(s) receipt of your letter and the enclosed Prospectus, dated January , 1996 (the "Prospectus"), and the related Letter of Transmittal (which together constitute the "Offer") relating to the offer by Wells Fargo & Company, a Delaware corporation ("Wells Fargo"), to exchange two-thirds of a share of Common Stock, par value $5.00 per share, of Wells Fargo for each outstanding share of Common Stock, par value $2.00 per share (collectively, the "Shares"), of First Interstate Bancorp, a Delaware corporation.
You are instructed to tender to Wells Fargo the number of Shares indicated below (or, if no number is indicated below, all Shares) that are held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer.
Number of Shares to be tendered* SIGN HERE
Please Print Name(s) and Address(es)
Area Code and Telephone Number(s)
* Unless otherwise indicated, it will be assumed that all of your Shares held by us for your account are to be tendered. | S-4/A | EX-99.4 | 1996-01-16T00:00:00 | 1996-01-16T14:30:51 |
0000931006-96-000001 | 0000931006-96-000001_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 (I.R.S. Employer jurisdiction of File Number) Identification No.)
4849 Greenville Ave., Suite 1500, Dallas, Texas 75206-4186 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: 214-369-7893
A. Set forth below in their entirety are news releases issued by Enserch Exploration, Inc. on January 16, 1996:
RESULTS OF GREEN CANYON 254 WELL
DALLAS, TEXAS (January 16, 1996)--Enserch Exploration, Inc. (NYSE--"EEX") has drilled and tested a third well at Green Canyon 254, the Allegheny Project, in the deep water of the Gulf of Mexico.
The OCS-G 7049 No. 5 confirmation well, drilled in 3,300 feet of water to a total depth of 15,066 feet, encountered 180 feet of pay. A limited well test from the lowest 30 feet of sand flowed at a rate of 3,000 barrels of oil equivalent per day on a 20/64-inch choke with 3,300 pounds of tubing pressure and verified the extent of the oil column.
"We drilled the #5 structurally up-dip from the earlier discoveries to verify our expectations on the size of this field. This well further supports the estimated gross reserves of 111 million equivalent barrels DeGolyer and MacNaughton has attributed to this project," said David W. Biegler, chairman of Enserch Exploration.
The well is being temporarily abandoned for later completion and the rig is moving to a surface location on Block 298. If successful, that well will extend the proven limits of the field 3,000 feet to the south.
Enserch Exploration is the operator of the Green Canyon project, and owns a 40% working interest. Mobil Exploration & Producing U.S. Inc., an affiliate of Mobil Corporation, owns a 40% working interest and Reading & Bates owns 20%.
Enserch Exploration, Inc. is a natural gas and oil exploration and production company with activities focused in Texas and the Gulf of Mexico.
DEVELOPMENTS AT GARDEN BANKS 388
DALLAS, TEXAS (January 16, 1996)--Enserch Exploration, Inc. (NYSE--EEX) announces that the SB-2 well at Garden Banks Block 387 has reached total depth and encountered over 160 feet of pay in two zones. This well, along with the discovery well SB-1, is being completed and will be tied back to the floating production system on Block 388, three miles away.
Further, the A-1 well at Garden Banks 388, the Cooper project, the first well drilled from the floating production system, is drilling ahead below 5,800 feet. The planned total depth of the well is 11,448 feet.
Current gross production from the initial two wells on Garden Banks 388 is now averaging 4,000 barrels of oil equivalent per day. Development wells will be completed and brought on production throughout 1996. First production from the Block 387 wells is expected in May, some two months later than originally predicted due to sidetracking the SB-2 well.
Enserch Exploration is the operator and owns 60% of the Garden Banks project. Mobil Exploration & Producing U.S. Inc. owns the remaining 40%.
Enserch Exploration, Inc. is a natural gas and oil exploration and production company with activities focused in Texas and the Gulf of Mexico.
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 16, 1996 By: /s/ A. E. Gallatin | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-16T13:13:26 |
0000700841-96-000006 | 0000700841-96-000006_0001.txt | <DESCRIPTION>CERT.OF AMEND.OF ART. OF INCORP.
RESOLVED that Article Fourth of the Articles of Incorporation of this Corporation be and it is hereby amended by deleting said Article Fourth in its entirety and in substitution inserting the following:
"FOURTH: (A) The aggregate number of shares which the Corporation shall have authority to issue shall be 45,000,000 shares of which 40,000,000 shares shall be Common Stock par value $.05 (five cents) per share and 5,000,000 shares shall be Preferred Stock par value $1.00 per share.
The Preferred Stock shall be divided into and from time to time may be issued in classes and in series within any class and the Board of Directors is hereby authorized to make such division into classes and series, to determine the number of shares of any such class or series, and to determine the designation, voting rights, preferences, limitations and special rights, if any, of the shares of each such class or series.
(B) On the effective date of this Amendment each share of the issued and outstanding Common Stock of the Corporation shall be and hereby is changed without further action into 0.20 shares of Common Stock of the Corporation provided that if such change results in a fractional share then the Corporation shall issue such additional fraction of a share as is necessary to increase the fractional share to a full share." | PRE 14A | EX-99 | 1996-01-16T00:00:00 | 1996-01-16T15:18:26 |
0000091155-96-000023 | 0000091155-96-000023_0000.txt | INVESTMENT COMPANY ACT OF 1940
SMITH BARNEY NATURAL RESOURCES FUND INC. (Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York, 10013 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code
Smith Barney Natural Resources Fund Inc. 388 Greenwich Street, New York, New York 10013 (Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as possible after this Post-Effective Amendment becomes effective.
It is proposed that this filing will become effective:
__X_ immediately upon filing pursuant to Rule 485(b) ____ on December 19, 1995 pursuant to Rule 485(b) ____ 60 days after filing pursuant to Rule 485(a) ___ on ____________ 1996 pursuant to Rule 485(a)
The Registrant has previously filed a declaration of registration of its shares pursuant to Rule 24f-2 under the Company Act of 1940, as amended. Registrant's Rule 24f-2 fiscal year ended October 31, 1995 was filed on December 29, 1995.
SMITH BARNEY NATURAL RESOURCES FUND INC.
Part A Item No. Prospectus Caption
1. Cover Page Cover Page
3. Financial Highlights Financial Highlights
4. General Description of Cover Page; Prospectus
5. Management of the Fund Management of the Fund; The
6. Capital Stock and Other Investment Objective and
7. Purchase of Securities Purchase of Shares; Valuation Being Offered of Shares; Redemption of
8. Redemption or Repurchase Redemption of Shares;
9. Legal Proceedings Not Applicable
Part B Item No. Statement of Additional
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and Distributor; Additional
13. Investment Objectives Investment Objective and
14. Management of the Fund Management of the Fund;
15. Control Persons and Management of the Fund
16. Investment Advisory and Management of the Fund;
17. Brokerage Allocation Investment Objective and
18. Capital Stock and other Purchase of Shares; Securities Redemption of Shares; Taxes
19. Purchase, Redemption and Purchase of Shares; Pricing of Securities Being Redemption of Shares; Offered Valuation of Shares; Exchange
22. Calculation of Performance Data
23. Financial Statement Financial Statements
SMITH BARNEY NATURAL RESOURCES FUND INC.
P R O S P E C T U S
Prospectus begins on page one
LOGO Smith Barney Mutual Funds Investing for your future. Every day.
New York, New York 10013
Smith Barney Natural Resources Fund Inc. (the "Fund") is a seeks long-term capital appreciation by investing primarily Resource Investments." Natural Resource Investments are debt securities of issuers which: (1) own or process natural precious metals, other minerals, water, timberland, and forest products; (2) own or produce sources of energy gas, coal, uranium, geothermal, oil shale and biomass; (3) exploration and development, transportation, distribution natural resources; (4) own or control oil, gas, or other or royalties; (5) provide related services or supplies, such servicing, chemicals, parts and equipment; (6) develop or gy-efficient technologies; and (7) are involved in the of raw commodities into intermediate products. The Fund may bullion and gold coins. A company is considered a Natural when it derives at least 50% of its total revenue from a described above.
This Prospectus sets forth concisely certain information including sales charges, distribution and service fees and spective investors will find helpful in making an investment ors are encouraged to read this Prospectus carefully and reference.
Additional information about the Fund is contained in a tional Information dated January 5, 1996, as amended or to time, that is available upon request and without charge ing the Fund at the telephone number or address set forth ing a Smith Barney Financial Consultant. The Statement of tion has been filed with the Securities and Exchange is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION A CRIMINAL OFFENSE.
No person has been authorized to give any information or representations in connection with this offering other than in this Prospectus and, if given or made, such other representations must not be relied upon as having been Fund or the distributor. This Prospectus does not constitute an offer by the Fund or the distributor to sell or a solicitation of an offer to buy any of the securities offered hereby in any jurisdiction to any is unlawful to make such offer or solicitation in such jurisdiction.
The following summary is qualified in its entirety by appearing elsewhere in this Prospectus and in the Statement Information. Cross references in this summary are to tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified ment company that seeks long-term capital appreciation by in Natural Resource Investments. Although the Fund invests ral Resource Investments, it may invest in companies not in resource area, gold bullion and gold coins, investment grade securities, U.S. Government securities and, for cash money market instruments. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several ("Classes") to investors designed to provide them with the selecting an investment best suited to their needs. The offered three classes of shares: Class A shares, Class B shares, which differ principally in terms of sales charges expenses to which they are subject. A fourth Class of is offered only to investors meeting an initial investment $5,000,000. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value sales charge of up to 5.00% and are subject to an annual of the average daily net assets of the Class. The initial reduced or waived for certain purchases. Purchases of Class when combined with current holdings of Class A shares charge equal or exceed $500,000 in the aggregate, will be value with no initial sales charge, but will be subject to a deferred sales charge ("CDSC") of 1.00% on redemptions made of purchase. See "Prospectus Summary--Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset maximum CDSC of 5.00% of redemption proceeds, declining by after the date of purchase to zero. This CDSC may be waived redemptions. Class B shares are subject to an annual service an annual distribution fee of 0.75% of the average daily net Class. The Class B shares' distribution fee may cause that higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will to Class A shares, based on relative net asset value, eight date of the original purchase. Upon conversion, these shares subject to an annual distribution fee. In addition, a B shares that have been acquired through the reinvestment of tributions ("Class B Dividend Shares") will be converted at "Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value sales charge. They are subject to an annual service fee of distribution fee of 0.75% of the average daily net assets of investors pay a CDSC of 1.00% if they redeem Class C shares purchase. The CDSC may be waived for certain redemptions. distribution fee may cause that Class to have higher dividends than Class A shares. Purchases of Class C shares, with current holdings of shares of the Fund equal or exceed aggregate, should be made in Class A shares at net asset charge, and will be subject to a CDSC of 1.00% on months of purchase.
Class Y Shares. Class Y shares are available only to initial investment minimum of $5,000,000. Class Y shares are value with no initial sales charge or CDSC. They are not or distribution fees.
In deciding which Class of Fund shares to purchase, the following factors, as well as any other relevant facts and circumstances:
Intended Holding Period. The decision as to which Class of beneficial to an investor depends on the amount and intended his or her investment. Shareholders who are planning to regular investment may wish to consider Class A shares; as accumulates shareholders may qualify for reduced sales are subject to lower ongoing expenses over the term of the alternative, Class B and Class C shares are sold without any charge so the entire purchase price is immediately invested investment return on these additional invested amounts may offset the higher annual expenses of these Classes. Because return cannot be predicted, however, there can be no be the case.
Finally, investors should consider the effect of the CDSC version rights of the Classes in the context of their own frame. For example, while Class C shares have a shorter CDSC B shares, they do not have a conversion feature, and an ongoing distribution fee. Thus, Class B shares may be Class C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase which are not subject to an initial sales charge, CDSC or tion fees. The maximum purchase amount for Class A shares is B shares is $249,999 and Class C shares is $499,999. There chase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales shares may be waived for certain eligible purchasers, and price will be immediately invested in the Fund. In addition, chases, which when combined with current holdings of Class A with a sales charge equal or exceed $500,000 in the aggregate, will be made at net asset value with no initial sales charge, but will be subject to a CDSC of 1.00% on redemptions made within 12 months of purchase. The investment may be met by adding the purchase to the net Class A shares offered with a sales charge held in funds Barney Inc. ("Smith Barney") listed under "Exchange purchases may also be eligible for a reduced initial sales "Purchase of Shares." Because the ongoing expenses of Class lower than those for Class B and Class C shares, purchasers chase Class A shares at net asset value or at a reduced consider doing so.
Smith Barney Financial Consultants may receive different selling the different Classes of shares. Investors should purpose of the CDSC on the Class B and Class C shares is the the initial sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for tion of the sales charges and service and distribution fees shares and "Valuation of Shares," "Dividends, Distributions change Privilege" for other differences between the Classes of shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to Smith Barney 401(k) Program, which is generally designed to ers or plan sponsors in the creation and operation of Section 401(a) of the Internal Revenue Code of 1986, as as well as other types of participant directed, tax- plans (collectively, "Participating Plans"). Class A, Class Class Y shares are available as investment alternatives for Plans. See "Purchase of Shares--Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Smith Barney, a broker that clears securities transactions on a fully disclosed basis (an "Introducing Broker") or an the selling group. Direct purchases by certain retirement through the Fund's transfer agent, First Data Investor Services Group, Inc. (the "Transfer Agent"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class an account by making an initial investment of at least or $250 for an individual retirement account ("IRA") or a ment Plan. Investors in Class Y shares may open an account investment of $5,000,000. Subsequent investments of at least for all Classes. For participants in retirement plans 403(b)(7) or Section 401(a) of the Code, the minimum initial requirement for Class A, Class B and Class C shares and the ment requirement for all Classes is $25. The minimum initial requirement for Class A, Class B and Class C shares and the ment requirement for all Classes through the Systematic described below is $50. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Plan under which they may authorize the automatic placement each month or quarter for Fund shares in an amount of at chase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the Exchange, Inc. ("NYSE") is open for business. See "Purchase demption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management wholly owned subsidiary of Smith Barney Holdings Inc. the Fund's investment manager. Holdings is a wholly owned ers Group Inc. ("Travelers"), a diversified financial engaged, through its subsidiaries, principally in four segments: Investment Services, Consumer Finance Services, ices and Property & Casualty Insurance Services.
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for Class of certain other Smith Barney Mutual Funds at the values next determined, plus any applicable sales charge change Privilege."
VALUATION OF SHARES Net asset value of the Fund for the quoted daily in the financial section of most newspapers and from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment tions of net realized capital gains, if any, are declared and paid annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class will be reinvested automatically, unless otherwise specified additional shares of the same Class at current net asset by dividend and distribution reinvestments will not be charge or CDSC. Class B shares acquired through dividend and vestments will become eligible for conversion to Class A shares on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS No assurance can be will achieve its investment objective. The Fund's investments may be subject to greater risk and market fluctuation than a fund that invests resenting a broader range of investment alternatives. prices of companies involved in natural resources industries volatile. The Fund's policy of investing in securities of presents certain risks not present in domestic investments. in medium- or low-rated securities and unrated securities of ty. Generally, these securities offer a higher current yield offered by higher-rated securities but involve greater risk of loss of income and principal, including the or bankruptcy of the issuers of such securities. Therefore, the Fund should not be considered as a complete investment be appropriate for all investors. See "Investment Objective icies."
THE FUND'S EXPENSES The following expense table lists the investor will incur either directly or indirectly as a based on the maximum sales charge or maximum CDSC that may time of purchase or redemption and, unless otherwise noted, operating expenses for its most recent fiscal year:
* Purchases of Class A shares, which when combined with Class A shares offered with a sales charge equal or aggregate, will be made at net asset value with no sales be subject to a CDSC of 1.00% on redemptions made within 12 months. ** Upon conversion of Class B shares to Class A shares, longer be subject to a distribution fee. Class C shares conversion feature and, therefore, are subject to an fee. As a result, long-term shareholders of Class C than the economic equivalent of the maximum front-end permitted by the National Association of Securities Dealers, Inc. *** For Class Y shares, "Other expenses" have been estimated incurred by the Class A shares because no Class Y shares as of October 31, 1995.
The sales charge and CDSC set forth in the above table are charges imposed on purchases or redemptions of Fund shares actually pay lower or no charges, depending on the amount case of Class B, Class C and certain Class A shares, the shares are held and whether the shares are held through the Program. See "Purchase of Shares" and "Redemption of receives an annual 12b-1 service fee of 0.25% of the value assets of Class A shares. Smith Barney also receives, with and Class C shares, an annual 12b-1 fee of 1.00% of the net assets of the respective Class, consisting of a 0.75% a 0.25% service fee. "Other expenses" in the above table for shareholder services, custodial fees, legal and costs and registration fees.
The following example is intended to assist an investor in various costs that an investor in the Fund will bear directly or indirectly. The example assumes payment by the Fund of operating expenses at the levels set forth in the table above. See "Purchase of Shares," "Management of the Fund."
* Ten-year figures assume conversion of Class B shares to the end of the eighth year following the date of purchase.
The example also provides a means for the investor to of funds with different fee structures over varying facilitate such comparison, all funds are required to return assumption. However, the Fund's actual return will greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE THOSE SHOWN.
The following information for the fiscal year October 31, by KPMG Peat Marwick LLP, independent auditors, whose report the Fund's Annual Report dated October 31, 1995. The the fiscal years ending October 31, 1987 through October 31, audited by Coopers & Lybrand L.L.P. The information set out read in conjunction with the financial statements and appear in the Fund's Annual Report, which is incorporated by Statement of Additional Information. No information is Shares since no Class Y Shares were outstanding for the periods shown.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
** Net investment loss before waiver of fees by investment investment adviser for the year ended October 31, 1993 ended October 31, 1987 was $(0.04) and $(0.10), respectively. *** Annualized expense ratio before waiver of fees by administrator was 2.28% and 1.86% for the year ended for the period ended October 31, 1987, respectively. # The per share amounts have been calculated using the method, which more appropriately presents per share data since use of the undistributed net investment income with results of operations. ++ The operating expense ratio excludes interest expense. expense ratio including interest expense was 2.18% for October 31, 1993.
(1) Includes realized gains and losses from foreign currency transactions.
(2) Due to new SEC disclosure guidelines, average calculated only for the current year and not for the prior periods.
* The Fund commenced operations on November 24, 1986. On the Fund commenced selling Class B shares. Those shares to November 6, 1992 were designated as Class A shares. ** Net investment loss before waiver of fees by investment investment adviser for the year ended October 31, 1993 ended October 31, 1987 was $(0.04) and $(0.10), respectively. *** Annualized expense ratio before waiver of fees by administrator was 2.28% and 1.86% for the year ended for the period ended October 31, 1987, respectively. + Annualized.
(1) Includes realized gains and losses from foreign currency transactions.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
(1) For the period from November 6, 1992 (inception date) to October 31, 1993.
(2) Includes realized gains and losses from foreign currency transactions.
(3) Due to new SEC disclosure guidelines, average calculated only for the current year and not for the prior periods.
++ Total return is not annualized, as it may not be return for the year.
Precious Metals and Minerals Fund Inc.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
(1) For the period from November 7, 1994 (inception date) to October 31, 1995.
(2) Includes realized gains and losses from foreign currency transactions.
(3) Due to new SEC disclosure guidelines, average calculated only for the current year and not for the prior periods.
++ Total return is not annualized, as it may not be total return for the year.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is to seek long-term tion by investing primarily in Natural Resource Investments. income is not a primary part of the Fund's investment objective may not be changed without approval of a majority standing shares. Because the securities in which the Fund risks not associated with more traditional investments, an Fund, by itself, should not be considered a balanced is no guarantee that the Fund will achieve its investment objective.
Under normal market conditions, the Fund will invest at assets in Natural Resource Investments. Up to 35% of the invested in companies not in the natural resources area, porate debt securities, U.S. Government securities and, for purposes, money market instruments. For temporary defensive may invest in excess of 35% in money market instruments.
The Fund may utilize up to 10% of its assets to purchase rities owned by the Fund and up to an additional 10% of its call options on securities the Fund may acquire in the purchase only put options that are traded on a regulated purchase and write put and call options on domestic and to hedge against risks of market-wide movements affecting assets invested in the country whose stocks are subject to the hedges.
The composition of the Fund's portfolio will vary tion of SBMFM of how best to achieve long-term capital securities in which the Fund may invest include common stocks, convertible securities and warrants. Debt securities acquire include bonds, notes and debentures of companies and Fund may invest in debt securities when SBMFM believes they Fund's ability to achieve long-term capital appreciation. in fixed-income securities that are rated as low as B by Service, Inc. ("Moody's") or Standard & Poor's Corporation unrated, are deemed by SBMFM to be of comparable quality. er-rated securities in which the Fund may invest, some of tive characteristics, may be subject to greater market risk of loss of income or principal than higher-rated Factors and Special Considerations" below. A description of and commercial paper rating systems of Moody's and S&P is Statement of Additional Information.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Because issuers of Natural Resource Investments often are the United States, a significant portion of the Fund's of securities of foreign issuers. The percentage of assets ular countries or regions will change from time to time in judgment of the Fund's investment manager, which may be things, consideration of the political stability and countries or regions.
RISK FACTORS AND SPECIAL CONSIDERATIONS
The Fund intends to invest at least 65% of its assets in Investments. As a result of this concentration policy, which policy of the Fund, the Fund's investments may be subject to market fluctuation than a fund that invests in securities broader range of investment alternatives. Historically, nies involved in natural resource-related industries have been volatile.
Foreign Securities. The Fund's policy of investing in issuers also presents certain risks not present in domestic risks include those resulting from fluctuations in currency revaluation of currencies, political and economic ble imposition of currency exchange blockages or other laws or restrictions, reduced availability of public issuers, and the fact that foreign companies are not form accounting, auditing and financial reporting standards latory practices and requirements comparable to those companies. Economic, political and social conditions tries may have a significant effect on the success of the securities of many foreign companies may be less liquid and volatile that those of securities of comparable domestic tion, the possibility exists in certain foreign countries of nationalization, confiscatory taxation and limitations on of funds or other assets of the Fund, including the withholding of dividends. Investment in foreign securities also may result in higher cost of converting foreign currency to U.S. dollars, eign custody, the payment of fixed brokerage commissions on which generally are higher than commissions on domestic imposition of transfer taxes or transaction charges exchanges.
Because the Fund may invest in securities denominated or cies other than the U.S. dollar, changes in foreign currency
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
affect the value of securities in the Fund and the depreciation of investments. To protect against uncertainty in exchange rates, the Fund may enter into forward currency tions. Foreign securities may be subject to foreign could reduce the yield on such securities.
Lower-Rated Securities. The Fund may invest in medium- or securities and unrated securities of comparable quality. securities offer a higher current yield than the yield securities but involve greater volatility of price and risk and principal, including the probability of default by or issuers of such securities. Medium- and low-rated and rities (a) will likely have some quality and protective in the judgment of the rating organization, are outweighed ties or major risk exposures to adverse conditions and (b) speculative with respect to the issuer's capacity to pay principal in accordance with the terms of the obligation. possible that these types of factors could, in certain value of securities held by the Fund, with a commensurate of the Fund's shares. Therefore, an investment in the Fund sidered as a complete investment program and may not be investors.
While the market values of medium- and lower-rated unrated securities tend to react less to fluctuations in than do those of higher-rated securities, the market values these securities also tend to be more sensitive to opments and changes in economic conditions than higher-rated addition, medium- and lower-rated securities and comparable generally present a higher degree of credit risk. Issuers of er-rated securities and comparable unrated securities are leveraged and may not have more traditional methods of them so that their ability to service their debt obligations nomic downturn or during sustained periods of rising impaired. The risk of loss due to default by such issuers is greater because medium- and lower-rated securities and securities generally are unsecured and frequently are prior payment of senior indebtedness. The Fund may incur to the extent that it is required to seek recovery upon a ment of principal or interest on its portfolio holdings. In kets in which medium- and lower-rated or comparable unrated traded generally are more limited than those in which
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
higher-rated securities are traded. The existence of limited securities may restrict the availability of securities for chase and also may have the effect of limiting the ability of the Fund to (a) obtain accurate market quotations for purposes of valuing culating net asset value and (b) sell securities at their meet redemption requests or to respond to changes in the cial markets. The market for some medium- and lower-rated unrated securities is relatively new and has not fully nomic recession. Any such economic downturn could adversely of the issuers of such securities to repay principal and pay interest thereon.
Fixed-income securities, including medium- and lower-rated unrated securities, frequently have call or buy-back their issuers to call or repurchase the securities from the Fund. If an issuer exercises these rights during periods interest rates, the Fund may have to replace the security ing security, resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P have acteristics with respect to capacity to pay interest and repay principal. Securities which are rated B generally lack characteristics investment and assurance of interest and principal payments period of time may be small.
In light of these risks, SBMFM, in evaluating the issuer, whether rated or unrated, will take various factors tion, which may include, as applicable, the issuer's sensitivity to economic conditions and trends, the operating the community support for the facility financed by the the issuer's management and regulatory matters.
Money Market Instruments. The Fund may hold up to 20% of assets in cash and invest in short-term instruments, and it short-term instruments without limitation when SBMFM appropriate to maintain a temporary defensive posture. Short- in which the Fund may invest include: (a) obligations issued to principal and interest by the United States government, instrumentalities ("U.S. government securities") (including ments with respect to such securities); (b) bank obligations
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
time deposits and bankers' acceptances of domestic or savings and loan associations and similar institutions); (c) securities and other instruments denominated in U.S. dollars national development agencies, banks and other financial ments and their agencies or instrumentalities and countries that are members of the Organization for Foreign Development; and (d) commercial paper rated no lower than A- 2 by S&P or Prime- 2 by Moody's or the equivalent from another major rating unrated, of an issuer having an outstanding, unsecured debt within the three highest rating categories.
U.S. Government Securities. U.S. government securities in invest include: direct obligations of the United States issued by U.S. government agencies and instrumentalities, ments that are supported by the full faith and credit of the instruments that are supported by the right of the issuer to United States Treasury; and instruments that are supported credit of the instrumentality.
Up to 15% of the assets of the Fund may be invested in tractual or other restrictions on resale and other readily marketable, including (a) repurchase agreements with greater than seven days, (b) time deposits maturing in more dar days and (c) new and early stage companies whose licly traded. In addition, the Fund may invest up to 5% of rants and up to 5% of its assets in the securities of or through a parent or affiliated company have been in for less than three years. The Fund also may borrow for purposes, but not for leveraging purposes, in an amount up to 10% of its total assets, and may pledge its assets in connection with such these borrowings exceed 5% of the value of the Fund's total will not make any additional investments. Except for the rowing, the investment guidelines set forth in this at any time without shareholder consent by vote of the Board complete list of investment restrictions that the Fund has restrictions that cannot be changed without the approval of the Fund's outstanding shares is contained in the Statement Information.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
In attempting to achieve its investment objective, the others, the following portfolio strategies:
Repurchase Agreements. The Fund may engage in repurchase tions on U.S. government securities with banks which are the ments acceptable for purchase by the Fund and with certain eral Reserve Bank of New York's list of reporting dealers. Under the terms of a typical repurchase agreement, the Fund would acquire an tion for a relatively short period (usually not more than an obligation of the seller to repurchase, and the Fund to tion at an agreed-upon price and time, thereby determining Fund's holding period. This arrangement results in a fixed is not subject to market fluctuations during the Fund's value of the underlying securities will be monitored on an SBMFM to ensure that the value is at least equal at all amount of the repurchase obligation, including interest. could involve certain risks in the event of default or party, including possible delays or restrictions upon the dispose of the underlying securities, the risk of a possible value of the underlying securities during the period in which the Fund seeks to assert its rights to them, the risk of incurring expenses asserting those rights and the risk of losing all or part of the agreement. SBMFM, acting under the supervision of the reviews the value of the collateral and the creditworthiness and dealers with which the Fund enters into repurchase evaluate potential risks.
Lending of Portfolio Securities. The Fund has the ability from its portfolio to unaffiliated brokers, dealers and zations. Such loans, if and when made, may not exceed 20% of assets, taken at value. Loans of portfolio securities by the lateralized by cash, letters of credit or U.S. government maintained at all times in an amount equal to at least 100% ket value (determined by marking to market daily) of the risks in lending portfolio securities, as with other credit, consist of possible delays in receiving additional recovery of the securities or possible loss of rights in the the borrower fail financially. Loans will be made to firms be of good standing and will not be made unless, in the consideration to be earned from such loans would justify the risk.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Short Sales Against the Box. The Fund may make short if, at all times when a short position is open, the Fund owns preferred stock or debt securities convertible or payment of further consideration, into the shares of common stock sold short. Short sales of this kind are referred to as short sales broker-dealer that executes a short sale generally invests the sale until they are paid to the Fund. Arrangements may broker-dealer to obtain a portion of the interest earned by investment of short sale proceeds. The Fund will segregate convertible or exchangeable preferred stock or debt account with its custodian; not more than 10% of the Fund's at current value) may be held as collateral for such sales at any one time. The extent to which the Fund may make short sales of common ited by the requirements contained in the Code, for lated investment company. See "Dividends, Distributions and Taxes."
Purchasing Put and Call Options on Securities. The Fund 10% of its assets to purchase put options on securities owned by the Fund and up to an additional 10% of its assets to purchase call which the Fund may acquire in the future. The Fund may options that are traded on a regulated exchange. By buying a limits its risk of loss from a decline in the market value until the put expires. Any appreciation in the value of the ty, however, will be partially offset by the amount of the the put option and any related transaction costs. The Fund options on a security it intends to purchase in the future tional cost that would result from a substantial increase in of the security. Prior to their expiration, put and call in closing sale transactions (sales by the Fund, prior to options it has purchased, of options of the same series), from the sale will depend on whether the amount received is the premium paid for the option plus the related transaction costs.
Stock Index Options. The Fund may purchase and write put domestic and foreign stock indexes to hedge against risks of movements affecting that portion of its assets invested in stocks are subject to the hedge. A stock index measures the tain group of stocks by assigning relative values to the included in the index. Examples of domestic stock indexes Poor's 500 Stock Index and the New York Stock Exchange
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
and examples of foreign stock indexes are the Canadian (Montreal Stock Exchange), the Financial Times--Stock tional Stock Exchange) and the Toronto Stock Exchange Stock Exchange). Options on stock indexes are similar to ties. Because no underlying security can be delivered, represents the holder's right to obtain from the writer, in tiple of the amount by which the exercise price exceeds (in the case of a put) or is less than (in the case of a call) the closing value of index on the exercise date. Options on foreign stock indexes options on domestic stock indexes. Like domestic stock index stock index options are subject to position and exercise ulations imposed by the exchange on which they are traded. stock index options, foreign stock index options carry risks investing in foreign securities, as described above. The stock index options to hedge against the risk of market-wide depend on the extent of diversification of the Fund's stock the sensitivity of its stock investments to factors index. The effectiveness of purchasing or writing stock hedging technique will depend upon the extent to which price Fund's securities investments correlate with price movements index selected. In addition, successful use by the Fund of subject to the ability of SBMFM to predict correctly tion of the underlying index.
When the Fund writes an option on a stock index, it will gated account with Morgan Guaranty Trust Company of New York ty"), the Fund's custodian, or with a foreign subcustodian will deposit cash or cash equivalents or a combination of equal to the market value of the option, and will maintain the option is open.
Gold Futures Contracts and Related Options. If SBMFM advantageous to do so, the Fund may, for hedging purposes, as initial margin and premiums on futures contracts and tracts. The Fund may enter into futures contracts for the gold, purchase put and call options on those futures options on those futures contracts. Use of these strategies defense against a decline in the value of the Fund's assets anticipated price weakness. The Fund will only enter into that are traded on a regulated domestic or foreign will purchase or write options on gold futures only on a
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
exchange approved for such purpose by the Commodities sion (the "CFTC"). Currently, gold futures and options marily on the Commodity Exchange of New York ("COMEX"), the Exchange and the Chicago Board of Trade; the Fund expects to related options primarily on COMEX. When the Fund enters options positions (futures contracts to purchase gold and chased or put options written by the Fund), an amount of lents equal to the underlying commodities value of the ited and maintained in a segregated account with the Fund's collateralize the positions, thereby insuring that the use unleveraged.
A gold futures contract provides for the future sale by purchase by the other party of a certain amount of gold at a date, time and place. The Fund may enter into futures when SBMFM believes that the value of its gold and gold- decrease. The Fund may enter into futures contracts to anticipates purchasing gold or gold-related securities and will rise before the purchases will be made. The use of gold as a hedging device involves several risks. There can be no there will be a correlation between price movements in the futures contracts, on the one hand, and price movements in subject of the hedge, on the other hand. Positions in gold and related options may be closed out only through an contract or option was entered into and there can be no active market will exist for a particular contract at any particular time. Losses incurred in hedging transactions and the costs of will affect the Fund's performance.
An option on a gold futures contract, as contrasted with ment in such a contract, gives the purchaser the right, in mium paid, to assume a position in a gold futures contract cise price at any time prior to the expiration date of the cise of an option, the delivery of the futures position by option to the holder of the option will be accompanied by mulated balance in the writer's futures margin account, amount by which the market price of the futures contract of a call, or is less than, in the case of a put, the option on the futures contract. The potential loss related an option on futures contracts is limited to the premium
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
and there are no daily cash payments to reflect changes in underlying contract. The value of the option, however, does that change would be reflected in the net asset value of the Fund.
Currency Exchange Transactions. The Fund may engage in transactions in order to protect against uncertainty in the exchange rates. The Fund will conduct its currency exchange either on a spot (i.e., cash) basis at the rate prevailing exchange market, or through entering into forward contracts sell currencies. The Fund's dealings in forward currency limited to hedging involving either specific transactions or tions. In hedging specific portfolio positions, the Fund may ward currency contract with respect to either the currency tions are denominated or another currency deemed appropriate ward currency contract involves an obligation to purchase or currency at a future date, which may be any fixed number of of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into in the interbank directly between currency traders (usually large commercial customers. Although such transactions are intended to loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result such currency increase. To assure that the Fund's forward are not used to achieve investment leverage, the Fund will custodian or subcustodians cash or readily marketable at all times equal to or exceeding the Fund's commitment contracts.
Securities of Developing Countries. A developing country sidered to be a country that is in the initial stages of its cycle. Investing in the equity and fixed-income markets of tries involves exposure to economic structures that are and mature, and to political systems that can be expected to ity, than those of developed countries. Historical the markets of developing countries have been more volatile of the more mature economies of developed countries; often have provided higher rates of return to investors.
The Fund's net asset value per share is determined as of trading on the NYSE on each day that the NYSE is open for the value of the Fund's net assets attributable to each Class by the total num- ber of shares of the Class outstanding.
Generally, the Fund's investments are valued at market absence of a market value with respect to any securities, at determined by or under the direction of the Board of is primarily traded on a domestic or foreign exchange is sale price on that exchange or, if there were no sales during the day, at the mean between the bid and ask price. Portfolio securities traded on foreign exchanges are generally valued at the ues of such securities on their respective exchanges, except occurrence subsequent to the time a value was so established changed the value, then the fair value of those securities by consideration of other factors by or under the direction Directors or its delegates. Over-the-counter securities and or traded on certain foreign exchanges whose operations are United States over-the-counter market for which no sale was date are valued at the mean between the bid and ask price. ally valued at the last sale price or, in the absence of a last offer price. Investments in U.S. government securities term securities) are valued at the average of the quoted bid in the over-the-counter market. Short-term investments that or less are valued at amortized cost whenever the Board of that amortized cost reflects fair value of those valuation involves valuing an instrument at its cost assuming a constant amortization to maturity of any discount regardless of the effect of fluctuating interest rates on the instrument. Further information regarding the Fund's contained in the Statement of Additional Information.
The Fund's policy is to distribute its investment income other than its net realized capital gains) and net realized any, once a year, normally at the end of the year in which beginning of the next year.
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If a shareholder does not otherwise instruct, dividends distributions will be reinvested automatically in additional Class at net asset value, subject to no sales charge or CDSC. In order to avoid the application of a 4% nondeductible excise tax on certain amounts of ordinary income and capital gains, the Fund may distribution shortly before December 31 in each year of any nary income or capital gains and expects to pay any distributions necessary to avoid the application of this tax.
The per share dividends on Class B and Class C shares of lower than the per share dividends on Class A and Class Y a result of the distribution fee applicable with respect to Class B and Class C shares. The per share dividends on Class A shares of the Fund may be lower than the per share dividends on Class Y shares principally as a ice fee applicable to Class A shares. Distributions of will be in the same amount for Class A, Class B, Class C and Class Y shares.
The Fund has qualified and intends to continue to qualify each year as a reg- ulated investment company under Subchapter M of the Code. net investment income and distributions of net realized gains are taxable to shareholders as ordinary income, shareholders have held their Fund shares and whether such butions are received in cash or reinvested in additional tions of net realized long-term capital gains will be as long-term capital gains, regardless of how long shares and whether such distributions are received in cash additional Fund shares. Furthermore, as a general rule, a loss on a sale or redemption of Fund shares will be a long- loss if the shareholder has held the shares for more than one year and will be a short-term capital gain or loss if the shareholder has one year or less. Some of the Fund's dividends declared from income may qualify for the Federal dividends-received tions.
Dividends or other income received by the Fund may be and other taxes imposed by foreign countries. Tax countries and the United States may reduce or eliminate such holders may be entitled to claim a credit or deduction for in calculating their United States income tax, subject to certain limitations. If eligible, the Fund will determine whether to make an
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
foreign withholding or other taxes paid by it as paid by its determining whether to make this election, the Fund will tion such factors as the amount of foreign taxes paid and costs associated with making the election. If the election ers of the Fund would be required to include their of such foreign taxes in computing their taxable income and ally be entitled to credit such amounts against their United taxes due, if any, or to include such amounts in their any. For any year for which it makes such an election, the its shareholders (shortly after the close of its fiscal share of such foreign taxes that must be included in the income and will be available as a credit or deduction. taxes incurred by the Fund for the fiscal year ended October immaterial, no election was made.
Statements as to the tax status of each shareholder's tions are mailed annually. Each shareholder will also various written notices after the close of the Fund's prior the Federal income tax status of his or her dividends and were received from the Fund during the Fund's prior taxable should consult their tax advisors regarding specific questions as to the Fed- eral and local tax consequences of investing in the Fund.
The Fund offers four Classes of shares. Class A shares are with an initial sales charge and Class B and Class C shares initial sales charge but are subject to a CDSC payable upon tions. Class Y shares are sold without an initial sales charge or a CDSC and are available only to investors investing a minimum of spectus Summary--Alternative Purchase Arrangements" for a to consider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage with Smith Barney, an Introducing Broker or an investment group, except for investors purchasing shares of the Fund retirement plan who may do so directly through the Transfer chasing shares of the Fund, investors must specify whether for Class A, Class B, Class C or Class Y shares. No charged by the Fund in connection with a brokerage account investor purchases or holds shares.
Investors in Class A, Class B and Class C shares may open ing an initial investment of at least $1,000 for each account, or $250 for an IRA or a Self-Employed Retirement Plan in the Fund. shares may open an account by making an initial investment sequent investments of at least $50 may be made for all pants in retirement plans qualified under Section 403(b)(7) of the Code, the minimum initial investment requirement for Class C shares and the subsequent investment requirement for the Fund is $25. For the Fund's Systematic Investment Plan, tial investment requirement for Class A, Class B and Class C subsequent investment requirement for all Classes is $50. investment requirements for Class A shares for employees of subsidiaries, including Smith Barney, Directors of the Fund and children. The Fund reserves the right to waive or change decline any order to purchase its shares and to suspend the from time to time. Shares purchased will be held in the by the Fund's Transfer Agent. Share certificates are issued holder's written request to the Transfer Agent.
Purchase orders received by the Fund or Smith Barney prior regular trading on the NYSE on any day the Fund calculates are priced according to the net asset value determined on received by dealers or Introducing Brokers prior to the ing on the NYSE on any day the Fund calculates its net asset according to the net asset value determined on that day, received by the Fund or Smith Barney prior to Smith Barney's (the "trade date"). Payment for Fund shares is due on the after the trade date (the "settlement date").
Shareholders may make additions to their accounts at any shares through a service known as the Systematic Investment Systematic Investment Plan, Smith Barney or the Transfer through preauthorized transfers of $50 or more to charge the account or other financial institution indicated by the monthly or quarterly basis to provide systematic additions
Fund account. A shareholder who has insufficient funds to fer will be charged a fee of up to $25 by Smith Barney or the Transfer Agent. The Systematic Investment Plan also authorizes Smith Barney in the shareholder's Smith Barney brokerage account or er's shares of a Smith Barney money market fund to make account. Additional information is available from the Fund Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are as follows:
* Purchases of Class A shares, which when combined with Class A shares offered with a sales charge equal or exceed aggregate, will be made at net asset value without any but will be subject to a CDSC of 1.00% on redemptions made of purchase. The CDSC on Class A shares is payable to compensates Smith Barney Financial Consultants and other clients make purchases of $500,000 or more. The CDSC is circumstances in which the CDSC applicable to Class B and waived. See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the may be deemed to be underwriters of the Fund as defined in of 1933, as amended.
The reduced sales charges shown above apply to the Class A shares of the Fund made at one time by "any person," individual, his or her spouse and children, or a trustee or a single trust estate or single fiduciary account. The minimums may also be met by aggregating the purchase with of all Class A shares held in funds sponsored by Smith with a sales charge listed under "Exchange Privilege."
Purchases of Class A shares may be made at net asset value charge in the following circumstances: (a) sales of Class A tors of the Fund and employees of Travelers and its members of the National Association of Securities Dealers, spouses and children of such persons (including the deceased Director or employee, and retired Directors or to any trust, pension, profit-sharing or other benefit plan provided such sales are made upon the assurance of the chase is made for investment purposes and that the securities will not be re- sold except through redemption or repurchase; (b) offers of any other investment company in connection with the pany with the Fund by merger, acquisition of assets or chases of Class A shares by any client of a newly employed cial Consultant (for a period up to 90 days from the Financial Consultant's employment with Smith Barney), on the purchase of Class A shares is made with the proceeds of the of a mutual fund which (i) was sponsored by the Financial employer, (ii) was sold to the client by the Financial subject to a sales charge; (d) shareholders who have redeemed Class A shares in the Fund (or Class A shares of another fund of the Smith that are offered with a sales charge equal to or greater charge of the Fund) and who wish to reinvest their Fund, provided the reinvestment is made within 60 calendar redemption; and (e) accounts managed by registered subsidiaries of Travelers. In order to obtain such provide sufficient information at the time of purchase to that the purchase would qualify for the elimination of the sales charge.
Class A shares of the Fund may be purchased by "any above) at a reduced sales charge or at net asset value ing the dollar amount of the new purchase and the total net Class A shares of the Fund and of funds sponsored by Smith offered with a sales charge listed under "Exchange such person and applying the sales charge applicable to such order to obtain such discount, the purchaser must provide tion at the time of purchase to permit verification that the fies for the reduced sales charge. The right of accumulation modification or discontinuance at any time with respect to chased thereafter.
Upon completion of certain automated systems, a reduced chase at net asset value will also be available to employees same employer purchasing as a group, provided each mum initial investment required. The sales charge applicable each member of such a group will be determined by the table under "Initial Sales Charge Alternative--Class A Shares," upon the aggregate sales of Class A shares of Smith Barney with a sales charge to, and share holdings of, all members of the group. To be eligible for such reduced sales charges or to purchase at purchases must be pursuant to an employer- or partnership- ing certain requirements. One such requirement is that the plan must be open to specified partners or employees of the employer and its subsidiaries, if any. Such plan may, but is not required to, provide for payroll investments pursuant to retirement plans under Sections 401 or 408 of the Code. Smith Barney may also offer a reduced sales charge or net for aggregating related fiduciary accounts under such Barney will realize economies of sales efforts and sales individual who is a member of a qualified group may also shares at the reduced sales charge applicable to the group sales charge is based upon the aggregate dollar value of with a sales charge that have been previously purchased and the group, plus the amount of the current purchase. A which (a) has been in existence for more than six months, other than acquiring Fund shares at a discount and (c) ria which enable Smith Barney to realize economies of scale distributing shares. A qualified group must have more than available to arrange for group meetings between representatives of the Fund and the members, and must agree to include sales and other Fund in its publications and mailings to members at no cost order to obtain such reduced sales charge or to purchase at the purchaser must provide sufficient information at the permit verification that the purchase qualifies for the reduced sales charge. Approval of group purchase reduced sales charge plans is tion of Smith Barney.
Class A Shares. A Letter of Intent for amounts of $50,000 opportunity for an investor to obtain a reduced sales charge investments over a 13 month period, provided that the Letter when placing orders. For purposes of a Letter of Investment" as referred to in the preceding sales charge includes (i) all Class A shares of the Fund and other Smith Funds offered with a sales charge acquired during the term (ii) the value of all Class A shares previously purchased and still owned. Each investment made during the period receives the reduced applicable to the total amount of the investment goal. If achieved within the period, the investor must pay the sales charges applicable to the purchases made and the or an appropriate number of escrowed shares will be redeemed. The term of the Letter will commence upon the date the Letter is signed, or the investor, up to 90 days before such date. Please contact Financial Consultant or the Transfer Agent to obtain a application.
Class Y Shares. A Letter of Intent may also be used as a to meet the minimum investment requirement for Class Y must make an initial minimum purchase of $1,000,000 in Class Fund and agree to purchase a total of $5,000,000 of Class Y within 6 months from the date of the Letter. If a total $5,000,000 is not made within the six month period, all chased to date will be transferred to Class A shares, where ject to all fees (including a service fee of 0.25%) and the Fund's Class A shares, which may include a CDSC of the Transfer Agent or a Smith Barney Financial Consultant tion.
"CDSC Shares" are sold at net asset value next determined sales charge so that the full amount of an investor's immediately invested in the Fund. A CDSC, however, may be redemptions of these shares. "CDSC Shares" are: (a) Class B C shares; and (c) Class A shares, which when combined with offered with a sales charge currently held by an investor, $500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to original cost of the shares being redeemed or their net time of redemption. CDSC Shares that are redeemed will not CDSC to the extent that the value of such shares represents: appreciation of Fund assets; (b) reinvestment of dividends distributions; (c) with respect to Class B shares, shares five years after their purchase; or (d) with respect to Class A shares that are CDSC Shares, shares redeemed more their purchase.
Class C shares and Class A shares that are CDSC Shares are 1.00% CDSC if redeemed within 12 months of purchase. In the CDSC is imposed on Class B shares, the amount of the the number of years since the shareholder made the purchase the amount is being redeemed. Solely for purposes of years since a purchase payment, all purchase payments made be aggregated and deemed to have been made on the last day Smith Barney statement month. The following table sets forth charge for redemptions of Class B shares by shareholders, of purchases by Participating Plans, as described below. See Shares--Smith Barney 401(k) Program."
Class B shares will convert automatically to Class A after the date on which they were purchased and thereafter subject to any distribution fee. There also will be such proportion of Class B Dividend Shares owned by the total number of his or her Class B shares converting at the total number of Class B shares (other than Class B Dividend the shareholder. Shareholders who held Class B shares of Short-Term World Income Fund (the "Short-Term World Income 1994 and who subsequently exchanged those shares for Class B Fund will be offered the opportunity to exchange all such Class A shares of the Fund four years after the date on were deemed to have been purchased. Holders of such Class B notified of the pending exchange in writing approximately 30 fourth anniversary of the purchase date and, unless the rejected in writing, the exchange will occur on or about the sary date. See "Prospectus Summary--Alternative Purchase Shares Conversion Feature."
The length of time that CDSC Shares acquired through an held will be calculated from the date that the shares acquired in one of the other applicable Smith Barney Mutual shares being redeemed will be considered to represent, as appreciation or dividend and capital gains distribution other funds. For Federal income tax purposes, the amount of reduce the gain or increase the loss, as the case may be, on ized on redemption. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10 per share for a cost of $1,000. Subsequently, the investor tional shares through dividend reinvestment. During the the purchase, the investor decided to redeem $500 of his or her investment. Assuming at the time of the redemption the net asset value $12 per share, the value of the investor's shares would be at $12 per share). The CDSC would not be applied to the appreciation ($200) and the value of the reinvested dividend shares ($60). Therefore, $240 of the $500 redemption proceeds ($500 minus charged at a rate of 4.00% (the applicable rate for Class B deferred sales charge of $9.60.
The CDSC will be waived on: (a) exchanges (see "Exchange tomatic cash withdrawals in amounts equal to or less than the value of the shareholder's shares at the time the (see "Automatic Cash Withdrawal Plan") (provided, however, withdrawals in amounts equal to or less than 2.00% per month the shareholder's shares will be permitted for withdrawal established prior to November 7, 1994); (c) redemptions of months following the death or disability of the shareholder; shares made in connection with qualified distributions from IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions of shares in connection with a combination of investment company by merger, acquisition of assets or a shareholder who has redeemed shares from other funds of Mutual Funds may, under certain circumstances, reinvest all redemption proceeds within 60 days and receive pro rata imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by case of shareholders who are also Smith Barney clients or by in the case of all other shareholders) of the shareholder's as the case may be.
Investors may be eligible to participate in the Smith which is generally designed to assist plan sponsors in the tion of retirement plans under Section 401(a) of the Code. cable, the same terms and conditions are offered to all the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class Y shares as investment alternatives under the Smith Barney A, Class B and Class C shares acquired through the Smith are subject to the same service and/or distribution fees as, sales charge and CDSC schedules than, the Class A, Class B acquired by other investors. Similar to those available to Class Y shares acquired through the Smith Barney 401(k) to any initial sales charge, CDSC or service or distribution ticipating Plan has made an initial investment in the Fund, quent investments in the Fund must be in the same Class of otherwise described below.
Class A Shares. Class A shares of the Fund are offered sales charge to any Participating Plan that purchases from $4,999,999 of Class A shares of one or more funds of the Funds. Class A shares acquired through the Smith Barney November 7, 1994 are subject to a CDSC of 1.00% of Participating Plan terminates within four years of the date Plan first enrolled in the Smith Barney 401(k) Program.
Class B Shares. Class B shares of the Fund are offered to Plan that purchases less than $250,000 of one or more funds Mutual Funds. Class B shares acquired through the Smith are subject to a CDSC of 3.00% of redemption proceeds, if Plan terminates within eight years of the date the enrolled in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled Barney 401(k) Program, it will be offered the opportunity to its Class B shares for Class A shares of the Fund. Such of the pending exchange in writing approximately 60 days anniversary of the enrollment date and, unless the exchange in writing, the exchange will occur on or about the eighth anniversary date. Once the exchange has occurred, a Participating Plan will acquire additional Class B shares of the Fund but instead shares of the Fund. If the Participating Plan elects not to Class B shares at that time, each Class B share held by the will have the same conversion feature as Class B shares held ors. See "Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of the Fund are offered to Plan that purchases from $250,000 to $499,999 of one or more Barney Mutual Funds. Class C shares acquired through the Program after November 7, 1994 will be subject to a CDSC of proceeds, if the Participating Plan terminates within four the Participating Plan first enrolled in the Smith Barney any year after the date a Participating Plan enrolled in the 401(k) Program, if its total Class C holdings equal at least calendar year-end, the Participating Plan will be offered exchange all of its Class C shares for Class A shares of the will be notified in writing within 30 days after the last calendar year, and unless the exchange offer has been exchange will occur on or about the last business day of the following March. Once the exchange has occurred, a Participating Plan will acquire Class C shares of the Fund but instead may acquire the Fund. Class C shares not converted will continue to be tribution fee.
Class Y Shares. Class Y shares of the Fund are offered distribution fee, sales charge or CDSC to any Participating $5,000,000 or more of Class Y shares of one or more funds of Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the asset value of the shares redeemed does not exceed the of the shares purchased through reinvestment of dividends or tributions, plus (a) with respect to Class A and Class C net asset value of such shares purchased more than one year redemption and, with respect to Class B shares, the current Class B shares purchased more than eight years prior to the (b) with respect to Class A and Class C shares, increases in value of the shareholder's Class A or Class C shares above ments made during the preceding year and, with respect to increases in the net asset value of the shareholder's Class purchase payments made during the preceding eight years. CDSC applies to a Participating Plan depends on the number Participating Plan first became enrolled in the Smith Barney unlike the applicability of the CDSC to other shareholders, the number of years since those shareholders made the which the amount is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in lump-sum or other distributions made by a Participating Plan as a result of: (a) the retirement of an employee in the Participating Plan; tion of employment of an employee in the Participating Plan; disability of an employee in the Participating Plan; (d) the 59 1/2 by an employee in the Participating Plan; (e) in the Participating Plan to the extent permitted under Code; or (f) redemptions of shares in connection with a loan ticipating Plan to an employee.
Participating Plans wishing to acquire shares of the Fund Barney 401(k) Program must purchase such shares directly Agent. For further information regarding the Smith Barney investors should contact a Smith Barney Financial Consultant.
Except as otherwise noted below, shares of each Class may the net asset value next determined for shares of the same lowing funds of the Smith Barney Mutual Funds, to the extent offered for sale in the shareholder's state of residence. A, Class B and Class C shares are subject to minimum and all shares are subject to the other requirements of the exchanges are made and a sales charge differential may apply.
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Funds, Inc.--Utility Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
**Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
*Smith Barney Funds, Inc.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government
++Smith Barney Funds, Inc.--Short-Term U.S. Treasury
Smith Barney Funds, Inc.--U.S. Government Securities
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney California Municipals Fund Inc.
*Smith Barney Intermediate Maturity California Municipals
*Smith Barney Intermediate Maturity New York Municipals
*Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
*Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond
Smith Barney World Funds, Inc.--International Balanced
Smith Barney World Funds, Inc.--International Equity
Smith Barney World Funds, Inc.--Pacific Portfolio
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
**Smith Barney Money Funds, Inc.--Retirement Portfolio
++Smith Barney Municipal Money Market Fund, Inc.
++Smith Barney Muni Funds--California Money Market
++Smith Barney Muni Funds--New York Money Market Portfolio *Available for exchange with Class A, Class C and Class Y shares of the Fund. **Available for exchange with Class A shares of the Fund. +Available for exchange with Class B and Class C shares of the Fund. ++Available for exchange with Class A and Class Y shares of the Fund.
Class A Exchanges. Class A shares of the Smith Barney out a sales charge or with a maximum sales charge of less charged by other Smith Barney Mutual Funds will be subject "sales charge differential" upon the exchange of such shares of a fund sold with a higher sales charge. The "sales charge limited to a percentage rate no greater than the excess of rate applicable to purchases of shares of the mutual fund exchange over the sales charge rate(s) actually paid on the relinquished in the exchange and on any predecessor of those poses of the exchange privilege, shares obtained through of dividends and capital gains distributions, are treated as same sales charges applicable to the shares on which the tions were paid; however, except in the case of the Smith gram, if no sales charge was imposed upon the initial shares obtained through automatic reinvestment will be charge differential upon exchange.
Class B Exchanges. In the event a Class B shareholder holder was a Class B shareholder of the Short-Term World 15, 1994) wishes to exchange all or a portion of his or her the funds imposing a higher CDSC than that imposed by the Class B shares will be subject to the higher applicable the new Class B shares will be deemed to have been purchased as the Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed to have been purchased on the same date as the Class C shares of the Fund that have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who or a portion of their Class Y shares for Class Y shares in identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. exchange privilege is an important benefit, excessive be detrimental to the Fund's performance and its mine that a pattern of frequent exchanges is excessive and interest of the Fund's other shareholders. In this event, Smith Barney that the Fund may, at its discretion, decide to purchases and/or exchanges by a shareholder. Upon such a Fund will provide notice in writing or by telephone to the 15 days prior to suspending the exchange privilege and during the 15 day period the shareholder will be required to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund or exchange into any of the Barney Mutual Funds ordinary available, which position the expected to maintain for a significant period of time. All will be considered in determining what constitutes an exchanges.
Exchanges will be processed at the net asset value next applicable sales charge differential. Redemption procedures also applicable for exchanging shares, and exchanges will be of all supporting documents in proper form. If the account shares of the fund being acquired is identical to the shares of the fund exchanged, no signature guarantee is gain or loss for tax purposes will be realized upon the upon the cost or other basis of shares redeemed. Before investors should read the current prospectus describing the acquired. The Fund reserves the right to modify or leges upon 60 days' prior notice to shareholders.
The Fund is required to redeem the shares of the Fund described below, at a redemption price equal to their net next determined after receipt of a written request in proper other than any applicable CDSC. Redemption requests received regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any redemption must specify the Class being redeemed. In the event of a failure to specify which Class, or if the investor owns fewer shares of specified, the redemption request will be delayed until the Agent receives further instructions from Smith Barney, or if account is not with Smith Barney, from the shareholder tion proceeds will be remitted on or before the third day proper tender, except on any days on which the NYSE is under the Investment Company Act of 1940, as amended ("1940 dinary circumstances. Generally, if the redemption proceeds Smith Barney brokerage account, these funds will not be shareholder's benefit without specific instruction and Smith fit from the use of temporarily uninvested funds. Redemption shares purchased by check, other than a certified or be remitted upon clearance of the check, which may take up more.
Shares held by Smith Barney as custodian must be redeemed written request to a Smith Barney Financial Consultant. those held by Smith Barney as custodian may be redeemed Financial Consultant, Introducing Broker or dealer in the submitting a written request for redemption to:
Smith Barney Natural Resources Fund Inc. Class A, B, C or Y (please specify) c/o First Data Investor Services Group, Inc.
A written redemption request must (a) state the Class and amount of shares to be redeemed, (b) identify the and (c) be signed by each registered owner exactly as the tered. If the shares to be redeemed were issued in tificates must be endorsed for transfer (or be accompanied stock power) and must be submitted to the Transfer Agent redemption request. Any signature appearing on a written excess of $2,000 must be guaranteed by an eligible guarantor as a domestic bank, savings and loan institution, domestic ber bank of the Federal Reserve System or member firm of a ties. Written redemption request of $2,000 or less do not guarantee unless more than one such redemption request is period. Redemption proceeds will be mailed to an investor's address of record.
may require additional supporting documents for redemptions tions, executors, administrators, trustees or guardians. A will not be deemed properly received until the Transfer Agent receives all required docu- ments in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM FOR SHAREHOLDERS WHO DO NOT HAVE A
Certain shareholders may be eligible to redeem and telephone. To determine if a shareholder is entitled to program, he or she should contact the Transfer Agent at (800) 451-2010. Once eligibility is confirmed, the shareholder must complete and return a Telephone/Wire including a signature guarantee, that will be provided by upon request. (Alternatively, an investor may authorize on the new account application with a signature guarantee initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any the Fund's shares may be made by eligible shareholders by fer Agent at (800) 451-2010. Such request may be made 4:00 p.m. (New York City time) on any day the NYSE is open. Redemptions of shares (i) by retirement plans or (ii) for which certificates have been issued are not permitted under this program.
A shareholder will have the option of having the to his/her address of record or wired to a bank account shareholder. Generally, redemption proceeds will be mailed case may be, on the next business day following the order to use the wire procedures, the bank receiving the member of the Federal Reserve System or have a correspondent bank. The Fund reserves the right to charge shareholders a each wire redemption. Such charges, if any, will be assessed shareholder's account from which shares were redeemed. In bank account designated to receive redemption proceeds, a complete a new Telephone/Wire Authorization Form and, for the shareholder's assets, will be required to provide a and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by account registration of the fund being acquired is identical the shares of the fund exchanged. Such exchange requests may the Transfer Agent at (800) 451-2010 between 9:00 a.m. and City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange Program. Neither the Fund nor its agents will be liable for the communicated by telephone that are reasonably believed to be and its agents will employ procedures designed to verify the caller and legitimacy of instructions (for example, a account number will be required and phone calls may be reserves the right to suspend, modify or discontinue the and exchange program or to impose a charge for this service ing at least seven (7) days prior notice to shareholders.
The Fund offers shareholders an automatic cash withdrawal shareholders who own shares with a value of at least $10,000 receive cash payments of at least $50 monthly or quarterly. accounts are eligible for automatic cash withdrawal plans holder is eligible to receive qualified distributions and of at least $5,000. The withdrawal plan will be carried over between funds or Classes of the Fund. Any applicable CDSC will not be waived on amounts withdrawn by a shareholder that exceed 1.00% per month of the value of the shareholder's shares subject to the CDSC at the time the commences. (With respect to withdrawal plans in effect prior 1994, any applicable CDSC will be waived on amounts exceed 2.00% per month of the shareholder's shares subject further information regarding the automatic cash withdrawal should contact a Smith Barney Financial Consultant.
The Fund reserves the right to involuntarily liquidate any account in the Fund if the aggregate net asset value of the Fund account is less than $500. (If a shareholder has more the Fund, each account must satisfy the minimum account er, will not redeem shares based solely on market reductions ue. Before the Fund exercises such right, shareholders will notice and will be permitted 60 days to bring accounts up to avoid automatic redemption.
From time to time, the Fund may include its total return, total return in advertisements and/or other types of sales figures are computed separately for Class A, Class B, Class shares of the Fund. These figures are based on historical intended to indicate future performance. Total return is fied period of time assuming deduction of the maximum sales from the initial amount invested and reinvestment of all capital gain distributions on the reinvestment dates at stated in this Prospectus, then dividing the value of the end of the period so calculated by the initial amount 100%. The standard average annual total return, as prescribed by the SEC, is derived from this total return which provides the ending redeemable value. Such standard total return information may also be dard total return information for differing periods computed ner but without annualizing the total return or taking sales account. The Fund may also include comparative performance advertising or marketing its shares. Such performance data from Lipper Analytical Services, Inc. or similar that monitor the performance of mutual funds or other industry publications.
Overall responsibility for management and supervision of the Fund's Board of Directors. The Directors approve all ments between the Fund and the companies that furnish including agreements with its distributor, investment transfer agent. The day-to-day operations of the Fund are Fund's investment manager. The Statement of Additional background information regarding each Director and executive Fund.
SBMFM, located at 388 Greenwich Street, New York, New York the Fund's investment manager pursuant to an investment dated as of December 18, 1995. SBMFM (through predecessor in the investment counseling business since 1968 and is a
MANAGEMENT OF THE FUND (CONTINUED)
tered investment adviser. SBMFM renders investment advice to nies that had aggregate assets under management as of excess of $71 billion.
Subject to the supervision and direction of the Fund's SBMFM manages the Fund's portfolio in accordance with the investment objective and policies, makes investment places orders to purchase and sell securities, employs managers and securities analysts who provide research services to the Fund and oversees all aspects of the Fund's administration. For services rendered, the Fund pays SBMFM a monthly fee at the 0.75% of the value of the Fund's average daily net assets.
John G. Goode, President and Chief Executive Officer of ment Management, a division of SBMFM, and David Stadlin, of the Fund, manage the day-to-day operations of the Fund, all investment decisions.
Management's discussion and analysis and additional regarding the Fund during the fiscal year ended October 31, in the Annual Report dated October 31, 1995. A copy of the be obtained upon request without charge from a Smith Barney tant or by writing or calling the Fund at the address or on page one of this Prospectus.
Smith Barney is located at 388 Greenwich Street, New York, New York 10013. Smith Barney distributes shares of the Fund as principal such conducts a continuous offering pursuant to a "best requiring Smith Barney to take and pay for only such securities as may be sold to the public. Pursuant to a plan of distribution adopted by Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is with respect to Class A, Class B and Class C shares at the 0.25% of the average daily net assets of the respective also paid a distribution fee with respect to Class B and Class C shares at the annual rate of 0.75% of the average daily net assets Classes. Class B shares that automatically convert to Class years after the date of original purchase will no longer be distribution fee. The fees are used by Smith Barney to pay sultants for servicing shareholder accounts and, in the case
MANAGEMENT OF THE FUND (CONTINUED)
cover expenses primarily intended to result in the sale of expenses include: advertising expenses; the cost of printing spectuses to potential investors; payments to and expenses Financial Consultants and other persons who provide support nection with the distribution of shares; interest and/or indirect and other overhead costs of Smith Barney associated Fund shares, including lease, utility, communications and expenses.
The payments to Smith Barney Financial Consultants for Class include a commission or fee paid by the investor or time of sale and, with respect to Class A, Class B and Class tinuing fee for servicing shareholder accounts for as long remains a holder of that Class. Smith Barney Financial different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the shareholder service expenses actually incurred by Smith ments may exceed distribution expenses actually incurred. Directors will evaluate the appropriateness of the Plan and on a continuing basis and in so doing will consider all including expenses borne by Smith Barney, amounts received proceeds of the CDSC.
The Fund was incorporated on July 16, 1986, under the laws Maryland, and is registered with the SEC as a diversified, investment company. The Fund offers shares of common stock fied into four Classes, A, B, C and Y, with a par value of $.001 per share. Each Class of shares has the same rights, privileges and with respect to: (a) the designation of each Class; (b) the respective sales charges for each Class; (c) the fees borne by each Class; (d) the expenses allocable Class; (e) voting rights on matters exclusively affecting a the exchange privilege of each Class; and (g) the conversion Class B shares. The Fund's Board of Directors does not will be any conflicts among the interests of the holders of Classes. The Directors, on an ongoing basis, will consider conflict exists and, if so, take appropriate action.
Morgan Guaranty, located at 60 Wall Street, New York, New as the Fund's custodian.
First Data Investor Services Group, Inc., located at Massachusetts 02109, serves as the Fund's transfer agent.
The Fund does not hold annual shareholder meetings. There meeting of shareholders for the purpose of electing such time as less than a majority of the Directors holding elected by shareholders. The Directors will call a meeting written request of shareholders holding at least 10% of the shares and the Fund will assist shareholders in calling such required by the 1940 Act. When matters are submitted for shareholders of each Class will have one vote for each full proportionate fractional vote for any fractional share held erally, shares of the Fund will be voted on a fund-wide except matters affecting only the interests of one or more of the Classes.
The Fund sends its shareholders a semi-annual report and report, which include listings of investment securities held by the Fund at the end of the period covered. In an effort to reduce the Fund's ing costs, the Fund plans to consolidate the mailing of it's annual reports by household. This consolidation means that a multiple accounts with the identical address of record will copy of each report. In addition, the Fund also plans to ing of its prospectus so that a shareholder having multiple individual, IRA and/or Self-Employed Retirement Plan single Prospectus annually. Shareholders who do not want apply to their accounts should contact their Smith Barney or the Transfer Agent.
SMITH BARNEY NATURAL RESOURCES FUND INC.
New York, New York 10013
This Statement of Additional Information expands upon and supplements the information contained in the current Prospectus of Smith Barney Natural Resources Fund Inc. (the "Fund") dated January 5, 1996 , as amended or supplemented from time to time, and should be read in conjunction with the Fund's Prospectus. The Fund's Prospectus may be obtained from any Smith Barney Financial Consultant, or by writing or calling the Fund at the address or telephone number set forth above. This Statement of Additional Information, although not in itself a prospectus, is incorporated by reference into the Prospectus in its entirety.
For ease of reference, the same section headings are used in both the Prospectus and this Statement of Additional Information, except where shown below:
The executive officers of the Fund are employees of certain of the organizations that provide services to the Fund. These organizations are the following:
These organizations and the functions they perform for the Fund are discussed in the Prospectus and in this Statement of Additional Information.
Directors and Executive Officers of the Fund
The Directors and executive officers of the Fund, together with information as to their principal business occupations during the past five years, are shown below. Each Director who is an "interested person" of the Fund, as defined in the Investment Company Act of 1940, as amended (the "1940 Act"), is indicated by an asterisk.
Herbert Barg, Director (age 72). Private investor. His address is 273 Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Director (age 73) . Retired; formerly Senior Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End Drive, Ramsey, New Jersey 17466.
Martin Brody, Director (age 74). Vice Chairman of the Board of Restaurant Associates Industries, Corp.; a Director of Jaclyn, Inc. His address is HMK Associates, Three ADP Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Director (age 58). Professor, Graduate School of Business Administration, Harvard University; a Director of Peer Review Analysis, Inc. His address is Harvard University Graduate School of Business Administration, Boston, Massachusetts 02163.
Burt N. Dorsett, Director (age 65). Managing Partner of Dorsett McCabe Management, Inc., an investment counseling firm; Director of Research Corporation Technologies, Inc., a clearing and licensing firm. His address is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Director (age 69). Chairman of the Board and President of The Dress Barn, Inc. His address is 30 Dunnigan Drive, Suffern, New York 10901.
Stephen E. Kaufman, Director (age 63). Attorney. His address is 277 Park Avenue, New York, New York 10017.
Joseph J. McCann, Director (age 65). Financial Consultant; formerly Vice President of Ryan Homes, Inc., Pittsburgh, Pennsylvania. His address is 200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Investment Officer (age 62). Managing Director of Smith Barney, Chairman of Smith Barney Strategy Advisers Inc. and President of SBMFM; prior to July 1993, Senior Executive Vice President of Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"); Vice Chairman of Asset Management Division of Shearson Lehman Brothers; Director of PanAgora Asset Management, Inc. and PanAgora Asset Management Limited. Mr. McLendon is also Chairman of the Board for 41 other funds of the Smith Barney Mutual Funds. His address is 388 Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Director (age 62). President, Cornelius C. Rose Associates, Inc., Financial Consultants; and Chairman and Director of Performance Learning Systems, an educational consultant. His address is P.O. Box 355, Fair Oaks, Enfield, New Hampshire 03748.
James J. Crisona, Director Emeritus (age 88). Attorney; formerly Justice of the Supreme Court of the State of New York. His address is 118 East 60th Street, New York, New York 10022.
Jessica M. Bibliowicz, President (age 36). Executive Vice President of Smith Barney; prior to 1994, Director of Sales and Marketing for Prudential Mutual Funds; prior to 1990, First Vice President, Asset Management Division of Shearson Lehman Brothers. Ms. Bibliowicz is also President of 41 other funds of the Smith Barney Mutual Funds. Her address is 388 Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (age 38). Managing Director of Smith Barney; Chief Financial Officer of the Smith Barney Mutual Funds; and Director and Senior Vice President of SBMFM; prior to January, 1990, Senior Vice President and Chief Financial Officer of Cortland Financial Group, Inc. Mr. Daidone is also Senior Vice President and Treasurer of 41 other funds of the Smith Barney Mutual Funds. His address is 388 Greenwich Street, New York, New York 10013.
John G. Goode, Vice President and Investment Officer (age 51). President and Chief Executive Officer of Davis Skaggs Investment Management ("Davis Skaggs"), a division of SBMFM; Managing Director of Smith Barney. His address is 1 Sansome Street, Suite 3850, San Francisco, California 94104.
David A. Stadlin, Vice President and Investment Officer (age 31). Research Analyst of Davis Skaggs; Vice President of Smith Barney. His address is 1 Sansome Street, Suite 3850, San Francisco, California 94104.
Christina T. Sydor, Secretary (age 44). Managing Director of Smith Barney and Secretary of SBMFM. Ms. Sydor is also Secretary of 41 other funds of the Smith Barney Mutual Funds. Her address is 388 Greenwich Street, New York, New York 10013.
Each Director also serves as a director, trustee and/or general partner of certain other mutual funds for which Smith Barney serves as distributor. As of January 31, 1995, Directors and officers of the Fund, as a group, owned less than 1% of the outstanding common stock of the Fund.
No director, officer or employee of Smith Barney or any parent or subsidiary receives any compensation from the Fund for serving as an officer or Director of the Fund. The Fund pays each Director who is not a director, officer or employee of Smith Barney or any of its affiliates a fee of $2,000 per annum plus $250 per meeting attended and each Director Emeritus who is not a director, officer or employee of Smith Barney or any of its affiliates a fee of $1,000 per annum plus $125 per meeting attended. All Directors are reimbursed for travel and out-of-pocket expenses to attend meetings of the Board.
For the calendar year ended December 31, 1995, the Directors of the Fund were paid the following compensation:
(*) Number of director/trusteeships held with other Smith Barney Mutual Funds. ** Mr. Crisona became Director emeritus as of January 1, 1995. A Director emeritus may attend meetings but has no voting rights.
SBMFM serves as investment manager to the Fund pursuant to a written agreement (the "Management Agreement"), which was approved by the Board of Directors, including a majority of the Directors who are not "interested persons" of the Fund or SBMFM, on September 26, 1995 and by shareholders on December 18, 1995. SBMFM pays the salary of any officer and employee who is employed by both it and the Fund. The services provided by SBMFM under the Management Agreement are described in the Prospectus under "Management of the Fund." SBMFM bears all expenses in connection with the performance of its services. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), which in turn, is a wholly owned subsidiary of Travelers Group Inc. ("Travelers").
As compensation for investment management services provided pursuant the Management Agreement, the Fund pays SBMFM a fee computed daily and paid monthly at the annual rate of 0.75% of the value of the Fund's average daily net assets. Prior to SBMFM, for the period from June 21, 1994 through December 19, 1995, Smith Barney Strategy Advisers Inc. ("SBSA") and Lehman Brothers Global Assets Management Limited ("LBGAM") served as the Fund's investment adviser and sub-investment adviser, respectively. Prior to June 20, 1994, LBGAM served as the Fund's investment adviser. For the 1993 fiscal year and for the period from November 1, 1993 through June 20, 1994, the Fund paid LBGAM $399,613 and $376,967, respectively, in investment advisory fees. For the period from June 21, 1994 through October 31, 1994 and the fiscal year ended October 31, 1995, the Fund paid SBSA $216,106 and $505,253, respectively, in investment advisory fees.
Prior to entering into the Management Agreement, SBMFM served as administrator to the Fund pursuant to a written agreement dated April 20, 1994 (the "Administration Agreement"), which was most recently approved by the Fund's Board of Directors including a majority of the Directors who are not "interested persons" of the Fund or SBMFM, on July 19, 1995 . SBMFM paid the salary of any officer and employee who was employed by both it and the Fund and bore all expenses in connection with the performance of its services. As compensation for administrative services rendered to the Fund, SBMFM received a fee at the annual rate of 0.20% of the value of the Fund's average daily net assets. For the period from April 20, 1994 through October 31, 1994 and for the fiscal year ended October 31, 1995, the Fund paid SBMFM $158,152 and $134,734 , respectively, in administration fees.
Prior to April 20, 1994, Boston Company Advisors, Inc. ("Boston Advisors") served as the Fund's administrator and received a fee computed daily and paid monthly at the annual rate of 0.20% of the value of the Fund's average daily net assets. For the period November 1, 1993 to April 19, 1994 and the 1993 fiscal year, Boston Advisors received $59,580 and $95,808 respectively, in administration fees.
The Fund bears expenses incurred in its operation, including: taxes, interest, brokerage fees and commissions, if any; fees of Directors who are not officers, directors, shareholders or employees of Smith Barney or SBMFM; SEC fees and state Blue Sky qualification fees; charges of custodians; transfer and dividend disbursing agent's fees; certain insurance premiums; outside auditing and legal expenses; and costs of preparation and printing of prospectuses for regulatory purposes and for distribution to existing shareholders, cost of shareholders' reports and shareholder meetings and meetings of the officers or Board of Directors of the Fund.
SBMFM has agreed that if in any fiscal year the aggregate expenses of the Fund (including fees paid under the Management Agreement, but excluding interest, taxes, brokerage and, with the prior written consent of the necessary state securities commissions, extraordinary expenses) exceed the expense limitation of any state having jurisdiction over the Fund, SBMFM will, to the extent required by law, reduce its management fees by the amount of such excess expense. Such a fee reduction, if any, will be estimated and reconciled on a monthly basis. The most restrictive state expense limitation applicable to the Fund would require SBMFM to reduce its fees in any year that such expenses exceed 2.5% of the first $30 million of average net assets, 2.0% of the next $70 million of average net assets and 1.5% of the remaining average net assets. No fee reductions were required for 1993, 1994 and 1995 fiscal years.
Willkie Farr & Gallagher serves as counsel to the Fund. The Directors who are not "interested persons" of the Fund have selected Stroock & Stroock & Lavan as their counsel.
KPMG Peat Marwick LLP, independent auditors, 345 Park Avenue, New York, New York 10154, serve as auditors of the Fund and render an opinion on the Fund's financial statements annually. With respect to the period prior to November 1, 1994, Coopers & Lybrand L.L.P., independent auditors, served as auditors of the Fund and rendered an opinion on the Fund's financial statements for the fiscal year ended October 31, 1994.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Prospectus discusses the Fund's investment objective and the policies it employs to achieve its objective. The following discussion supplements the description of the Fund's investment objective and management policies in the Prospectus.
United States Government Securities. United States government securities include debt obligations of varying maturities issued or guaranteed by the United States government or its agencies or instrumentalities ("U.S. government securities"). Direct obligations of the United States Treasury include a variety of securities that differ in their interest rates, maturities and dates of issuance.
U.S. government securities include not only direct obligations of the United States Treasury, but also include securities issued or guaranteed by the Federal Housing Administration, Federal Financing Bank, Export-Import Bank of the United States, Small Business Administration, Government National Mortgage Association, General Services Administration, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, Maritime Administration, Tennessee Valley Authority, Resolution Trust Corporation, District of Columbia Armory Board, Student Loan Marketing Association and various institutions that previously were or currently are part of the Farm Credit System (which has been undergoing a reorganization since 1987). Because the United States government is not obligated by law to provide support to an instrumentality that it sponsors, the Fund will invest in obligations issued by such an instrumentality only if SBMFM determines that the credit risk with respect to the instrumentality does not make its securities unsuitable for investment by the Fund.
Lending of Portfolio Securities. As stated in the Prospectus, the Fund has the ability to lend securities from its portfolio to brokers, dealers and other financial organizations. Such loans, if and when made, will not exceed 20% of the Fund's total assets. The Fund may not lend its portfolio securities to Smith Barney or its affiliates unless it has applied for and received specific authority from the SEC. Loans of portfolio securities by the Fund will be collateralized by cash, letters of credit or U.S. government securities which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. From time to time, the Fund may return a part of the interest earned from the investment of collateral received for securities loaned to the borrower and/or a third party, which is unaffiliated with the Fund or with Smith Barney, and which is acting as a "finder." In lending its securities, the Fund 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 instruments or obtaining yield in the form of interest paid by the borrower when U.S. government securities are used as collateral. Requirements of the SEC, which may be subject to future modifications, currently provide that the following conditions must be met whenever the Fund's portfolio securities are loaned: (a) the Fund must receive at least 100% cash collateral or equivalent securities or letters of credit from the borrower; (b) the borrower must increase such collateral whenever the market value of the securities rises above the level of such collateral; (c) the Fund must be able to terminate the loan at any time; (d) the Fund must receive reasonable interest on the loan, as well as an amount equal to any dividends, interest or other distributions on the loaned securities, and any increase in market value; (e) the Fund may pay only reasonable custodian fees in connection with the loan; and (f) voting rights on the loaned securities may pass to the borrower; however, if a material event adversely affecting the investment occurs, the Fund's Board of Directors must terminate the loan and regain the right to vote the securities. The risks in lending portfolio securities, as with other extensions of secured credit, consist of possible delay in receiving additional collateral or in the recovery of the securities or possible loss of rights in the collateral should the borrower fail financially. Loans will be made to firms deemed by SBMFM to be of good standing and will not be made unless, in the judgment of SBMFM, the consideration to be gained from such loans would justify the risk.
Options on Securities. The Fund may purchase put and call options on securities. An option position may be closed out only where there exists a secondary market for an option of the same series on a securities exchange or in the over- the-counter market. Although the Fund generally will purchase only those options for which SBMFM believes there is an active secondary market so as to facilitate its closing transactions, there is no assurance that sufficient trading interest to create a liquid secondary market on a securities exchange will exist for any particular option or at any particular time, and for some options no such secondary market may exist. A liquid secondary market in an option may cease to exist for a variety of reasons. In the past, for example, higher than anticipated trading activity or order flow, or other unforeseen event, have at times rendered certain of the facilities of the Options Clearing Corporation and various securities exchanges inadequate and resulted in the institution of special procedures, such as trading rotations, restrictions on certain types of orders or trading halts or suspensions in one or more options. There can be no assurance that similar events, or events that may otherwise interfere with the timely execution of customers' orders, will not recur. In such event, it might not be possible to effect closing transactions in particular options.
Securities exchanges have established limitations governing the maximum number of calls and puts of each class which may be held or exercised within certain time periods by an investor or group of investors acting in concert (regardless of whether the options are held or exercised in one or more accounts or through one or more brokers). It is possible that the Fund, SBMFM and other of its clients and affiliates may be considered to be such a group. A securities exchange may order the liquidation of positions found to be in violation of these limits and it may impose certain other sanctions. Dollar amount limits apply to U.S. government securities. These limits may restrict the number of options which the Fund will be able to purchase on a particular security.
Stock Index Options. The Fund may purchase and write put and call options on domestic stock indexes listed on domestic securities exchanges and, subject to applicable state securities regulations, on foreign stock indexes listed on foreign securities exchanges for the purpose of hedging its portfolio. A stock index fluctuates with changes in the market values of the stocks included in the index. Some stock index options are based on a broad market index such as the NYSE Composite Index or the Canadian Market Portfolio Index, or a narrower market index such as the Standard & Poor's 100. Indexes also are based on an industry or market segment such as the AMEX Oil and Gas Index or the Computer and Business Equipment Index.
Options on stock indexes are similar to options on securities except that the delivery requirements are different. Instead of giving the right to take or make delivery of a security at a specified price, an option on a stock index gives the holder the right to receive a cash "exercise settlement amount" equal to (a) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (b) a fixed "index multiplier." Receipt of this cash amount will depend upon the closing level of the stock index upon which the option is based being greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The amount of cash received will be equal to such difference between the closing price of the index and the exercise price of the option expressed in U.S. dollars or a foreign currency, as the case may be, times a specified multiple. The writer of the option is obligated, in return for the payment received, to make delivery of this amount. The writer may offset its position in stock index options prior to expiration by entering into a closing transaction on an exchange or it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index options as a hedging technique will depend upon the extent to which price movements in the portion of the Fund's securities portfolio being hedged correlate with price movements of the stock index selected. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Fund will realize a gain or loss from the purchase or writing of options on an index depends upon movements in the level of stock prices in the particular stock market generally or, in the case of certain indexes, in an industry or market segment, rather than movements in the price of a particular stock. Accordingly, successful use by the Fund of options on stock indexes will be subject to the ability of SBMFM to predict correctly movements in the direction of the stock market generally or of a particular industry. This requires different skills and techniques than predicting changes in the prices of individual stocks.
The Fund will engage in stock index options transactions only when determined by SBMFM to be consistent with the Fund's effort to control risk. There can be no assurance that the use of these portfolio strategies will be successful. When the Fund writes an option on a stock index, the Fund will establish a segregated account with Morgan Guaranty, or with a sub-custodian for the Fund, in an amount equal to the market value of the option and will maintain the account while the option is open.
Futures Contracts on Gold and Related Options. The Fund's purpose in entering into a gold futures contract or a related option is to mitigate the effects of fluctuations in the price of gold without necessarily buying gold or other portfolio assets. For example, if the Fund expects gold prices to increase, the Fund might purchase gold futures contracts in anticipation of the future purchase of gold or gold-related securities. Such a purchase would have much the same effect as the Fund's buying gold. If gold prices increase as anticipated, the value of the gold futures contracts would increase at approximately the same rate.
No consideration is paid or received by the Fund upon the purchase of a gold futures contract. Initially, the Fund will be required to deposit with a broker an amount of cash or cash equivalents, such as U.S. government securities or high grade debt obligations. This amount, known as initial margin, is subject to change by the exchange on which the contract is traded and brokers may charge a higher amount. Initial margin is in the nature of a performance bond or good faith deposit on the contract and is returned to the Fund upon termination of the gold futures contract, assuming that all contractual obligations have been satisfied. Subsequent payments, known as maintenance margin, to and from broker, will be made daily as the price of the gold bullion underlying the futures contract fluctuates, making the positions in the futures contract more or less valuable, a process known as "marking-to-market." Because the value of an option on a futures contract is fixed at the point of sale, there are no daily cash payments by the purchaser to reflect changes in the value of the underlying contract; however, the value of the option does change daily and that change would be reflected in the net asset value of the Fund.
There are several risks in connection with the use of gold futures contracts and related options as hedging devices. Successful use of gold futures contracts and related options by the Fund is subject to the ability of SBMFM to predict correctly movements in the price of gold and other factors affecting markets for gold. These predictions involve skills and techniques that are different from those generally involved in the management of the Fund. In addition, there can be no assurance that there will be a correlation between movements in the price of gold futures contracts or an option on a gold futures contract and movements in the price of the hedged assets. A decision of whether, when and how to hedge involves the exercise of skill and judgment, and even a well conceived hedge may be unsuccessful to some degree because of market behavior or unexpected trends in the price of gold or the hedged securities.
At any time prior to the expiration of a gold futures contract or an option on a gold futures contract, the Fund may elect to close the position by taking an opposite position, which will operate to terminate the Fund's existing position in the contract. Positions in futures contracts and options on futures contracts may be closed out only on the exchange on which they were entered into (or through a linked exchange). Although the Fund intends to purchase gold futures contracts and related options only if there is an active market for the contracts, there is no assurance that an active market will exist for the contracts or options at any particular time. Most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit. It is possible that gold futures contract prices could move to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of gold futures positions and subjecting the Fund to substantial losses. In such event, and in the event of adverse price movements, the Fund would be required to make daily cash payments of maintenance margin, and an increase, if any, in the value of the portion of the portfolio being hedged may partially or completely offset losses on the futures contract. As described above, however, there is no guarantee that the price of the assets being hedged will, in fact, correlate with the price movements in a gold futures contract or an option thereon and thus provide an offset to losses on the futures contract or option.
If the Fund has hedged against the possibility of a change in the price of gold adversely affecting the value of its assets and prices move in a direction opposite to that which was anticipated, the Fund will probably lose part or all of the benefit of the increased value of the assets hedged because of offsetting losses in its futures positions. In addition, in such a situation, if the Fund has insufficient cash, it might have to sell assets to meet daily maintenance margin requirements at a time when it would be disadvantageous to do so. These sales of assets could, but will not necessarily, be at increased prices which reflect the change in the value of gold.
The ability of the Fund to trade in gold futures contracts and related options may be materially limited by the requirements of the Internal Revenue Code of 1986, as amended (the "Code"), applicable to a regulated investment company. See "Taxes."
Currency Transactions. The Fund may engage in currency exchange transactions to protect against uncertainty in the level of future exchange rates. The Fund's dealings in forward currency exchange contracts will be limited to hedging involving either specific transactions or portfolio positions. Transaction hedging is the purchase or sale of forward currency with respect to specific receivables or payables of the Fund generally arising in connection with the purchase or sale of its portfolio securities. Position hedging is the sale of forward currency with respect to portfolio securities positions denominated or quoted in the currency. The Fund may not position hedge with respect to a particular currency to an extent greater than the aggregate market value at any time of the securities held in its portfolio denominated or quoted in or currently convertible (such as through exercise of an option or consummation of a forward contract) into that particular currency. If the Fund enters into a transaction hedging or position hedging transaction, it will cover the transaction through one or more of the following methods: (a) ownership of the underlying currency or an option to purchase such currency; (b) ownership of an option to enter into an offsetting forward contract; (c) entering into a forward contract to purchase currency being sold or to sell currency being purchased, provided such covering contract is itself covered by one of these methods unless the covering contract closes out the first contract; or (d) depositing into a segregated account with the custodian or a sub-custodian of the Fund cash or readily marketable securities in an amount equal to the value of the Fund's total assets committed to the consummation of the forward contract and not otherwise covered. In the case of transaction hedging, any securities placed in the account must be liquid debt securities. In any case, if the value of the securities placed in the segregated account declines, additional cash or securities will be placed in the account so that the value of the account will equal the above amount. Hedging transactions may be made from any foreign currency into U.S. dollars or into other appropriate currencies.
At or before the maturity of a forward contract, the Fund may either sell a portfolio security and make delivery of the currency, or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Fund will obtain, on the same maturity date, the amount of the currency it is obligated to deliver. If the Fund retains the portfolio security and engages in an offsetting transaction, the Fund, at the time of execution of the offsetting transaction, will incur a gain or a loss to the extent that movement has occurred in forward contract prices. Should forward prices decline during the period between the Fund's entering into a forward currency contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, the Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it has agreed to sell.
The cost to the Fund of engaging in currency transactions varies with factors such as the currency involved, the length of the contract period and the market conditions then prevailing. Because transactions in currency exchange usually are conducted on a principal basis, no fees or commissions are involved. The use of forward currency contracts does not eliminate fluctuations in the underlying prices of the securities, but it does establish a rate of exchange that can be achieved in the future. In addition, although forward currency contracts limit the risk of loss due to a decline in the value of the hedged currency, at the same time they limit any potential gain that might result should the value of the currency increase.
If a devaluation of a currency is generally anticipated, the Fund may not be able to contract to sell the currency at a price above the devaluation level that it anticipates. The Fund will not enter into a currency transaction if, as a result, it will fail to qualify as a regulated investment company under the Code for a given year.
The Fund has adopted the following investment restrictions for the protection of shareholders. Restrictions 1 through 8 below are fundamental policies that cannot be changed without approval by the holders of a majority of the outstanding voting securities of the Fund, defined as the lesser of (a) 67% of the shares present at a meeting, if the holders of more than 50% of the outstanding shares are present in person or by proxy or (b) more than 50% of the Fund's outstanding shares. The remaining restrictions may be changed by a vote of the Board of Directors at any time.
The investment policies adopted by the Fund prohibit it from:
1. With respect to 75% of the value of its total assets, investing more than 5% of its total assets in securities of any one issuer, except securities issued or guaranteed by the United States government, or purchase more than 10% of the outstanding voting securities of such issuer.
2. Issuing senior securities as defined in the 1940 Act and any rules and orders thereunder, except insofar as the Fund may be deemed to have issued senior securities by reason of: (a) borrowing money or purchasing securities on a when- issued or delayed-delivery basis; (b) purchasing or selling futures contracts and options on futures contracts and other similar instruments; and (c) issuing separate classes of shares.
3. Investing more than 25% of its total assets in securities, the issuers of which are in the same industry (other than in Natural Resource Investments as defined in the Prospectus). For purposes of this limitation, U.S. government securities are not considered to be issued by members of any industry.
4. Borrowing money, except that the Fund may borrow from banks for temporary or emergency (not leveraging) purposes, including the meeting of redemption requests which might otherwise require the untimely disposition of securities, in an amount not exceeding 10% 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 is made. Whenever borrowings exceed 5% of the value of the Fund's total assets, the Fund will not make any additional investments.
5. Making loans. This restriction does not apply to: (a) the purchase of debt obligations in which the Fund may invest consistent with its investment objectives and policies; (b) repurchase agreements; and (c) loans of its portfolio securities.
6. Engaging in the business of underwriting securities issued by other persons, except to the extent that the Fund may technically be deemed to be an underwriter under the Securities Act of 1933, as amended, in disposing of portfolio securities.
7. Purchasing or selling commodities or commodity contracts, but this shall not prevent the Fund from: (a) trading in futures contracts and options on futures contracts, or (b) investing in gold bullion and coins or receipts for gold.
8. Purchasing any securities on margin (except for such short-term credits as are necessary for the clearance of purchases and sales of portfolio securities) or selling any securities short (except against the box). For purposes of this restriction, the deposit or payment by the Fund of initial or maintenance margin in connection with futures contracts and related options and options on securities is not considered to be the purchase of a security on margin.
9. Investing in securities of other investment companies, except as they may be acquired as part of a merger, consolidation, reorganization or acquisition of assets.
10. Purchasing restricted securities, illiquid securities or other securities which are not readily marketable if more than 15% of the total assets of the Fund would be invested in such securities. For purposes of this limitation, (a) repurchase agreements providing for settlement in more than seven days after notice by the Fund and (b) time deposits maturing in more than seven calendar days shall be considered illiquid securities.
11. Purchasing any security if as a result the Fund would then have more than 5% of its total assets (taken at current value) invested in securities of issuers which directly or through a parent or affiliated company have had ongoing operations for fewer than three years. For purposes of this restriction, issuers include predecessors, sponsors, controlling persons, general partners, guarantors and originators of underlying assets.
12. Making investments for the purpose of exercising control or management.
13. Purchasing or retaining securities of any company if, to the knowledge of the Fund, any of the Fund's officers and Directors or any officer or director of SBMFM individually owns more than 1/2 of 1% of the outstanding securities of such company and together they own beneficially more than 5% of the securities.
14. Investing in warrants (other than warrants acquired by the 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 Fund's net assets, of which not more than 2% of the Fund's net assets may be invested in warrants not listed on a recognized domestic or foreign stock exchange to the extent permitted by applicable state securities laws.
15. Engaging in the purchase or sale of put, call, straddle or spread options or in the writing of such options other than (a) purchasing and writing put and call options on securities and stock indexes, (b) entering into closing purchase transactions with respect to such options, (c) purchasing put and call options on gold, purchasing gold futures contracts and writing covered call options on gold, or (d) upon 60 days' notice given to its shareholders, (i) writing put and other call options on gold or (ii) entering into other hedging transactions involving futures contracts and related options, including gold futures contracts.
Certain restrictions listed above permit the Fund without shareholder approval to engage in investment practices that the Fund does not currently pursue. The Fund has no present intention of altering its current investment practices as otherwise described in the Prospectus and this Statement of Additional Information and any future change in those practices would require Board approval and appropriate disclosure to investors. If any percentage limitation is complied with at the time of an investment, a later increase or decrease resulting from a change in values or assets will not constitute a violation of that limitation. In order to permit the sale of the Fund's shares in certain states, the Fund may make commitments more restrictive than the investment restrictions described above such as those regarding oil and mineral leases and real estate limited partnerships. For example, the Board of Directors has adopted a policy, which may be changed without shareholder approval, that the Fund may not purchase the security of any issuer (other than U.S. government securities) if, as a result, with respect to 100% of the Fund's total assets, more than 5% of the Fund's assets would be invested in the securities of such issuer. Should the Fund determine that any such commitment is no longer in the best interests of the Fund and its shareholders, it will revoke the commitment by terminating sales of its shares in the state involved.
While the Fund does not intend to trade in securities for short-term profits, securities may be sold without regard to the length of time they have been held by the Fund when warranted by the circumstances. The Fund cannot accurately predict its annual rate of portfolio turnover (that is, the lesser of purchases or sales of portfolio securities for the year divided by the monthly average value of portfolio securities for the year); however, it is anticipated that the annual turnover rate generally will not exceed 100%. Under certain market conditions, the Fund may experience increased portfolio turnover as a result of its options activities. For instance, the exercise of a substantial number of options on stock indexes written by the Fund (due to appreciation of the underlying index in the case of call options or depreciation of the underlying index in the case of put options) could result in a turnover rate in excess of 100%. A portfolio turnover rate of 100% would occur, for example, if all the securities in the Fund's portfolio were replaced once during a period of one year. Securities with remaining maturities of one year or less on the date of acquisition are excluded from the calculation. The portfolio turnover rates for the 1994 and 1995 fiscal years were 50% and 40% , respectively.
Most of the purchases and sales of securities for the Fund, whether transacted on a securities exchange or over- the-counter, will be effected in the primary trading market for the securities. The primary trading market for a given security generally is located in the country in which the issuer has its principal office. Decisions to buy and sell securities for the Fund are made by SBMFM, which also is responsible for placing these transactions, subject to the overall review of the Board of Directors. Although investment decisions for the Fund are made independently from those of the other accounts managed by SBMFM, investments of the type the Fund may make also may be made by those other accounts. When the Fund and one or more other accounts managed by SBMFM are prepared to invest in, or desire to dispose of, the same security, available investments or opportunities for sales will be allocated in a manner believed by SBMFM to be equitable to each. In some cases, this procedure may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund.
Transactions on domestic stock exchanges and some foreign stock exchanges involve the payment of negotiated brokerage commissions. On exchanges on which commissions are negotiated, the cost of transactions may vary among different brokers. On many foreign exchanges, commissions generally are fixed. There is generally no stated commission in the case of securities traded on domestic or foreign over- the-counter markets, but the prices of those securities include undisclosed commissions or mark-ups. The cost of securities purchased from underwriters includes an underwriting commission or concession, and the prices at which securities are purchased from and sold to dealers include a dealer's mark-up or mark-down. For the 1993, 1994 and 1995 fiscal years, the Fund paid $452,311, $287,617 and $246,842 , respectively, in brokerage commissions. During the 1993 fiscal year another fund was acquired by the Fund, causing duplication in the Fund's portfolio. These securities were then sold resulting in higher brokerage commissions in 1993 than in 1994 or 1995.
In selecting brokers or dealers to execute portfolio transactions on behalf of the Fund, SBMFM seeks the best overall terms available. In assessing the best overall terms available for any transaction, SBMFM will consider the factors it deems relevant, 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 and the reasonableness of the commission, if any, for the specific transaction and on a continuing basis. In addition, the Advisory Agreement authorizes SBMFM in selecting brokers or dealers to execute a particular transaction and in evaluating the best overall terms available, to consider the brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund and/or other accounts over which SBMFM or its affiliates exercise investment discretion.
The Fund's Board of Directors periodically 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 inuring to the Fund. It is possible that certain of the services received will primarily benefit one or more accounts for which SBMFM or its affiliates exercise investment discretion. Conversely, the Fund may be the primary beneficiary of services received as a result of portfolio transactions effected for other accounts. The fee under the Management Agreement is not reduced by reason of the receipt by SBMFM of such brokerage and research services.
The Fund's Board of Directors has determined that any portfolio transactions for the Fund may be executed through Smith Barney or an affiliate of Smith Barney if, in the judgment of SBMFM, the use of Smith Barney is likely to result in price and execution at least as favorable as those of other qualified brokers, and if, in the transaction, Smith Barney charges the Fund a commission rate consistent with those charged by Smith Barney to comparable unaffiliated customers in similar transactions. Similarly, the Fund may execute portfolio transactions in gold futures through an affiliated broker if comparable conditions are satisfied, including that the Fund is charged commissions consistent with those charged for comparable transactions in comparable accounts of the broker's most favored unaffiliated clients. In addition, under rules adopted by the SEC, Smith Barney may directly execute such transactions for the Fund on the floor of any national securities exchange, provided (a) the Board of Directors has expressly authorized Smith Barney to effect such transactions and (b) Smith Barney annually advises the Fund of the aggregate compensation it earned on such transactions. Smith Barney will not participate in commissions from brokerage given by the Fund to other brokers or dealers and will not receive any reciprocal brokerage business resulting therefrom. Over- the-counter purchases and sales are transacted directly with principal market makers except in those cases in which better prices and executions may be obtained elsewhere. For the 1993, 1994 and 1995 fiscal years, the Fund paid $32,625, $2,800 and $0, respectively, in brokerage commissions to Smith Barney and/or Shearson Lehman Brothers.
The Fund will not purchase any security, including U.S. government securities, during the existence of any underwriting or selling group relating thereto of which Smith Barney is a member, except to the extent permitted by regulations adopted by the SEC.
The schedule of sales charges on Class A shares described in the Prospectus applies to purchases made by any "purchaser," which is defined to include the following: (a) an individual; (b) an individual's spouse and his or her children purchasing shares for his or her own account; (c) a trustee or other fiduciary purchasing shares for a single trust estate or single fiduciary account; (d) a pension, profit-sharing or other employee benefit plan qualified under Section 401(a) of the Code and qualified employee benefit plans of employers who are "affiliated persons" of each other within the meaning of the 1940 Act; (e) tax- exempt organizations enumerated in Sections 501(c)(3) or (13) of the Code; and (f) a trustee or other professional fiduciary (including a bank, or an investment adviser registered with the SEC under the Investment Advisers Act of 1940, as amended), purchasing shares of the Fund for one or more trust estates or fiduciary accounts. Purchasers who wish to combine purchase orders to take advantage of volume discounts should contact a Smith Barney Financial Consultant.
Reduced sales charges, in accordance with the schedule in the Prospectus, apply to any purchase of Class A shares if the aggregate investment in Class A shares of the Fund and in Class A shares of other funds of the Smith Barney Mutual Funds that are offered with a sales charge, including the purchase being made, of any purchaser, is $25,000 or more. The reduced sales charge is subject to confirmation of the shareholder's holdings through a check of appropriate records. The Fund reserves the right to terminate or amend the combined right of accumulation at any time after written notice to shareholders. For further information regarding the combined right of accumulation, shareholders should contact a Smith Barney Financial Consultant.
Determination of Public Offering Price
The Fund offers its shares to the public on a continuous basis. The public offering price for a Class A and Class Y share of the Fund is equal to the net asset value per share at the time of purchase plus for Class A shares an initial sales charge based on the aggregate amount of the investment. The public offering price for a Class B or Class C share (or Class A share purchases, including applicable right of accumulation, equaling or exceeding $500,000), is equal to the net asset value per share at the time of purchase and no sales charge is imposed at the time of purchase. A contingent deferred sales charge ("CDSC"), however, is imposed on certain redemptions of Class B shares and Class C shares, and of Class A shares when purchased in amounts equaling or exceeding $500,000. The method of computation of the public offering price is shown in the Fund's financial statements incorporated by reference in their entirety into this Statement of Additional Information.
The right of redemption may be suspended or the date of payment postponed: (a) for any period during which the New York Stock Exchange Inc. (the "NYSE") is closed (other than for customary weekend and holiday closings); (b) when trading in the markets the Fund normally utilizes is restricted, or an emergency exists, as determined by the SEC, so that disposal of the Fund's investments or determination of net asset value is not reasonably practicable; or (c) for such other periods as the SEC by order may permit for protection of the Fund's shareholders.
If the Board of Directors of the Fund determines that it would be detrimental to the best interests of the remaining shareholders of the Fund to make a redemption payment wholly in cash, the Fund may pay, in accordance with SEC rules, any portion of a redemption in excess of the lesser of $250,000 or 1% of the Fund's net assets by distribution in kind of portfolio securities in lieu of cash. Securities issued as a distribution in kind may incur brokerage commissions when shareholders subsequently sell those securities.
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to shareholders who own shares with a value of at least $10,000 ($5,000 for retirement plan accounts) and who wish to receive specific amounts of cash monthly or quarterly. Withdrawals of at least $50 monthly may be made under the Withdrawal Plan by redeeming as many shares of the Fund as may be necessary to cover the stipulated withdrawal payment. Any applicable CDSC will not be waived on amounts withdrawn by shareholders that exceed 1.00% per month of the value of a shareholder's shares at the time the Withdrawal Plan commences. (With respect to Withdrawal Plans in effect prior to November 7, 1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed 2.00% per month of the value of a shareholder's shares at the time the Withdrawal Plan commences.) To the extent that withdrawals exceed dividends, distributions and appreciation of a shareholder's investment in the Fund, there will be a reduction in the value of the shareholder's investment and continued withdrawal payments will reduce the shareholder's investment and may ultimately exhaust it. Withdrawal payments should not be considered income from an investment in the Fund. Furthermore, as it generally would not be advantageous to a shareholder to make additional investments in the Fund at the same time that he or she is participating in the Withdrawal Plan, purchases by such shareholders in amounts of less than $5,000 ordinarily will not be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold their shares in certificate form must deposit their share certificates with First Data as agent for Withdrawal Plan members. All dividends and distributions on shares in the Withdrawal Plan are reinvested automatically at net asset value in additional shares of the Fund. Withdrawal Plans should be set up with a Smith Barney Financial Consultant. A shareholder who purchases shares directly through First Data may continue to do so. Applications for participation in the Withdrawal Plan must be received by First Data no later than the eighth day of the month to be eligible for participation beginning with that month's withdrawal. For additional information, shareholders should contact a Smith Barney Financial Consultant.
Smith Barney serves as the Fund's distributor on a best efforts basis pursuant to a distribution agreement (the "Distribution Agreement") which was most recently approved by the Fund's Board of Directors on July 19, 1995. For the 1993, 1994 and 1995 fiscal years, Smith Barney or its predecessor, Shearson Lehman Brothers, received $95,564, $93,066 and $76,401, respectively, in sales charges from the sale of Class A shares, and did not reallow any portion thereof to dealers. For the period from November 6, 1992 through October 31, 1993 and the fiscal years ended October 31, 1994 and 1995, Smith Barney or its predecessor received from shareholders $66,095, $94,391 and $136,462, respectively, in CDSC on the redemption of Class B and Class C shares.
When payment is made by the investor before the settlement date, unless otherwise noted by the investor, the funds will be held as a free credit balance in the investor's brokerage account and Smith Barney may benefit from the temporary use of the funds. The investor may designate another use for the funds prior to settlement date, such as an investment in a money market fund of the Smith Barney Mutual Funds (other than Smith Barney Exchange Reserve Fund). If the investor instructs Smith Barney to invest the funds in a Smith Barney money market fund, the amount of the investment will be included as part of the average daily net assets of both the Fund and the Smith Barney money market fund, and affiliates of Smith Barney that serve the funds in an investment advisory capacity or administrative capacity will benefit from the fact that they are receiving fees from both such investment companies for managing these assets computed on the basis of their average daily net assets. The Fund's Board of Directors has been advised of the benefits to Smith Barney resulting from these settlement procedures and will take such benefits into consideration when reviewing the Management and Distribution Agreements for continuance.
For the fiscal year ended October 31, 1995, Smith Barney incurred distribution expenses totaling approximately $429,083, consisting of approximately $14,019 for advertising, $2,351 for printing and mailing of prospectuses, $315,157 for support services, $96,612 to Smith Barney Financial Consultants, and $944 in accruals for interest on the excess of Smith Barney expenses incurred in distributing the Fund's shares over the sum of the distribution fees and CDSC received by Smith Barney from the Fund.
To compensate Smith Barney for the service it provides and for the expense it bears under the Distribution Agreement, the Fund has adopted a services and distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund pays Smith Barney a service fee, accrued daily and paid monthly, calculated at the annual rate of 0.25% of the value of the Fund's average daily net assets attributable to the Class A, Class B and Class C shares. In addition, the Fund pays Smith Barney a distribution fee with respect to Class B and Class C shares primarily intended to compensate Smith Barney for its initial expense of paying Financial Consultants a commission upon sales of those shares. The Class B and Class C distribution fee is calculated at the annual rate of 0.75% of the value of the Fund's average net assets attributable to the shares of the respective Class.
For the fiscal year ended October 31, 1994, the Fund incurred $62,693 and $134,998 in service fees for Class A and Class B shares, respectively. For the fiscal year ended October 31, 1995, the Fund incurred $90,913, $76,842 and $663 in service fees for Class A, Class B and Class C shares, respectively. In addition, Class B and Class C shares pay a distribution fee primarily intended to compensate Smith Barney for its initial expense of paying its Financial Consultants a commission upon the sale of its Class B and Class C shares. These distribution fees are calculated at the annual rate of 0.75% of the value of the average daily net assets attributable to the respective Class. For the fiscal year ended October 31, 1994 and 1995, the Fund incurred $404,995 and $230,525 for Class B shares, respectively, in distribution fees. For the fiscal year ended October 31, 1995, the Fund incurred $1,989 for Class C shares in distribution fees.
Under its terms, the Plan continues from year to year, provided such continuance is approved annually by vote of the Board of Directors, including a majority of the Directors who are not interested persons of the Fund and who have no direct or indirect financial interest in the operation of the Plan (the "Independent Directors"). The Plan may not be amended to increase the amount of the service and distribution fees without shareholder approval, and all material amendments of the Plan also must be approved by the Directors and Independent Directors in the manner described above. The Plan may be terminated with respect to a Class of the Fund at any time, without penalty, by vote of a majority of the Independent Directors or by a vote of a majority of the outstanding voting securities of the Class (as defined in the 1940 Act). Pursuant to the Plan, Smith Barney will provide the Fund's Board of Directors with periodic reports of amounts expended under the Plan and the purpose for which such expenditures were made.
Each Class' net asset value per share is calculated on each day, Monday through Friday, except on days on which the NYSE is closed. The NYSE currently is scheduled to be closed on New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on the preceding Friday or subsequent Monday when one of these holidays falls on a Saturday or Sunday, respectively. Because of the differences in distribution fees and Class-specific expenses, the per share net asset value of each Class may differ. The following is a description of the procedures used by the Fund in valuing its assets.
Securities listed on a national securities exchange will be valued on the basis of the last sale on the date on which the valuation is made or, in the absence of sales, at the mean between the closing bid and asked prices. Over-the- counter securities will be valued on the basis of the bid price at the close of business on each day, or, if market quotations for those securities are not readily available, at fair value, as determined in good faith by the Fund's Board of Directors. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which constitutes fair value as determined by the Fund's Board of Directors. Amortized cost involves valuing an instrument at its original cost to the Fund and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the effect of fluctuating interest rates on the market value of the instrument. All other securities and other assets of the Fund will be valued at fair value as determined in good faith by the Fund's Board of Directors.
Except as noted below, shareholders of any of the Smith Barney Mutual Funds may exchange all or part of their shares for shares of the same class of other Smith Barney Mutual Funds, to the extent such shares are offered for sale in the shareholder's state of residence, on the basis of relative net asset value per share at the time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may be exchanged for Class A shares of any of the other funds, and the sales charge differential, if any, will be applied. Class A shares of any fund may be exchanged without a sales charge for shares of the funds that are offered without a sales charge. Class A shares of any fund purchased without a sales charge may be exchanged for shares sold with a sales charge, and the appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of shares purchased with a sales charge may be exchanged for Class A shares of any of the other funds, and the sales charge differential, if any, will be applied.
C. Class B shares of any fund may be exchanged without paying a CDSC. Class B shares of the Fund exchanged for Class B shares of another fund will be subject to the higher applicable CDSC of the two funds and, for purposes of calculating CDSC rates and conversion periods, will be deemed to have been held since the date the shares being exchanged were deemed to be purchased.
Dealers other than Smith Barney must notify First Data of the investor's prior ownership of Class A shares of Smith Barney High Income Fund and the account number in order to accomplish an exchange of shares of the Smith Barney High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same Class in a fund with different investment objectives when they believe that a shift between funds is an appropriate investment decision. This privilege is available to shareholders residing in any state in which the fund shares being acquired may legally be sold. Prior to any exchange, the shareholder should obtain and review a copy of the current prospectus of each fund into which an exchange is to be made. Prospectuses may be obtained from a Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting documents, shares submitted for exchange are redeemed at the then-current net asset value and, subject to any applicable CDSC, the proceeds immediately invested, at a price described above, in shares of the fund being acquired. Smith Barney reserves the right to reject any exchange request. The exchange privilege may be modified or terminated at any time after written notice to shareholders.
From time to time, the Fund may quote total return of a Class in advertisements or in reports and other communications to shareholders. The Fund may include comparative performance information in advertising or marketing the Fund's shares. Such performance information may include data from the following industry and financial publications: Barron's, Business Week, CDA Investment Technologies, Inc., Changing Times, Forbes, Fortune, Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund Values, The New York Times, USA Today and The Wall Street Journal. To the extent any advertisement or sales literature of the Fund describes the expenses or performance of Class A, Class B, Class C or Class Y, it will also disclose such information for the other Classes.
"Average annual total return" figures, as described below, are computed according to a formula prescribed by the SEC. The formula can be expressed as follows:
Where: P =a hypothetical initial payment of $1,000. T =average annual total return. n =number of years. ERV =Ending Redeemable Value of a hypothetical $1,000 investment made at the beginning of the 1-, 5- or 10-year period at the end of the 1-, 5- or 10-year period (or reinvestment of all dividends and distributions.
Class A's average annual total return was as follows for the periods indicated:
(26.89) % for the one-year period beginning on November 1, 1994 through October 31, 1995.
2.97 % per annum during the five-year period from November 1, 1990 through October 31, 1995.
1.12 % per annum for the period from commencement of operations (November 24, 1986) through October 31, 1995.
Class B's average annual total return was as follows for the periods indicated:
(27.42) % for the one-year period beginning on November 1, 1994 through October 31, 1995; and
5.70 % per annum for the period from commencement of operations (November 6, 1992) through October 31, 1995.
Average annual total return figures calculated in accordance with the above formula assume that the maximum 5.00% sales charge or maximum applicable CDSC, as the case may be, has been deducted from the hypothetical investment. If the maximum 5.00% sales charge had not been deducted at the time of purchase, Class A's average annual total return for the same periods would have been (23.04)%, 4.04% and 1.70%, respectively. If the maximum CDSC had not been deducted at the time of purchase, Class B's average annual total return for the same periods would have been (23.60)% and 6.59%, respectively.
Aggregate total return figures represent the cumulative change in the value of an investment in the Fund for the specified period and are computed by the following formula:
Where: P =a hypothetical initial payment of $10,000. ERV =Ending Redeemable Value of a made at the beginning of the 1-, 5- or 10-year period at the end of the 1-, 5- or 10- year period (or fractional portion thereof), assuming reinvestment of all dividends and distributions.
Class A's aggregate total return was as follows for the periods indicated:
(23.04) % for the one-year period beginning on November 1, 1994 through October 31, 1995.
21.88 % for the five-year period from November 1, 1990 through October 31, 1995.
16.31% for the period from commencement of operations (November 24, 1986) through October 31, 1995.
Class B's aggregate total return was as follows for the periods indicated:
(27.42) % for the one-year period beginning on November 1, 1994 through October 31, 1995.
17.97 % per annum from commencement of operations (November October 31, 1995.
Class C's aggregate total return was as follows for the period indicated:
(22.45) % for the period from commencement of operations October 31, 1995.
Class A aggregate total return figures assume that the maximum 5.00% sales charge has not been deducted from the investment at the time of purchase. If the maximum 5.00% sales charge had been deducted at the time of purchase, Class A's aggregate total return for the same periods would have been (26.89) %, 15.76 % and 10.49 %, respectively.
Class B aggregate total return figures assume that the maximum applicable CDSC has been deducted from the investment at the time of purchase. If the maximum 5% CDSC had not been deducted at the time of purchase, Class B's aggregate total return for the same periods would have been (23.60) % and 20.97 %, respectively.
Class C aggregate total return figure assumes that the maximum applicable CDSC has been deducted from the investment at the time of purchase. If the maximum 1% CDSC had not been deducted at the time of purchase, Class C's aggregate total return for the same period would have been (21.67)%.
Performance will vary from time to time depending upon market conditions, the composition of the Fund's portfolio and operating expenses and the expenses exclusively attributable to the Class. Consequently, any given performance quotation should not be considered representative of the Class' performance for any specified period in the future. Because performance will vary, it may not provide a basis for comparing an investment in the Class with certain bank deposits or other investments that pay a fixed yield for a stated period of time. Investors comparing the Class' performance with that of other mutual funds should give consideration to the quality and maturity of the portfolio securities.
It is important to note that the total return figures set forth above are based on historical earnings and are not intended to indicate future performance.
Tax Status of the Fund
The following is a summary of selected Federal income tax considerations that may affect the Fund and its shareholders. The summary is not intended as a substitute for individual tax advice and investors are urged to consult their own tax advisors as to the tax consequences of an investment in the Fund.
The Fund has qualified and intends to continue to qualify each year as a regulated investment company under the Code. Provided that the Fund (a) is a regulated investment company and (b) distributes at least 90% of its net investment income (including for this purpose, net realized short-term capital gains), the Fund will not be liable for Federal income taxes to the extent its net investment income and its net realized long- and short-term capital gains, if any, are distributed to its shareholders. One of several requirements for qualification is that the Fund receives at least 90% of its gross income each year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of securities or foreign currencies, or other income derived with respect to the Fund's investments in stock, securities and foreign currencies. Income from investments in gold bullion and gold coins will not qualify as gross income from "securities" for purposes of the 90% test. Therefore, the Fund intends to restrict its investment in gold bullion and gold coins to the extent necessary to meet the 90% test.
An additional requirement is that the Fund must earn less than 30% of its gross income from the disposition of securities held for less than three months (the "30% Test"). The 30% Test limits the extent to which the Fund may sell stocks, securities, and certain financial instruments or currencies held for less than three months. If the Fund purchases a put option for the purpose of hedging an underlying portfolio security, the acquisition of the option is treated as a short sale of the underlying security unless the option and the security are acquired on the same date. As discussed below, this requirement may also limit investments by the Fund in stock index options. For purposes only of the 30% Test, the Fund's gains or losses from the sale (including open short sales) or other disposition of stock or securities (with the term "securities" defined to include put and call options) held for less than three months ("three-month investments") will be netted against its gain or loss on positions that are part of a "designated hedge" with respect to such three-month investments.
Taxation of the Fund's Investments
Gain or loss on the sale of securities by the Fund generally will be long-term capital gain or loss if the Fund has held the securities for more than one year. Gain or loss on sales of securities held for not more than one year will be short-term. If the Fund acquires a debt security at a substantial discount, a portion of any gain upon the sale or redemption will be taxed as ordinary income, rather than capital gain, to the extent that it reflects accrued market discount.
Option Transactions. The tax consequences of options transactions entered into by the Fund will vary depending on the nature of the underlying security and whether the "straddle" rules, discussed separately below, apply to the transaction.
If the Fund purchases a put option on an equity security, convertible debt security or gold or purchases a call option on gold and such a put or call option expires unexercised, the Fund will realize a capital loss equal to the cost of the option. If the Fund enters into a closing sale transaction with respect to the option, it will realize a capital gain or loss (depending on whether the proceeds from the closing transaction are greater or less than the cost of the option). The gain or loss will be short-term or long-term depending on the Fund's holding period for the option. If the Fund exercises such a put option, it will realize a short-term capital gain or loss (long-term if the Fund holds the underlying security for more than one year before it purchases the put) from the sale of the underlying security measured by the sales proceeds decreased by the premium paid and the Fund's tax basis in the underlying securities. No gain or loss will be recognized by the Fund if it exercises a call option.
The Fund may write a covered call option on gold. If the option expires unexercised, or if the Fund enters into a closing purchase transaction, the Fund will realize a gain or loss without regard to any unrealized gain or loss on the underlying gold. Generally, any such gain or loss will be short-term capital gain or loss. If a call option written by the Fund is exercised, the Fund will treat the premium received for writing such call option as additional sales proceeds and will recognize a capital gain or loss from the sale of the underlying gold. Whether the gain or loss will be long-term or short-term will depend on the Fund's holding period for the underlying gold.
The Code imposes a special "mark-to-market" system for taxing "section 1256 contracts" including certain options on nonconvertible debt securities (including U.S. government securities), options on certain stock indexes, gold futures contracts and certain foreign currency contracts. In general, gain or loss on section 1256 contracts will be taken into account for tax purposes when actually realized (by a closing transaction, by exercise, by taking delivery or by other termination). In addition, any section 1256 contracts held at the end of a taxable year will be treated as sold at their year-end fair market value (that is, marked to the market), and the resulting gain or loss will be recognized for tax purposes. Provided that section 1256 contracts are held as capital assets and are not part of a straddle, both the realized and unrealized year-end gain or loss from these investment positions (including premiums on options that expire unexercised) will be treated as 60% long- term and 40% short-term capital gain or loss, regardless of the period of time particular positions are actually held by the Fund.
It is not entirely clear whether mark-to-market gain on instruments held for less than three months at the close of the Fund's taxable year represents a gain on securities held for less than three months for purposes of the 30% Test discussed above. Although a favorable ruling by the Internal Revenue Service on this issue may be forthcoming, pending such a determination, the Fund may have to restrict its fourth quarter transactions in section 1256 contracts.
Straddles. While the mark-to-market system is limited to section 1256 contracts, the Code contains other rules applicable to transactions which create positions which offset positions in section 1256 or other investment contracts ("straddles"). Straddles are defined to include "offsetting positions" in actively traded personal property. In general, investment positions may be "offsetting" if there is a substantial diminution in the risk of loss from holding one position by reason of holding one or more other positions. Under current law, it is not clear under what circumstances one investment made by the Fund, such as an option contract, would be treated as offsetting another investment also held by the Fund, and, therefore, whether the Fund would be treated as having entered into a straddle. Also, the forward currency contracts entered into by the Fund may result in the creation of straddles for Federal income tax purposes.
If two (or more) positions constitute a straddle, a realized loss from one position (including a mark-to-market loss) must be deferred to the extent of unrecognized gain in an offsetting position. Also, the holding period rules described above may be modified to recharacterize long-term gain as short-term gain, or to recharacterize short-term loss as long-term loss, in connection with certain straddle transactions. Furthermore, interest and other carrying charges allocable to personal property that is part of a straddle must be capitalized. In addition, "wash sale" rules apply to straddle transactions to prevent the recognition of loss from the sale of a position at a loss where a new offsetting position is or has been acquired within a prescribed period. To the extent that the straddle rules apply to positions established by the Fund, losses realized by the Fund may be either deferred or recharacterized as long-term losses, and long-term gains realized by the Fund may be converted into short-term gains.
If the Fund chooses to identify particular offsetting positions as being components of a straddle, a realized loss will be recognized, but only upon the liquidation of all of the components of the identified straddle. Special rules apply to the treatment of "mixed" straddles (that is, straddles consisting of a section 1256 contract and an offsetting position that is not a section 1256 contract). If the Fund makes certain elections, the section 1256 contract components of such straddles will not be subject to the "60%/40%" mark-to-market rules. If any such election is made, the amount, the nature (as long or short-term) and the timing of the recognition of the Fund's gains or losses from the affected straddle positions will be determined under rules that will vary according to the type of election made.
The portion of the dividends received from the Fund which qualifies for the dividends-received deduction for corporations will be reduced to the extent that the Fund holds dividend-paying stock for less than 46 days (91 days for certain preferred stocks). The Fund's holding period will not include any period during which the Fund has reduced its risk of loss from holding the stock by purchasing an option to sell or entering into a short sale of substantially identical stock or securities, such as securities convertible into the stock. The holding period for stock may also be reduced if the Fund diminishes its risk of loss by holding one or more positions in substantially similar or related properties. Dividends- received deductions will be allowed only with respect to shares a corporate shareholder has held for at least 46 days within the meaning of the same holding period rules applicable to the Fund.
If the Fund is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends must be included in the Fund's gross income as of the later of (a) the date that such stock became ex-dividend with respect to such dividends (i.e., the date on which a buyer of the stock would not be entitled to receive the declared, but unpaid, dividends) or (b) the date that the Fund acquired such stock. Accordingly, in order to satisfy its income distribution requirements, the Fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an earlier year than would otherwise be the case.
If a shareholder (a) incurs a sales charge in acquiring or redeeming shares of the Fund, (b) disposes of those shares within 90 days and (c) acquires shares in a mutual fund for which the otherwise applicable sales charge is reduced by reason of a reinvestment right (i.e., an exchange privilege), the original sales charge increases the shareholder's tax basis in the original shares only to the extent that the otherwise applicable sales charge for the second acquisition is not reduced. The portion of the original sales charge that does not increase the shareholder's tax basis in the original shares would be treated as incurred with respect to the second acquisition and, as a general rule, would increase the shareholder's tax basis in the newly acquired shares. Furthermore, the same rule would apply to a disposition of the newly acquired or redeemed shares made within 90 days of the second acquisition. This provision prevents a shareholder from immediately deducting the sales charge by shifting his or her investment in a family of mutual funds.
Investors considering buying shares of the Fund on or just prior to a record date for a taxable-dividend or capital gain distribution should be aware that, regardless of whether the price of the Fund shares to be purchased reflects the amount of the forthcoming dividend or distribution payment, any such payment will be a taxable dividend or distribution payment.
Capital Gains Distributions. As a general rule, a shareholder who redeems or exchanges his or her shares will recognize long-term capital gain or loss if the shares have been held for more than one year, and will recognize short- term capital gain or loss if the shares have been held for one year or less. However, if a shareholder receives a distribution taxable as long-term capital gain with respect to shares of the Fund, and redeems or exchanges the shares before he or she has held them for more than six months, any loss on the redemption or exchange that is less than or equal to the amount of the distribution will be treated as a long-term capital loss.
Backup Withholding. If a shareholder fails to furnish a correct taxpayer identification number, fails to fully report dividend or interest income or fails to certify that he or she has provided a correct taxpayer identification number and that he or she is not subject to such withholding, then the shareholder may be subject to a 31% "backup withholding tax" with respect to (a) taxable dividends and distributions and (b) any proceeds of any redemption of Fund shares. An individual's taxpayer identification number is his or her social security number. The backup withholding tax is not an additional tax and may be credited against a shareholder's Federal income tax liability.
The foregoing is only a summary of certain tax considerations generally affecting the Fund and its shareholders, and is not intended as a substitute for careful tax planning. Shareholders are urged to consult their tax advisors with specific reference to their own tax situations, including their state and local tax liabilities.
The Fund was incorporated under the laws of the State of Maryland on July 16, 1986 under the name Shearson Lehman Precious Metals and Minerals Fund Inc. On November 17, 1989, March 31, 1992, July 30, 1993, October 14, 1994 and December 19, 1995, the Fund changed its name to SLH Precious Metals and Minerals Fund Inc., Shearson Lehman Brothers Precious Metals and Minerals Fund Inc., Smith Barney Shearson Precious Metals and Minerals Fund Inc., Smith Barney Precious Metals and Minerals Fund Inc. and Smith Barney Natural Resources Fund Inc., respectively.
Morgan Guaranty, located at 60 Wall Street, New York, New York 10260, serves as the Fund's custodian. Under its agreement with the Fund, Morgan Guaranty holds the Fund's portfolio securities and keeps all necessary accounts and records. For its services, Morgan Guaranty receives a monthly fee based upon the month-end market value of securities held in custody and also receives securities transaction charges. The assets of the Fund are held under bank custodianship in compliance with the 1940 Act. Morgan Guaranty is authorized to establish separate accounts in foreign securities owned by the Fund to be held with foreign branches of other domestic banks as well as with certain foreign banks and securities depositories.
First Data Investor Services Group, Inc., located at Exchange Place, Boston, Massachusetts 02109, serves as the Fund's transfer agent. Under the transfer agency agreement, First Data maintains the shareholder account records for the Fund, handles certain communications between shareholders and the Fund, and distributes dividends and distributions payable by the Fund. For these services, First Data receives a monthly fee computed on the basis of the number of shareholder accounts it maintains for the Fund during the month and is reimbursed for out-of-pocket expenses.
The Fund's Annual Report for the fiscal year ended October 31, 1995 and Semi-Annual Report for the period ended April 30, 1995 are incorporated herein by reference in their entirety.
Description of Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's") ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and political subdivisions. Ratings are assigned to general obligation and revenue bonds. General obligation bonds are usually secured by all resources available to the municipality and the factors outlined in the rating definitions below are weighed in determining the rating. Because revenue bonds in general are payable from specifically pledged revenues, the essential element in the security for a revenue bond is the quantity and quality of the pledged revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the quality of general obligation bond credit is usually appropriate in the rating analysis of a revenue bond, other factors are important, including particularly the competitive position of the municipal enterprise under review and the basic security covenants. Although a rating reflects S&P's judgment as to the issuer's capacity for the timely payment of debt service, in certain instances it may also reflect a mechanism or procedure for an assured and prompt cure of a default, should one occur, i.e., an insurance program, Federal or state guarantee or the automatic withholding and use of state aid to pay the defaulted debt service.
Prime -- These are obligations of the highest quality. They have the strongest capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the issuers will suffer the smallest declines in income and will be least susceptible to autonomous decline. Debt burden is moderate. A strong revenue structure appears more than adequate to meet future expenditure requirements. Quality of management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to remain, substantial. Stability of the pledged revenues is also exceptionally strong, due to the competitive position of the municipal enterprise or to the nature of the revenues. Basic security provisions (including rate covenant, earnings test for issuance of additional bonds, and debt service reserve requirements) are rigorous. There is evidence of superior management.
High Grade -- The investment characteristics of general obligation and revenue bonds in this group are only slightly less marked than those of the prime quality issues. Bonds rated AA have the second strongest capacity for payment of debt service.
Good Grade -- Principal and interest payments on bonds in this category are regarded as safe. This rating describes the third strongest capacity for payment of debt service. It differs from the two higher ratings because:
General Obligation Bonds -- There is some weakness, either in the local economic base, in debt burden, in the balance between revenues and expenditures, or in quality of management. Under certain adverse circumstances, any one such weakness might impair the ability of the issuer to meet debt obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional. Stability of the pledged revenues could show some variations because of increased competition or economic influences on revenues. Basic security provisions, while satisfactory, are less stringent. Management performance appears adequate.
Medium Grade -- Of the investment grade ratings, this is the lowest.
General Obligation Bonds -- Under certain adverse conditions, several of the above factors could contribute to a lesser capacity for payment of debt service. The difference between "A" and "BBB" ratings is that the latter shows more than one fundamental weakness, or one very substantial fundamental weakness, whereas the former shows only one deficiency among the factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged revenues could show substantial variations, with the revenue flow possibly being subject to erosion over time. Basic security provisions are no more than adequate. Management performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.
The rating C is reserved for income bonds on which no interest is being paid.
Bonds rated D are in default, and payment of interest and/or repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus sign, which is used to show relative standing within the major rating categories, except in the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are usually given note ratings (designated SP-1, -2 or -3) by S&P to distinguish more clearly the credit quality of notes as compared to bonds. Notes rated SP-1 have a very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics are given the designation of SP-1+. Notes rated SP-2 have a satisfactory capacity to pay principal and interest.
Moody's Ratings for Municipal Bonds
Bonds that are 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.
Bonds that 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.
Bonds that are rated A possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
Bonds that are rated Baa are considered as medium-grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Bonds that are 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.
Bonds that are rated B generally lack characteristics of the 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.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through B. 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.
Bonds that are rated Caa are of poor standing. These issues may be in default or present elements of danger may exist with respect to principal or interest.
Bonds that are rated Ca represent obligations that are speculative in a high degree. These issues are often in default or have other marked short comings.
Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term loans are designated Moody's Investment Grade ("MIG") and for variable rate demand obligations are designated Variable Moody's Investment Grade ("VMIG"). This distinction is in recognition of the differences between short-term credit risk and long-term credit risk. Loans bearing the designation MIG 1 or VMIG 1 are of the best quality, enjoying strong protection by established cash flows of funds for their servicing or from established and broad-based access to the market for refinancing, or both. Loans bearing the designation MIG 2 or VMIG 2 are of high quality, with ample margins of protection although not as large as the preceding group. Loans bearing the designation MIG 3 or VMIG 3 are of favorable quality, with all security elements accounted for, but lacking the undeniable strength of the preceding grades. Liquidity and cash flow may be tight and market access for refinancing, in particular, is likely to be less well established.
Description of S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second highest, commercial paper rating assigned by S&P. Paper rated A-1+ must have either the direct credit support of an issuer or guarantor that possesses excellent long-term operating and financial strengths combined with strong liquidity characteristics (typically, such issuers or guarantors would display credit quality characteristics which would warrant a senior bond rating of AA- or higher), or the direct credit support of an issuer or guarantor that possesses above average long-term fundamental operating and financing capabilities combined with ongoing excellent liquidity characteristics. Paper rated A-1 by S&P has the following characteristics: liquidity ratios are adequate to meet cash requirements; long-term senior debt is rated A or better; the issuer has access to at least two additional channels of borrowing; basic earnings and cash flow have an upward trend with allowance made for unusual circumstances; typically, the issuer's industry is well established and the issuer has a strong position within the industry; and the reliability and quality of management are unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating assigned by Moody's. Among the factors considered by Moody's in assigning ratings are the following: (a) evaluation of the management of the issuer; (b) economic evaluation of the issuer's industry or industries and an appraisal of speculative-type risks which may be inherent in certain areas; (c) evaluation of the issuer's products in relation to competition and customer acceptance; (d) liquidity; (e) amount and quality of long-term debt; (f) trend of earnings over a period of ten years; (g) financial strength of a parent company and the relationships which exist with the issuer; and (h) recognition by the management of obligations which may be present or may arise as a result of public interest questions and preparations to meet such obligations.
New York, New York 10013
Fund 31, 204, 256, 450
SMITH BARNEY NATURAL RESOURCES FUND INC.
Item 24. Financial Statements and Exhibits
The Registrant's Annual Report for the fiscal year ended October 31, 1995 and the Report of Independent Accountants dated December 29, 1995 are incorporated by reference to the Rule 30(b)2-1 filed on Accession # 911555-96-000006.
Consent of Independent Accountants is filed herein.
All references are to the Registrant's registration N-1A (the "Registration Statement") as filed with the Exchange Commission on July 18, 1986. File Nos. 33- 7339 and 811-4757.
(1)(a) Registrant's Articles of Incorporation are reference to Post-Effective Amendment No. 12 to the filed on October 27,1993 ("Post-Effective Amendment No. 12").
(b) Articles of Amendment dated October 30, 1986 to Incorporation are incorporated by reference to Post- Effective Amendment No. 12.
(c) Articles of Amendment dated November 17, 1989 to Incorporation are incorporated by reference to Post- Effective Amendment No. 12.
(d) Articles Supplementary dated November 5, 1992 to Incorporation are incorporated by reference to Post- Effective Amendment No. 12.
(e) Articles of Amendment dated November 19, 1992 to Incorporation are incorporated by reference to Post- Effective Amendment No. 12.
(f) Articles of Amendment dated July 30, 1993 to Incorporation are incorporated by reference to Post- Effective Amendment No. 12.
(g) Articles of Amendment dated October 14, 1994 and respectively and Articles Supplementary dated November incorporated by reference to Post-Effective Amendment Effective Amendment No. 15").
(h) Articles of Amendment dated December 18, 1995 to are filed herein.
(2)(a) Registrant's By-Laws are incorporated by reference Registration Statement.
(b) Amendment to Registrant's By-Laws is incorporated to Post-Effective Amendment No. 4 to the Registration January 3, 1989 ("Post-Effective Amendment No. 4").
(5) Form of Management Agreement between the Registrant Mutual Funds Management Inc. is incorporated by Amendment No. 19 to the Registration Statement filed on ("Post-Effective Amendment No. 19").
(6) Distribution Agreement between the Registrant and Smith Shearson Inc. is incorporated by reference to Post- Effective Amendment No. 12.
(8) Form of Custodian Agreement between the Registrant and Guaranty Trust Company of New York is incorporated by Post-Effective Amendment No. 17.
(9) Transfer Agency Agreement dated August 2, 1993 between and The Shareholder Services Group, Inc. is Post-Effective Amendment No. 14.
(11) Consent of Independent Accountants is filed herein.
(15) Amended Service and Distribution Plan pursuant to Rule the Registrant and Smith Barney Inc. is incorporated by Post-Effective Amendment No. 15.
(16) Performance Data is incorporated by reference to Post- Amendment No. 4.
(18) Form of Rule 18f-3(d) Multiple Class Plan of the Registrant is filed herein.
Item 25. Persons Controlled by or Under Common Control with
Item 26. Number of Holders of Securities
Title of Class Holders by Class as of December 1,
Common Stock Class A- 6833 par value $.001 per Class B- 4025
The response to this item is incorporated by reference Effective Amendment No. 1.
Item 28(a). Business and Other Connections of Investment
Investment Adviser - - Smith Barney Mutual Funds Management Inc.
Smith Barney Mutual Funds Management Inc. ("SBMFM") was incorporated in December 1968 under the laws of the State of Delaware. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc. (formerly known as Smith Barney Shearson Holdings Inc.), which in turn is a wholly owned subsidiary of Travelers Group Inc. (formerly known as Primerica registered as an investment adviser under the Investment Advisers Act of 1940 (the "Advisers Act") and has, through its predecessors, been in the investment counseling business since 1934.
The list required by this Item 28 of the officer and directors of SBMFM together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by such officer and directors during the past two fiscal years, is incorporated by reference to Schedules A and D of Form ADV filed by SBMFM pursuant to the Advisers Act (SEC File No. 801-8314).
Smith Barney Inc. ("Smith Barney") currently acts as Barney Managed Municipals Fund Inc., Smith Barney California Municipals Fund Inc., Smith Barney Massachusetts Municipals Fund, Smith Barney Aggressive Smith Barney Appreciation Fund Inc., Smith Barney Principal Smith Barney Managed Governments Fund Inc., Smith Barney Smith Barney Equity Funds, Smith Barney Investment Funds Smith Barney Natural Resources Fund Inc., Smith Barney Trust, Smith Barney Arizona Municipals Fund Inc., Smith Municipals Fund Inc., Smith Barney Fundamental Value Fund Series Fund, Consulting Group Capital Markets Funds, Smith Trust, Smith Barney Adjustable Rate Government Income Fund, Oregon Municipals Fund, Smith Barney Funds, Inc., Smith Barney Muni Funds, Smith Barney World Funds, Inc., Smith Funds, Inc., Smith Barney Municipal Money Market Fund, Inc., Account Funds, Smith Barney U.S. Dollar Reserve Fund Special Fund, N.V., Worldwide Securities Limited, (Bermuda), Institutional Cash Management Fund, Inc. and various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Smith Barney Inc. (formerly known as Smith Barney Shearson Holdings Inc.), which in turn is a wholly owned subsidiary of The Travelers Inc. (formerly Corporation) ("Travelers"). On June 1, 1994, Smith Barney name from Smith Barney Shearson Inc. to its current name. required by this Item 29 with respect to each director, of Smith Barney is incorporated by reference to Schedule A by Smith Barney pursuant to the Securities Exchange Act of No. 812-8510).
Item 30. Location of Accounts and Records
(1) Smith Barney Natural Resources Fund Inc. New York, New York 10013
(2) Smith Barney Mutual Funds Management Inc. New York, New York 10013
(3) Morgan Guaranty Trust Company of New York New York, New York 10260
(4) First Data Investor Services Group, Inc.
Pursuant to the requirements of the Securities Act of 1933, and the Investment Company Act of 1940, the
has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, State of New York on the 2nd day of January, 1996.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment to the Registration Statement has been signed below by the following persons in the capacities and as of the dates indicated.
/s/ Heath B. McLendon Director and Chairman of the Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone Senior Vice President and Lewis E. Daidone (Chief Financial and Accounting
Cornelius C. Rose, Jr. Director | 485BPOS | 485BPOS | 1996-01-16T00:00:00 | 1996-01-16T17:25:16 |
0000880934-96-000001 | 0000880934-96-000001_0001.txt | You have requested my opinion for use in conjunction with a Rule 24f-2 Notice for First Priority Funds ("Trust") to be filed in respect of shares of the Trust ("Shares") sold for the fiscal year ended November 30, 1995, pursuant to the Trust's registration statement filed with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933 (File No. 33-44737 ("Registration Statement").
In its Registration Statement, the Trust elected to register an indefinite number of shares pursuant to the provisions of Investment Company Act Rule 24f- 2.
As counsel, I have participated in the preparation and filing of the Trust's amended Registration Statement under the Securities Act of 1933. Further, I have examined and am familiar with the provisions of the Declaration of Trust dated October 15, 1991, ("Declaration of Trust"), the Bylaws of the Trust and such other documents and records deemed relevant. I have also reviewed questions of law and consulted with counsel thereon as deemed necessary or appropriate by me for the purposes of this opinion.
On the basis of the foregoing, it is my opinion the Shares sold for the fiscal year ended November 30, 1995, registration of which the Rule 24f-2 Notice makes definite in number, were legally issued, fully paid and non-assessable by the Trust.
I hereby consent to the filing of this opinion as an exhibit to the Rule 24f-2 Notice referred to above, the Registration Statement of the Trust and to any application or registration statement filed under the securities laws of any of the States of the United States.
The foregoing opinion is limited to the Federal laws of the United States and the laws of the Commonwealth of Massachusetts, and I am expressing no opinion as to the effect of the laws of any other jurisdiction. | 24F-2NT | EX-99.OPINIONLETTER | 1996-01-16T00:00:00 | 1996-01-16T16:54:45 |
0000814680-96-000002 | 0000814680-96-000002_0011.txt | KNOW ALL MEN BY THESE PRESENTS, that the undersigned, TCI Portfolios, Inc., hereinafter called the "Corporation", and certain directors and officers of the Corporation, do hereby constitute and appoint James E. Stowers, Jr., James E. Stowers III, William M. Lyons, and Patrick A. Looby, and each of them individually, their true and lawful attorneys and agents to take any and all action and execute any and all instruments which said attorneys and agents may deem necessary or advisable to enable the Corporation to comply with the Securities Act of 1933 and/or the Investment Company Act of 1940, as amended, and any rules, regulations, orders, or other requirements of the United States Securities and Exchange Commission thereunder, in connection with the registration under the Securities Act of 1933 and/or the Investment Company Act of 1940, as amended, including specifically, but without limitation of the foregoing, power and authority to sign the name of the Corporation in its behalf and to affix its corporate seal, and to sign the names of each of such directors and officers in their capacities as indicated, to any amendment or supplement to the Registration Statement filed with the Securities and Exchange Commission under the Securities Act of 1933 and/or the Investment Company Act of 1940, as amended, and to any instruments or documents filed or to be filed as a part of or in connection with such Registration Statement; and each of the undersigned hereby ratifies and confirms all that said attorneys and agents shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the Corporation has caused this Power to be executed by its duly authorized officers on this the 29th day of July, 1995.
By:/s/ James E. Stowers III JAMES E. STOWERS III, President
/s/ James E. Stowers, Jr. /s/ Robert W. Doering, M.D. JAMES E. STOWERS, JR. ROBERT W. DOERING, M.D.
/s/ James E. Stowers III /s/ Linsley L. Lundgaard JAMES E. STOWERS III LINSLEY L. LUNDGAARD
/s/ Robert T. Jackson /s/ Donald H. Pratt ROBERT T. JACKSON DONALD H. PRATT
/s/ Maryanne Roepke /s/ Lloyd T. Silver MARYANNE ROEPKE LLOYD T. SILVER Vice President and Treasurer, Director
/s/ Thomas A. Brown /s/ M. Jeannine Strandjord THOMAS A. BROWN M. JEANNINE STRANDJORD
By: /s/ Patrick A. Looby | 485APOS | EX-99.B24 | 1996-01-16T00:00:00 | 1996-01-16T10:41:39 |
0000094056-96-000001 | 0000094056-96-000001_0000.txt | Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of the earliest event reported)
(State or other (Commission File (I.R.S. Employer
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code)
ITEM 2. ACQUISITION or DISPOSITION of ASSETS
On December 31, 1995, the Registrant entered into asset purchase agreements with Colgate-Palmolive Company and its subsidiary, The Mennen Company, for the acquisition of certain consumer product brands, as well as a licensing agreement for the domestic distribution of the Cashmere Bouquet Talc product line. The combined purchase price for the brands and licensing agreement was a minimum of $12,000,000, comprised of a $2,000,000 cash down payment (utilizing current working capital funds), 5 year, 8% notes in an aggregate amount of $6,000,000 and an 8% royalty payment based upon net sales for a period of 8 years, with a minimum royalty payment of $4,000,000.
The Registrant purchased the Wildroot product line of men's hair care products and signed a licensing agreement for the manufacture and domestic distribution of the Cashmere Bouquet Talc line for women, from the Colgate- Palmolive Company. Protein 29 and Protein 21, both men's hair grooming preparations; Balm Barr, a hand and body lotion and creme product for women; Stretch Mark, a massage creme for women; and Quinsana, a medicated anti-fungal talc were purchased from The Mennen Company, a subsidiary of Colgate-Palmolive.
Based upon information currently available to the Registrant, it is estimated that approximately $1,000,000 of the aggregate purchase price will be allocated to inventory and equipment with the balance being allocated to trademarks and other intangible assets. The Registrant has the right to prepay the above mentioned notes within 179 days without incurring any interest expense. Terms of the notes also include semi-annual payments of interest through the five year period.
Concurrent with the acquisition of the brands and the licensing agreement, the Registrant entered into a six-month transition agreement with Colgate-Palmolive to facilitate the orderly transition of sales, production and distribution functions. Inasmuch as all the acquired brands can be manufactured by the Registrant, this six month period allows the Registrant lead time to order packaging and components, establish a distribution network, evaluate the customer base and shipping points, and otherwise assume production and distribution of the brands. Based upon information currently available, the Registrant believes that the acquisition of these product lines may initially increase its sales by over $6,000,000 on an annual basis.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
(a) Financial Statements of Business Acquired.
The Registrant believes that the brands acquired do not constitute a "business" in accordance with Rule 11-01(d) of Regulation S-X, and as such, financial statements otherwise required to be provided by Rule 3-05(a) and (b) of such Regulation are not necessary for this Item 7(a).
(b) Pro Forma Financial Information.
The Registrant believes that the brands acquired do not constitute a "business" in accordance with Rule 11-01(d) of Regulation S-X, and as such, pro forma financial statements are not necessary for this Item 7(b).
10.1 - Acquisition Agreement dated December 31, 1995, between Colgate-Palmolive Company and The Stephan Co., with exhibits, including the Transition Agreement.
10.2 - Acquisition Agreement dated December 31, 1995, between The Mennen Company and The Stephan Co., with exhibits.
10.3 - Letter agreement dated December 31, 1995, between Colgate-Palmolive Company, The Mennen Company and The Stephan Co.
The above referenced contracts and letter agreement will be provided as soon as practicable.
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, in the State of Florida on January 16, 1996. | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-16T15:20:35 |
0000950123-96-000129 | 0000950123-96-000129_0000.txt | /X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
For the quarterly period ended November 30, 1995
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
For the transition period to
(Exact name of registrant as specified in its charter)
(State or other jurisdiction (I.R.S. Employer
96 Spring Street, 8th Floor, New York, New York 10012 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 219-9496
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
As of January 10, 1996, there were 6,124,432 shares of Common Stock, par value $0.01 per share, of the Registrant outstanding.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1995
PART I - FINANCIAL INFORMATION
See notes to financial statements
See notes to financial statements
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
See notes to financial statements
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to financial statements
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Monetary amounts in thousands, except per share data)
1. DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
As more fully discussed in UniHolding Corporation's ("UniHolding") Annual Report on Form 10-K for the year ended May 31, 1995, UniHolding and its subsidiaries (collectively the "Company") primarily provide clinical laboratory testing services to physicians, managed care organizations, hospitals and other health care providers through its laboratories in Switzerland, the United Kingdom, Italy and Spain.
On March 31, 1994 UniHolding issued 3,275,865 shares (65.75%) of its common stock, a promissory note in the amount of $18,000 and canceled a debt in the amount of $2,900 in exchange for 60% of the capital stock of Unilabs Group Limited ("UGL"), 100% of the capital stock of Uni Clinical Laboratories UCL Engineering SA ("UCLE"), and options to acquire certain laboratory operating companies in Spain and Italy from Unilabs Holdings SA, a Panama corporation, ("Holdings") pursuant to a stock exchange agreement between UniHolding and Holdings.
UGL was formed pursuant to a Stock Purchase Agreement dated January 19, 1993 among Unilab Corporation ("Old Unilab"), MetCal, Inc. (now known as "Unilab Corporation") and Holdings. Pursuant to the agreement, which closed on November 10, 1993, Holdings contributed 70% of Unilabs SA, a Swiss corporation ("ULSA"), subject to the assumption by Unilab Corporation from UGL of a liability of $21,000 to Holdings and Unilab Corporation contributed 100% of the capital stock of JS Pathology plc ("JSP") in exchange for 60% and 40%, respectively, of the capital stock of UGL. Subsequent to November 10, 1993, Holdings and Unilab agreed upon an increase in the relative value of Holdings' original contribution by approximately $4,100. Accordingly, UGL issued a note in this amount to Holdings. JSP was subsequently transferred to United Laboratories Limited ("ULL"), a newly formed United Kingdom corporation and 100% subsidiary of UGL, in a reorganization which is deemed to have occurred as of November 10, 1993.
The acquisitions referred to above were accounted for as the reverse acquisition of UniHolding by an "accounting entity" consisting of ULSA and UCLE because following the acquisitions the former shareholders of ULSA and UCLE were in control of the Company. Accordingly, the financial statements of the Company are the financial statements of the "accounting entity" adjusted for the assumed acquisition, at fair value, of the net assets of UniHolding in exchange for the issuance of UniHolding's common stock outstanding before the transaction.
The Company accounted for the net assets of UniHolding at the fair value of the net assets acquired as of March 31, 1994.
On May 31, 1995, the Company exercised its options, acquired on March 31, 1994, to acquire the Spanish and Italian laboratory operations from Holdings for an aggregate cost of $7,342 paid in the form of two promissory notes offset against cash advances. The acquisitions were accounted for at predecessor cost.
As of May 29, 1995, with a view to streamlining the European subsidiary structure, UGL sold ULL, its wholly-owned subsidiary, to ULSA, currently an 87.2% subsidiary of UGL.
As of June 30, 1995, the Company, UGL and Unilab entered into an agreement whereby UGL acquired from Unilab 40% of UGL's common stock for a total consideration of $30,000. The consideration was paid $13,000 in cash, $2,000 through the assumption of a debt from Unilab to JSP, and $15,000 in the form of a one-year, interest-bearing promissory note. The agreement provides that if the note is still unpaid six months after its due date, Unilab has the right to convert it into shares of the Company's common stock. The acquisition of the minority interest in UGL has been accounted for as a purchase and the excess of the purchase price over the fair value, which approximates the carrying value, of the assets acquired have been allocated to goodwill.
The accompanying financial statements have been prepared based on generally accepted accounting principles in the United States and include the accounts of all the subsidiaries, as restated for this purpose.
In the opinion of management, the accompanying unaudited interim financial statements reflect all adjustments which are necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. All such adjustments made were of a normal recurring nature.
The accompanying interim financial statements and related notes should be read in conjunction with the consolidated financial statements of the Company and related notes as contained in the Annual Report on Form 10-K for the year ended May 31, 1995.
The results of operations and financial position for interim periods are not necessarily indicative of those to be expected for a full year, due, in part, to the seasonal fluctuations which are normal for the Company's business.
3. NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted average number of common shares outstanding.
4. PAID-IN CAPITAL AND REVERSE SPLIT
Effective as of December 27, 1995, the Company effected a four-to-one reverse split of its Common Stock. These financial statements reflect this reverse split for all periods presented. The reverse split has no effect on the financial position or results of operations of the Company.
As of July 3, 1995, the Company issued 25,000 (post-reverse split) new shares of common stock to one investor, at a price of $5.50 per share, including warrants for 12,500 shares at a price of $6.50 exercisable for 18 months from July 3, 1995. Further, as of October 5, 1995, the Company issued 37,500 (post-reverse split) new shares of common stock to two investors, at a price of $5.50 per share, including warrants for 18,750 shares at a price of $6.50 exercisable for 18 months from October 5, 1995. See also Note 7.
The Company's operations are located in Switzerland, the United Kingdom, Italy and Spain. Its net assets, revenues and expenses are substantially all denominated in Swiss franc, Sterling pound, Italian lire, and Spanish pesetas, while the Company presents its consolidated financial statements in US dollars. In accordance with generally accepted accounting principles in the United States, net gains and losses arising upon translation from local currency financial statements are accumulated in a separate component of Stockholders' Equity, the Cumulative Translation Adjustment account, which may be realized upon the eventual disposition by the Company of part or all of its investments.
6. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the period ended November 30, 1995, in connection with its acquisition of 40% of the share capital of UGL, the Company issued a note of $15,000 and assumed a note of $2,000 payable to JSP.
During the period ended November 30, 1995, capital lease obligations of $1,296 were incurred when the Company entered into leases for new capital equipment.
7. ACQUISITION OF TREASURY STOCK
At various times during the quarter ended August 31, 1995, the Company transferred funds to Holdings, with a view to enable Holdings to acquire some shares of the Company's common stock, either from private sources or on the market. As of November 30, 1995, the balance due by Holdings to the Company was approximately $2,900. The Company has agreed with Holdings that such balance would be paid by Holdings through the transfer of 155,000 (post-reverse split) shares of the Company's common stock reflecting the purchase price of such stock as paid by Holdings. Further, during the period, the Company acquired 8,000 (post-reverse split) of its own shares on the market for $142.
8. EXPANSION INTO CLINICAL TRIALS
As of March 1, 1995, the Company entered into a Cooperation Agreement, a License Agreement and a Marketing Agreement (together referred to as the "NDA Agreements") with NDA Clinical Trials Services Inc., a Delaware corporation ("NDA") to provide laboratory testing services to the pharmaceutical industry in clinical evaluations conducted in both the United States and Europe. According to the NDA Agreements, the Company and NDA will seek to offer a unique service to the pharmaceutical industry through their joint efforts in conducting laboratory tests of pharmaceutical products, utilizing similar procedures and data management, thereby providing a global product. European operations commenced in the Summer of 1995.
In connection therewith, the Company has formed a wholly-owned subsidiary whose only activity will be to sell and perform clinical trials services. The subsidiary's name is Unilabs Clinical Trials Ltd. ("UCT"), and is domiciled in London (UK).
In connection with its decision to expand into the clinical trials business, as of October 16, 1995, the Company entered into a Stock Purchase Agreement and an Option Agreement with NDA. Under these Agreements, the Company acquired 17% of NDA's capital through the purchase of newly-issued shares, together with an option to increase its stake in NDA to 30% on or before May 31, 1998. The consideration for the acquisition of 17% was $1,188 paid in cash at closing. The price for the acquisition of the additional 13% will be based on a formula linked to NDA's revenues for its fiscal year ending December 31, 1997.
Simultaneously, UCT granted to NDA and NDA's stockholders (excluding the Company), an option to subscribe to new shares of UCT based on a formula linked to UCT's revenues for its fiscal year ending May 31, 1998. The option is contingent upon the Company exercising its option on NDA's equity, and is limited to a maximum of 5/7th of the Company's aggregate investment in NDA.
9. INVESTMENT IN NEW VENTURE
During the period, UGL entered into an agreement with a non-affiliated company, Health Strategies Limited, a Jersey Channel Islands corporation ("HSL"), whereby a new company, MISE S.A., a British Virgin Islands corporation ("MISE") was formed. UGL has made an investment of $3,005 in MISE in return for 33% of the voting rights in MISE stock, and for 67% of any dividend which may be paid in the future. The purpose of this investment is for the Company to have access to a software package, of which the rights thereto have been contributed to MISE by HSL. The software package, known as "MDM", operates as a sophisticated payments system for health insurance companies. The package permits processing of payments by an insurance company through a networking system which checks claims for tests provided at the doctor's request against industry averages thereby identifying test service providers who may deviate from the relevant norms. MISE intends to market the package to health insurance companies throughout Europe. The Company believes that such a system should be particularly useful and applicable in the context of the ongoing deregulation of the European health care system as it may provide a useful tool in achieving substantial savings in health care costs.
Effective as of December 27, 1995, the Company undertook the following corporate actions:
(1) a four-to-one reverse split of its Common Stock;
(2) a decrease of authorized shares of its Common Stock from 60 million to 20 million; and
(3) changed its name from UniHolding Corp. to UniHolding Corporation.
Further, on December 15, 1995, the Company announced its intent to effect a spin-off of its clinical trials business through a distribution to its shareholders. Had such spin-off been effected as of June 1, 1995, the Company would have recorded the following pro forma results for the six months ended November 30, 1995 (unaudited):
A summary of the consolidated balance sheet giving pro forma effect to the spin-off as if it had occurred on June 1, 1995 is as follows (unaudited):
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
As discussed in Note 1 to the accompanying financial statements, the Company's results for the three and six month periods ended November 30, 1995 give effect to the acquisition by UniHolding and UGL, as of June 30, 1995, of 40% of the capital stock of UGL, while the Company's results for the three and six month periods ended November 30, 1994 included a 40% minority interest on UGL's earnings. The financial statements also give effect to the acquisition of ULL by ULSA from UGL. The following table presents the required adjustments to the results of operations for the three and six month periods ended November 30, 1994, providing a comparative analysis with the comparable period in the current fiscal year, had the 40% of UGL's common stock been acquired as of June 1, 1994, and had ULL been owned by ULSA as of June 1, 1994 (unaudited). The results of operations for the three and six month periods ended November, 1994 were translated into U.S. dollars using the exchange rates which were then valid.
Had the Spanish and Italian operations been acquired by the Company as of June 1, 1994, there would have been no material effect on the consolidated operations of the Company for the six month period ended November 30, 1994.
THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 1995 COMPARED WITH THE THREE AND SIX MONTH PERIODS ENDED NOVEMBER 30, 1994
Consolidated revenue denominated in US dollars for the three and six months ended November 30, 1995 increased $4.9 million or 23.6% and $8.7 million or 22.3%, respectively, as compared to the similar prior year periods. Excluding the effect of the change in the US dollar exchange rate versus the Swiss franc and the pound Sterling (approximately $2.6 million and $4.2 million for the three and six months, respectively), and excluding revenue generated by the newly-acquired Italian and Spanish operations ($1.7 million and $3.0 million for the three and six months, respectively), revenue increased by approximately $0.6 million and $1.5 million for the three and six months, respectively. Revenue generated by the Swiss operations remained stable because an increase in specimen volume was offset by a decrease in revenue resulting from the sale of a subsidiary in October 1994. Revenue generated by the UK operations increased by approximately 12.9% over the comparable six month period of the prior year due to additional revenue resulting from the NHS contract, offset by a decrease in other revenues due to the loss of a significant client. UCT has not recorded any revenues during the three and six months periods. It is actively engaged in a marketing and selling effort which expected to be brought to fruition within a few weeks. Management is confident that revenue will begin to be recorded within the present fiscal year.
Operating income for the six months ended November 30, 1995 increased by $0.2 million versus the comparable prior year period. This increase includes the positive effect of the change in the US dollar exchange rate versus the Swiss franc and the pound Sterling (approximately $0.6 million), the start-up expenses of the clinical trials activity without matching income ($0.5 million) and an increase in operating costs related to the strengthening of certain administrative functions and controls. The contribution to operating income by the Swiss operations was higher than in the comparable prior year period, whereas the contribution to operating income by the UK operations was lower. Operating income for the three months ended November 30, 1995 increased by $0.3 million versus the comparable prior year period due to the same factors.
Interest expense increased during the three and six months ended November 30, 1995 as compared to the similar prior year periods, due to higher average borrowing levels by the Company resulting from the Company's acquisition of the 40% minority interest in UGL and other capital expenditures, offset by an overall decrease in interest rates.
Other income of $0.3 million was recorded primarily from exchange gains realized on certain assets and liabilities as a result of fluctuations in exchange rates.
Provision for income taxes remained stable as compared to the comparable prior year period.
Minority interests in income decreased substantially as compared to the comparable prior year period. This resulted primarily from the decrease in the minority interests in income of UGL due to the acquisition of the 40% minority interest in UGL as of June 30, 1995.
Net cash provided by operating activities for the six months ended November 30, 1995 amounted to $8.6 million, an increase of $5.3 million from the prior year primarily due to decreases in working capital needs.
Net cash provided by financing activities for the six months ended November 30, 1995 was $1.3 million, as compared to $2.2 million in the comparable prior year period. The change primarily resulted from repayment of debt, coupled with cash proceeds from issuance of new capital.
Net cash used in investing activities for the six months ended November 30, 1995 was $24.4 million, consisting primarily of capital expenditures incurred in connection with new laboratory equipment, lending to affiliates, acquisition of treasury stock, the purchase of the 40% minority interest in UGL as of June 30, 1995, the purchase of the 17% minority interest in NDA as of October 16, 1995 and the recent investment in MISE ($3,005 million of which $2,005 million is presently paid). This compares to $5.2 million used in investing activities in the comparable prior year period, which had been used for purchases of property and equipment and intangibles, and for lending to affiliates.
The Company's bank facilities provide for a total of approximately $43.7 million, including secured senior revolving facilities consisting of term and/or guarantees. As of January 10, 1995, the Company had approximately $6.2 million of availability under the aggregate credit facilities. Cash on hand, cash flows from operations and additional borrowing capabilities are expected to be sufficient to meet anticipated operating requirements, debt repayments and provide funds for capital expenditures, excluding acquisitions, and working capital for the foreseeable future.
On June 30, 1995, the Company, UGL and Unilab entered into an agreement whereby UGL acquired from Unilab 40% of UGL's common stock for a total consideration of $30,000. The consideration was paid $13,000 in cash, $2,000 through the assumption of a debt from Unilab to JSP, and $15,000 in the form of a one-year, interest-bearing promissory note. While the agreement provides that if the note is still unpaid six months after its due date, Unilab has the right to convert it into shares of the Company's common stock, the Company intends to pay the note on or before its due date. In connection with this note, the Company is considering raising additional capital through debt or equity financing.
In July 1995, the Company issued 25,000 (post-reverse split) new shares of common stock to one investor, at a price of $5.50 per share, including warrants for 12,500 shares at a price of $6.75 exercisable for 18 months from July 3, 1995.
In October, 1995, the Company issued 37,500 (post-reverse split) new shares of common stock to two investors, at a price of $5.50 per share, including warrants for 18,750 shares at a price of $6.50 exercisable for 18 months from October 5, 1995.
PART II - OTHER INFORMATION
As described and discussed more thoroughly in the Company's Annual Report on Form 10-K for the year ended May 31, 1995, the Company is entitled to 80% of the net recovery (less legal fees and costs) of any settlement or successful resolution of the pending arbitration instituted by Americanino Capital Corp. ("ACC") pursuant to an agreement by which the Company sold its remaining interest in ACC.
In February 1993, ACC instituted the arbitration proceedings against Mr. Eugenio Schiena, Mr. Raffaele Palma, Mr. Tonino Manzali, FIBRA S.p.A., GEFAPI S.p.A., "S.G.F." SOCIETE GENERALE COMMERCIALE ET FINANCIERE S.A., PARIBAS FINANZIARIA S.p.A., BANQUE PARIBAS (Milan, Italy), and BANQUE PARIBAS (Paris, France) (hereinafter collectively referred to as the "Defendants") for misrepresentations and fraudulent conduct in the negotiation, consummation and performance under an agreement by and between the above mentioned parties. The arbitration is presently pending before an Arbitral Tribunal of three qualified arbitrators (the "Arbitral Tribunal") under the auspices of the International Court of Arbitration. A Draft of the Terms of Reference to be used in the proceedings was established by the Arbitral Tribunal and communicated to the respective parties on September 6, 1994. A hearing was held on November 9, 1994 to discuss and finalize the Draft Terms of Reference. As of November 9, 1994, the Terms of Reference were sent to all the parties for signature with a deadline date of February 15, 1995. Because certain Defendants did not sign within the prescribed time limit, the International Court of Arbitration decided on March 29, 1995, to approve the Terms of Reference, and to grant a time limit of 15 days to these Defendants to sign such Terms, whereupon the proceedings will go forward irrespective of who has signed the Terms of Reference. The International Court of Arbitration further summoned all the Defendants to effectuate payment within 30 days in the amount of $212,500 representing their share of the advance costs. In the meantime, on February 24, 1995, the Arbitral Tribunal fixed a deadline date of April 30, 1995 for the Claimant, ACC, to file its brief on jurisdiction and on the merits of its claim; and fixed a deadline date of July 31, 1995 for all the Defendants to file their briefs in reply. ACC has filed its Brief with the International Court of Arbitration in compliance with the deadline. In July 1995, the Company decided to open a bank guarantee in favor of the International Court of Arbitration to cover the amount of $212,500 which the Defendants have failed to pay, in order for the proceedings to continue. In July 1995, ACC was notified by the Panel that PARIBAS FINANZIARIA S.p.A., BANQUE PARIBAS (Italy), and BANQUE PARIBAS (France) on one hand, and Mr. MANZALI on the other hand, had each appointed new legal counsels, who requested an extension of the July 31 reply deadline in order to be able to study the files. The Panel agreed to such an extension. Accordingly, a new deadline date of September 30, 1995 was set by the Panel for all the Defendants to file their briefs in reply. To the Company's knowledge, all Defendants filed their briefs in reply, with the exception of Messrs. Schiena and Palma, and GEFAPI S.p.A. ACC shall file a further brief in response to the replies by a deadline of March 31, 1996 as set by the Panel.
The Company intends to monitor the proceedings. While, to the best of the Company's knowledge, the Claimant appears to have a legitimate claim, there can be no assurance that an award will be rendered in ACC's favor and thus benefit the Company as provided under the terms of the ACC Sale Agreement. The estimate of recovery is still subject to many factors beyond the Company's control. Pending developments in the arbitration proceedings, and in absence of other criteria, the management of the Company has recorded its rights at a present fair market value of $10,000 which is estimated to be the amount an unrelated party might presently pay to acquire all such rights arising from the ACC Sale Agreement. Realization of any amount is entirely dependent upon a favorable award from the Court and the collection thereof, if any, from the Defendants. The Company's management will continuously monitor and report the progress of the proceedings.
PROPOSED RESTRUCTURING OF SUBSIDIARY RELATIONSHIP
The Company has determined that the best financial strategy for maximizing the present and future value of the Company and its anticipated growth, is to effect a spin-off to the Company's shareholders of the clinical trials business conducted by UCT. The clinical trials business to be spun off consists of UCT, Pharmasoft, and the 17% interest in NDA with the option to purchase the additional 13% of NDA. The Company is now working on the details of such action, including the preparation of the documentation to be filed with the Securities & Exchange Commission and NASDAQ.
PROPOSED OFFERING OF NEW SHARES UNDER REGULATION S
The Company is presently reviewing several alternatives to expand its operations. In order to raise funds to enable the Company to consider such actions, the Company is currently offering a maximum of 1,875,000 million newly-issued shares of the Company in the offshore market to certain European investors presently not affiliated with the Company. The shares are being offered in the offshore market in accordance with Regulation S, which provides an exemption to registration of the shares from the Securities Act of 1933, as amended.
The Company is currently preparing the necessary documentation to be filed with the Securities & Exchange Commission and NASDAQ with a view to register substantially all of the outstanding shares of the Company s Common Stock under the Securities Act of 1933, as amended.
Exhibits included hereinafter are as follows:
99.1 UniHolding Corp. Announces Adjustments to its Capital Structure and the Decision to Register All Outstanding Shares
99.2 UniHolding Corp. Announces Spin-Off of Clinical Trials
99.3 UniHolding Corp. Announces Adjustments to its Capital
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/ Bruno Adam by Melanie K. Stapp (poa) By: Melanie K. Stapp by Power
99.1 PRESS RELEASE - UniHolding Corp. Announces Adjustments to its Capital Structure and the Decision to Register All Outstanding
99.2 PRESS RELEASE - UniHolding Corp. Announces Spin-Off of
99.3 PRESS RELEASE - UniHolding Corp. Announces Adjustments to its | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T13:23:08 |
0000950131-96-000089 | 0000950131-96-000089_0003.txt | <DESCRIPTION>LEGALITY CONSENT OF DORSEY & WHITNEY
Re: Registration Statement on Form S-3
We have acted as counsel to Green Tree Financial Corporation, a Delaware corporation (the "Company"), in connection with the preparation of a Registration Statement on Form S-3 filed by the Company with the Securities and Exchange Commission (the "Commission") on October 20, 1995, and as subsequently amended, including Amendment No. 4 thereto filed with the Commission on January 16, 1996 (the "Registration Statement"), relating to the registration by the Company of $435,000,000 of Asset-Backed Securities (the "Securities") to be issued by Green Tree Recreational, Consumer & Equipment Trusts to be formed by the Company from time to time. The Securities are proposed to be issued from time to time in series under either
(i) with respect to Securities issued by a Trust characterized for tax purposes as a grantor trust, a separate Pooling and Servicing Agreement in substantially the form filed as Exhibit 4.1 to the Registration Statement (each such agreement, a "Pooling and Servicing Agreement"), between the Company, as seller and servicer, and a bank or trust company, as trustee
(ii) with respect to Securities issued by a Trust characterized as an owner trust treated as a partnership for tax purposes, a combination of (a) a separate Trust Agreement in substantially the form filed as Exhibit 4.3 to the Registration Statement (each such Agreement, a "Trust Agreement"), (b) a separate Sale and Servicing Agreement in substantially the form filed as Exhibit 4.2 to the Registration Statement (each such Agreement, a "Sale and Servicing Agreement"), and, if such Trust issues Notes, a separate Indenture in substantially the form filed as Exhibit 4.4 to the Registration Statement (each such Indenture, an "Indenture").
The Company may provide a Limited Guaranty (the "Limited Guaranty") with respect to one or more classes of any series of Securities.
We have examined the Registration Statement, the forms of such agreements filed as exhibits thereto, and such other documents, and have reviewed such questions of law, as we have considered necessary and appropriate for the purposes of this opinion. Based on the foregoing, we are of the opinion that:
1. Each Pooling and Servicing Agreement, when it has been duly authorized by the Board of Directors of the Company and duly executed and delivered by the Company and the Trustee, will constitute the valid and binding obligation of the Company and the Limited Guaranty of the Company, if any, provided for therein will constitute the valid and binding obligation of the Company.
2. Each series of Certificates issued pursuant to a Pooling and Servicing Agreement, when duly executed and delivered in accordance with the terms of such Pooling and Servicing Agreement, will be legally and validly issued, and the holders of such Certificates will be entitled to the benefits of such Pooling and Servicing Agreement.
3. Each Sale and Servicing Agreement, when it has been duly authorized by the Board of Directors of the Company and duly executed and delivered by the Company and the Trustee, will constitute the valid and binding obligation of the Company and the Limited Guaranty of the Company, if any, provided for therein will constitute the valid and binding obligation of the Company. Each Trust Agreement, when it has been duly authorized by the Board of Directors of the Company and duly executed and delivered by the Company and the Trustee, will constitute the valid and binding obligation of the Company. Each Indenture, when it has been duly authorized by the Trust and the applicable Indenture Trustee, will constitute the valid and binding obligation of such Trust.
4. Each series of Certificates issued pursuant to a Trust Agreement, when duly executed and delivered in accordance with the terms of such Trust Agreement, will be legally and validly issued, fully paid and non-assessable, and the holders of such Certificates will be entitled to the benefits of such Trust Agreement and the related Sale and Servicing Agreement.
5. Each Series of Notes issued by a Trust, when duly authorized and executed by such Trust and duly authenticated by the Indenture Trustee pursuant to the terms of the related Indenture, will be legally and validly issued and will constitute the valid and binding obligations of such Trust.
The opinions set forth above are subject to the following qualifications and exceptions:
(a) In rendering the opinions set forth above, we have assumed that, at the time of the execution of the applicable Agreements and the execution and delivery of the related series of Securities, there will not have occurred any change in the law affecting the authorization, execution, delivery, validity or enforceability of the Securities or any Limited Guaranty, the Registration Statement will have been declared effective by the Commission and will continue to be effective, the Securities and the Limited Guaranty will be issued and sold as described in the Registration Statement, none of the particular terms of a series of Securities will violate any applicable law and neither the issuance and sale thereof nor the compliance by the Company with the terms thereof will result in a violation of any agreement or instrument then binding upon the Company or any order of any court or governmental body having jurisdiction over the Company.
(b) Our opinions in paragraphs 1, 3 and 5 above are subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or other similar law of general application affecting creditors' rights.
(c) Our opinion in paragraphs 1, 3 and 5 above are subject to the effect of general principles of equity, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing, and other similar doctrines affecting the enforceability of agreements generally (regardless of whether considered in a proceeding in equity or at law).
(d) Minnesota Statutes (S) 290.371, Subd. 4, provides that any corporation required to file a Notice of Business Activities Report does not have a cause of action upon which it may bring suit under Minnesota law unless the corporation has filed a Notice of Business Activities Report and provides that the use of the courts of the State of Minnesota for all contracts executed and all causes of action that arose before the end of any period for which a corporation failed to file a required report is precluded. Insofar as our opinion may relate to the valid, binding and
agreement under Minnesota law or in a Minnesota court, we have assumed that any party seeking to enforce such agreement has at all times been, and will continue at all times to be, exempt from the requirement of filing a Notice of Business Activities Report or, if not exempt, has duly filed, and will continue to duly file, all Notice of Business Activities Reports.
Our opinions expressed above are limited to the laws of the State of Minnesota and the Delaware General Corporation Law.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement, and to the reference to our firm under the heading "Legal Matters" in the Prospectus comprising part of the Registration Statement. | S-3/A | EX-5.1 | 1996-01-16T00:00:00 | 1996-01-16T17:16:00 |
0000889812-96-000028 | 0000889812-96-000028_0003.txt | <DESCRIPTION>OPINION OF TIMOTHY J. MCCARTNEY, ESQ.
* Member of N.Y. Bar
Re: Form S-8 Registration Statement
I have acted as counsel for Mark Solutions, Inc. (the "Company") in connection with the registration of 1,055,000 shares of Common Stock, $ .01 par value, of the Company (the "Shares") under the Securities Act of 1933, as amended on a Form S-8 registration statement (the "Registration Statement") to be filed on January 16, 1996 with the Securities and Exchange Commission.
I have examined originals or copies, certified or otherwise identified to my satisfaction, of such corporate records, agreements and other instruments and based upon such documents and other investigation as I have deemed necessary I am of the opinion that:
1. The Company has been duly organized and is validly existing as a business corporation in good standing under the laws of the State of Delaware.
2. Upon effectiveness of the Registration Statement and the delivery and issuance of the Shares as described therein, such Shares 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 and the related prospectus and further consent to the use of my name in the Registration Statement. | S-8 | EX-5.1 | 1996-01-16T00:00:00 | 1996-01-16T16:20:02 |
0000950172-96-000029 | 0000950172-96-000029_0000.txt | <DESCRIPTION>SCHEDULE 14D1 AMENDMENT NO. 5
PURSUANT TO SECTION 14(D)(1) OF THE SECURITIES EXCHANGE UNDER THE SECURITIES EXCHANGE ACT OF 1934
COMMON STOCK, PAR VALUE, $.01 PER SHARE (Title of Class of Securities)
(CUSIP Number of Class of Securities)
EXECUTIVE VICE PRESIDENT AND CHIEF LEGAL COUNSEL (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Bidders)
SKADDEN, ARPS, SLATE, MEAGHER & FLOM NEW YORK, NEW YORK 10022
Ocean Acquisition Corporation, a Delaware corporation (the "Purchaser") and a wholly owned subsidiary of Rite Aid Corporation, a Delaware corporation ("Parent"), and Parent hereby amend and supplement their Statement on Schedule 14D- 1 (the "Schedule 14D-1"), filed with the Securities Exchange Commission (the "Commission") on December 4, 1995, with respect to the Purchaser's offer to purchase 35,144,833 shares of common stock, par value $.01 per share (the "Shares"), of Revco D.S., Inc., a Delaware corporation (the "Company"), at a price of $27.50 per Share, net to the seller in cash, (such price, or such higher price per Share as may be paid in the Offer, the "Offer Price") upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). This Amendment No. 5 to the Schedule 14D-1 also constitutes Amendment No. 5 to the Statement on Schedule 13D of the Purchaser and Parent. The item numbers and responses thereto below are in accordance with the requirements of Schedule 14D-1.
(f) On January 16, 1996, Parent issued a press release which announced that Parent and the Purchaser have extended the expiration date of the Offer to 7:00 p.m., New York City time, on Wednesday, January 31, 1996. The Offer had previously been scheduled to expire at 7:00 p.m., New York City time, on Tuesday, January 16, 1996. A copy of the press release is filed herewith as exhibit (a)(13) and is incorporated by reference herein.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
(a)(13) Text of Press Release, dated January 16, 1996, issued by Parent.
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/ Martin L. Grass Title: Chairman of the Board and
By: /s/ Martin L. Grass
(a)(13) Text of Press Release, dated January 16, 1995, issued by Parent. | SC 14D1/A | SC 14D1/A | 1996-01-16T00:00:00 | 1996-01-16T14:35:27 |
0000950127-96-000016 | 0000950127-96-000016_0000.txt | (TO PROSPECTUS DATED APRIL 18, 1995)
The Common Stock is listed on the New York Stock Exchange under the trading symbol "NEM." On January 11, 1996, the last reported sale price of the Common Stock as reported on the New York Stock Exchange Composite Tape was $53.75 per share.
The shares of Common Stock offered hereby (the "Shares") will be purchased from the Company by Salomon Brothers Inc (the "Underwriter") at a price of $51.87 per Share (resulting in $241,255,825 aggregate net proceeds (before expenses) to the Company). The Company will pay certain expenses of the offering estimated at approximately $300,000.
The Shares may be offered by the Underwriter from time to time in one or more transactions (which may involve block transactions) on the New York Stock Exchange or on other national securities exchanges on which the Common Stock is traded, in the over-the-counter market, through negotiated transactions or otherwise at market prices prevailing at the time of the sale or at prices otherwise negotiated, subject to prior sale, when, as and if delivered to and accepted by the Underwriter. See "Underwriting."
SEE "RISK FACTORS" BEGINNING ON PAGE S-3 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
The Company has agreed to indemnify the Underwriter against certain liabilities under the Securities Act of 1933, as amended. 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 SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Shares are offered subject to receipt and acceptance by the Underwriter, to prior sale and to the Underwriter's right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the Shares will be made at the offices of Salomon Brothers Inc, Seven World Trade Center, New York, New York or through the facilities of The Depository Trust Company, on or about January 18, 1996.
The date of this Prospectus Supplement is January 11, 1996.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY, AND THE COMMON STOCK OF NEWMONT GOLD COMPANY, A SUBSIDIARY OF THE COMPANY, AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE PARIS BOURSE OR THE BASEL, GENEVA OR ZURICH STOCK EXCHANGES, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Prospective purchasers of Shares offered hereby should carefully read this Prospectus Supplement, the accompanying Prospectus and the documents incorporated by reference therein. In determining whether to purchase the Shares being offered hereby, prospective investors should carefully consider the following factors, in addition to the other information contained in this Prospectus Supplement or contained in the accompanying Prospectus or incorporated by reference therein.
The Company's sole asset is a controlling equity interest in Newmont Gold Company ("Newmont Gold"), a worldwide company engaged in gold production, exploration for gold and acquisition of gold properties. The profitability of the Company's current operations is significantly affected by changes in the market price of gold. Market gold prices can fluctuate widely and are affected by numerous factors beyond the Company's control, including industrial and jewelry demand, expectations with respect to the rate of inflation, the strength of the U.S. dollar (the currency in which the price of gold is generally quoted) and of other currencies, interest rates, central bank sales, forward sales by producers, global or regional political or economic events, and production and cost levels in major gold-producing regions such as South Africa. In addition, the price of gold sometimes is subject to rapid short-term changes because of speculative activities. The current demand for and supply of gold affect gold prices, but not necessarily in the same manner as current supply and demand affect the prices of other commodities. The supply of gold consists of a combination of new mine production and existing stocks of bullion and fabricated gold held by governments, public and private financial institutions, industrial organizations and private individuals. As the amounts produced in any single year constitute a very small portion of the total potential supply of gold, normal variations in current production do not necessarily have a significant impact on the supply of gold or on its price. If the Company's revenue from gold sales falls for a substantial period below its cost of production at any or all of its operations, the Company could determine that it is not economically feasible to continue commercial production at any or all of its operations or to continue the development of some or all of its projects. The Company's consolidated weighted average cash cost of equity production (which is equivalent to the weighted average costs applicable to sales per ounce of equity production) for its Nevada, Peruvian and Uzbekistan operations was $204 per ounce of gold sold in 1994, $198 in 1993 and $198 in 1992 and $211 for the first nine months of 1995.
The gold market generally is characterized by volatile prices. The volatility of gold prices is illustrated in the following table of annual high, low and average afternoon fixing prices of gold per ounce on the London Bullion Market:
On January 11, 1996, the afternoon fixing price for gold on the London Bullion Market was $399 per ounce and the spot market price of gold on the New York Commodity Exchange was $399.
The proven and probable ore reserve figures presented in the Company's Annual Report on Form 10-K for the year ended December 31, 1994, which is incorporated by reference in the Prospectus accompanying this Prospectus Supplement, are estimates, and no assurance can be given that the indicated level of recovery of gold will be realized. Reserve estimates may require revision based on actual production experience. Market price fluctuations of gold, as well as increased production costs or reduced recovery rates, may render proven and probable ore reserves containing relatively lower grades of mineralization uneconomic to exploit and may ultimately result in a restatement of the Company's proven and probable ore reserves.
The gold price used in estimating Newmont Gold's proven and probable ore reserves as of December 31, 1994 was $400 per ounce. Newmont Gold believes that if its Carlin reserve estimates were to be based on gold prices as low as $300 per ounce with current operating costs, 1994 year-end reserves would decrease by approximately 17%.
The Company's domestic and foreign mining operations and exploration activities are subject to extensive laws and regulations governing prospecting, developing, production, exports, taxes, labor standards, occupational health, waste disposal, protection and remediation of the environment, protection of endangered and protected species, mine safety, toxic substances and other matters. Mining is subject to potential risks and liabilities associated with pollution of the environment and the disposal of waste products occurring as a result of mineral exploration and production. The Company has been and may in the future be also subject to clean-up liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and comparable state laws which establish clean-up liability for the release of hazardous substances. In the context of environmental permitting, including the approval of reclamation plans, the Company must comply with standards, existing laws and regulations which may entail greater or lesser costs and delays depending on the nature of the activity to be permitted and how stringently the regulations are implemented by the permitting authority. It is possible that the costs and delays associated with the compliance with such laws, regulations and permits could become such that the Company would not proceed with the development of a project or the operation or further development of a mine.
During the past three years, the U.S. Congress considered a number of proposed amendments to the General Mining Law of 1872, as amended (the "General Mining Law"), which governs mining claims and related activities on federal lands. In 1992, a holding fee of $100 per claim was imposed upon unpatented mining claims located on federal lands. In October 1994, a one- year moratorium on the processing of new patent applications was approved. While such moratorium currently remains in effect, its future is unclear. In addition, a variety of legislation is now pending before the U.S. Congress to amend further the General Mining Law. The proposed legislation would, among other things, change the current patenting procedures, impose royalties, and enact new reclamation, environmental controls and restoration requirements. The royalty proposals range from a 2% royalty on "net profits" from mining claims to an 8% royalty on modified gross income/net smelter returns. Although the extent of any such changes is not presently known, approximately 92% of Newmont Gold's proven and probable ore reserves in the U.S. are located on private land and, therefore, are not subject to such amendments.
Amendments to current laws and regulations governing operations and activities of mining companies or more stringent implementation thereof are actively considered from time to time and could have a material adverse impact on the Company.
Certain of the Company's projects are located in foreign countries. The Company's foreign investments, which include projects in the Republic of Uzbekistan, Peru and Indonesia, are subject to the risks normally associated with conducting business in foreign countries, including labor disputes and uncertain political and economic environments, as well as risks of war and civil disturbances or other risks which may limit or disrupt the projects, restrict the movement of funds or result in the deprivation of contract rights or the taking of property by nationalization or expropriation without fair compensation laws or policies of particular countries, foreign taxation, limitations on ownership and on repatriation of earnings, and foreign exchange controls and currency fluctuations. Although the Company has not experienced any significant problem in foreign countries arising from such risks, there can be no assurance that such problems will not arise in the future. While political risk insurance from the Overseas Private Investment Corporation and/or the Multilateral Investment Guarantee Agency has been obtained to cover a portion of the Company's investments in Peru and the Republic of Uzbekistan against certain expropriation, war, civil unrest and political violence risks, such insurance is limited by its terms to the particular risks specified therein and is subject to certain exclusions. There can therefore be no assurance that claims would be paid under such insurance in connection with a particular event in a foreign country. Foreign investments may also be adversely affected by laws and policies of the U.S. affecting foreign trade, investment and taxation.
SPECULATIVE NATURE OF GOLD EXPLORATION AND DEVELOPMENT
Gold exploration is highly speculative in nature, involves many risks and frequently is nonproductive. There can be no assurance that the Company's gold exploration efforts will be successful. Once gold mineralization is discovered, it may take a number of years from the initial phases of drilling until production is possible, during which time the economic feasibility of production may change. Substantial expenditures are required to establish proven and probable ore reserves through drilling, to determine metallurgical processes to extract the metals from the ore and, in the case of new properties, to construct mining and processing facilities. As a result of these uncertainties, no assurance can be given that the Company's exploration programs will result in the expansion or replacement of current production with new proven and probable ore reserves.
Development projects have no operating history upon which to base estimates of future cash operating costs. Particularly for development projects, estimates of proven and probable ore reserves and cash operating costs are, to a large extent, based upon the interpretation of geologic data obtained from drill holes and other sampling techniques, and feasibility studies which derive estimates of cash operating costs based upon anticipated tonnage and grades of ore to be mined and processed, the configuration of the ore body, expected recovery rates of the gold from the ore, comparable facility and equipment operating costs, anticipated climatic conditions and other factors. As a result, it is possible that actual cash operating costs and economic returns may differ significantly from those currently estimated. It is not unusual in new mining operations to experience unexpected problems during the start-up phase.
The business of gold mining is generally subject to a number of risks and hazards, including environmental hazards, industrial accidents, labor disputes, encountering unusual or unexpected geologic formations, cave-ins, flooding, rock falls, periodic interruptions due to inclement or hazardous weather conditions, gold bullion losses and other acts of God. Such risks could result in damage to, or destruction of, mineral properties or producing facilities, personal injury or death, environmental damage, delays in mining, monetary losses and possible legal liability. The Company maintains insurance against risks which are typical in the operation of its business and in amounts which the Company believes to be reasonable, but no assurance can be given that such insurance will continue to be available, will be available at economically acceptable premiums or will be adequate to cover any resulting liability.
The $241.3 million net proceeds to the Company from the sale of the Shares to the Underwriter pursuant to the agreement described under "Underwriting" will be used by the Company to purchase an equal number of shares of common stock of Newmont Gold, which in turn will use such proceeds for its capital program and general corporate purposes.
The Company is a U.S. company whose sole asset is a controlling equity interest in Newmont Gold. Newmont Gold is a worldwide company engaged in gold production, exploration for gold and acquisition of gold properties. The Company owns 90% of the common stock and options to purchase additional shares of common stock of Newmont Gold.
Newmont Gold currently produces gold from the Carlin Trend in Nevada. Newmont Gold also produces gold through a 38% owned venture in Peru, which commenced operations in August 1993, and a 50% owned venture in Uzbekistan, which commenced gold production in September 1995. Newmont Gold additionally has two projects in Indonesia, Minahasa and Batu Hijau, both of which are 80% owned by Newmont Gold. Gold production is scheduled to commence at the Minahasa project by mid-1996. The Batu Hijau project is currently in the feasibility stage. The mineral rights for the Batu Hijau project are held pursuant to a Contract of Work between the Republic of Indonesia and P.T. Newmont Nusa Tenggara ("PTNNT"), which is 80% owned by Newmont Gold. During the third quarter of 1995 PTNNT recognized that, given the size, complexity and nature of this large porphyry copper/gold project and the cost of developing the project, it would require more time to complete feasibility studies beyond the December 1, 1995 date provided for in the Contract of Work. Accordingly, in October 1995, PTNNT requested from the government of Indonesia
an extension of the feasibility studies period. In late December 1995, PTNNT was advised by the Indonesian government that it needed more time to review PTNNT's request for an extension and that the time period provided for feasibility studies in the Contract of Work was suspended pending the Indonesian government's decision. Meanwhile, feasibility study activities continue on the project.
In addition to exploration activities conducted in connection with the above-referenced operations and projects, Newmont Gold continues to explore for gold and/or is conducting joint venture discussions in various countries, including Mexico, Canada, Ecuador, Laos and in the United States. Newmont Gold had approximately 26.1 million equity ounces of proven and probable gold ore reserves at December 31, 1994 and produced approximately 1.7 million equity ounces of gold in 1994.
In December 1994, the Company concluded that the geological model used by the previous owner of the Grassy Mountain property in Oregon was inadequate to support mine development. Pending completion of additional evaluations, 996,000 ounces of previously classified proven and probable reserves were then no longer classified as reserves as of December 31, 1994. After evaluating the deposit during 1995 to determine its economic potential, the Company concluded that the deposit does not meet its criteria for development and announced on January 5, 1996 that it is writing off in the fourth quarter of 1995 its $33.8 million investment in this property, which is expected to reduce earnings per share by approximately $0.23 per share after taxes.
The Company redeemed on December 14, 1995 the shares of its $5.50 Convertible Preferred Stock, par value $5.00 per share, that had not been previously converted into Common Stock.
Since the Company's only asset is a controlling equity interest in Newmont Gold, the rights of the Company to participate in any distribution of assets of Newmont Gold upon its liquidation or reorganization or otherwise (and thus the ability of holders of the shares of Common Stock to benefit from such distribution) are subject to prior claims of creditors of Newmont Gold, except to the extent that the Company may itself be a creditor with recognized claims against Newmont Gold. Claims on Newmont Gold by creditors may include claims of holders of indebtedness and claims of creditors in the ordinary course of business. Such claims may increase or decrease, and additional claims may be incurred in the future.
The Company was incorporated in 1921 under the laws of Delaware and maintains its principal executive offices at 1700 Lincoln Street, Denver, Colorado 80203 (telephone: (303) 863-7414).
Subject to the terms and conditions set forth in the Underwriting Agreement, the Company has agreed to sell, and the Underwriter has agreed to purchase from the Company, 4,651,163 Shares. Under the terms and conditions of the Underwriting Agreement, the Underwriter is committed to take and pay for all of the Shares, if any are taken.
It is expected that all or a substantial portion of the Shares may be sold by the Underwriter to purchasers in one or more transactions (which may involve block transactions) on the New York Stock Exchange or on other securities exchanges on which the Common Stock is traded or otherwise. The distribution of the Shares may also be effected from time to time in special offerings, exchange distributions and/or secondary distributions pursuant to and in accordance with the rules of the New York Stock Exchange or such other exchanges, in the over-the-counter market, in negotiated transactions through the writing of options on the Shares (whether such options are listed on an options exchange or otherwise) or otherwise, or in a combination of such
methods at prevailing market prices or at negotiated prices. The Underwriter may effect such transactions by selling Shares to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the Underwriter and/or the purchasers of such Shares for whom they may act as agents or to whom they may sell as principal.
In connection with the sale of the Shares, the Underwriter will receive compensation in the form of commissions or discounts and will also receive compensation from purchasers of the Shares for whom it may act as agent or to whom it may sell as principal in the form of commissions, in each case in amounts which will not exceed those customary in the types of transactions involved. Underwriters and dealers that participate in the distribution of the Shares may be deemed to be underwriters, and any discounts received by them from the Company and any compensation received by them on the resale of the Shares by them may be deemed to be underwriting discounts and commissions under the Securities Act of 1933, as amended (the "Act").
The Company has agreed that it will not, for a period of 90 days after the date hereof, without the prior written consent of the Underwriter, offer, sell or contract to sell, or otherwise dispose of directly or indirectly, shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock (other than the Common Stock offered hereby or pursuant to existing stock option or other incentive or benefit plans of the Company, arrangements made to persons becoming an employee of the Company, pursuant to the Company's junior preferred share rights or in connection with corporate acquisitions).
The Underwriting Agreement provides that the Company will indemnify the Underwriter against certain liabilities, including liabilities under the Act, or contribute to payments that the Underwriter may be required to make in respect thereof.
Salomon Brothers Inc has performed various investment banking services for the Company and Newmont Gold in the ordinary course of business for which it has received customary compensation.
No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in or incorporated by reference in this Prospectus Supplement or the Prospectus in connection with the offer contained in this Prospectus Supplement and Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company, Salomon Brothers Inc or any dealer. Neither the delivery of this Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the facts set forth in this Prospectus Supplement and Prospectus, or in the affairs of the Company since the date hereof. This Prospectus Supplement and the Prospectus do not
constitute an offer or solicitation by anyone 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. | 424B2 | 424B2 | 1996-01-16T00:00:00 | 1996-01-16T15:19:22 |
0000080124-96-000002 | 0000080124-96-000002_0000.txt | Re: Presidential Life Corporation (the "Company")
Enclosed please find for filing under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, a copy of the Current Report of the Company on Form 8-K. Concurrently herewith, copies of such report are being sent to the National Association of Securities Dealers, Inc.
Principal Executive Officer and Director
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: (Date of earliest event reported): January 16, 1996
(Exact name of registrant as specified in its charter)
(State or other jurisdiction (Commission (I.R.S. Employer of incorporation) File Number) Identification No.)
69 Lydecker Street, Nyack, New York 10960 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 358-2300
(Former name or former address, if change since last report)
On January 10, 1996, Presidential Life Insurance Company, a wholly-owned subsidiary of Presidential Life Corporation (the "Registrant"), was informed by Pennsylvania Insurance Commissioner Linda S. Kaiser, that in response to the significant improvement in the invested assets of Fidelity Mutual Life Insurance Company (FML) of Radnor, Pennsylvania, she has reopened the process to select an equity investor for the recapitalization and rehabilitation of FML.
Presidential disagrees with the Commissioner's decision to reopen the process and has reserved all of its rights, including those under the Stock Purchase Agreement signed in January 1995 with the Pennsylvania Insurance Department.
A copy of the press release made by the Commonwealth of Pennsylvania Insurance Department making the announcement is attached hereto as Exhibit 99.1 and is hereby incorporated by reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired None.
(b) Pro Forma Financial Information 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.
Dated: January 16, 1996 PRESIDENTIAL LIFE CORPORATION
Number Description of Documents Page
N E W S R E L E A S E COMMONWEALTH OF PENNSYLVANIA
FOR IMMEDIATE RELEASE CONTACT: Crystal L. Hull
PENNSYLVANIA INSURANCE DEPARTMENT REOPENS PROCESS FOR INVESTMENT IN FIDELITY MUTUAL LIFE INSURANCE COMPANY
HARRISBURG (Jan. 10) -- In response to the significant improvement in the invested assets of The Fidelity Mutual Life Insurance Company (FML) of Radnor, Pennsylvania Insurance Commissioner Linda S. Kaiser, today announced that she has reopened the process for selecting an equity investor to provide the recapitalization proposed in the amended plan of rehabilitation for FML. Only Presidential Life Insurance Company of Nyack, New York, the equity investor originally selected; DELPHI Financial Group, Inc., of Wilmington, Delaware; and Kelso and Company, Inc. of New York, New York, will be invited to participate in the Insurance Department's new search for an equity investor. All three companies were finalists in the original search for an equity investor.
The Insurance Department outlined an aggressive schedule over the course of the next six to eight months in its effort to rehabilitate FML. The first step will be the issuance of specifications to Presidential, DELPHI and Kelso with selection of the equity investor anticipated in early Spring.
"We will expedite the selection process in hopes of submitting a second amended plan of rehabilitation to Commonwealth Court by late Spring," said Kaiser. "The plan will preserve and maximize the value of each insurance policy and protect the financial investments of the policyholders."
According to Presidential's Chairman of the Board, Herbert Kurz, Presidential disagrees with the Insurance Commissioner's decision and has reserved its rights under the Stock Purchase Agreement signed in January 1995.
FML has been under the control of the Pennsylvania Insurance Department since November 6, 1992 when Commonwealth Court granted a request by the Insurance Department and Fidelity Mutual to place the financially-troubled company into rehabilitation. | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-16T15:15:55 |
0000070033-96-000001 | 0000070033-96-000001_0000.txt | <DESCRIPTION>10-Q FOR QUARTERLY PERIOD ENDED NOV 30, 1995
Condensed Consolidated Statement of Income (In Thousands Except Per Share Data)
Cost of service 34,125 32,847 Sales, general and administrative 23,273 21,110
Interest and other income 1,177 348 Interest and other expense (601) (708)
Income before income taxes 8,688 5,495 Provision for income taxes 2,954 1,978
common equivalent share (Note 2) $0.24 $0.17
Earnings per common and common equivalent share, assuming full dilution (Note 2) $0.24 $0.17
See Notes to Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statement of Income (In Thousands Except Per Share Data)
Six Months Ended November 30,
Cost of service 68,053 63,505 Sales, general and administrative 47,616 41,481
Interest and other income 2,304 803 Interest and other expense (1,310) (1,295)
Income before income taxes 16,460 10,303 Provision for income taxes 5,752 3,709
common equivalent share (Note 2) $0.44 $0.33
Earnings per common and common equivalent share, assuming full dilution (Note 2) $0.44 $0.33
See Notes to Unaudited Condensed Consolidated Financial Statements
NATIONAL DATA CORPORATION P. 1 of 2
Cash and cash equivalents $100,887 $30,740 of $1,170 and $1,409) 39,545 39,239 Deferred income taxes 601 601 Prepaid expenses and other current assets 4,295 4,345 Total current assets 148,251 77,850
Property and equipment, at cost 130,994 140,141 Property acquired under capital leases, net of accumulated amortization 7,789 9,033
of $42,112 and $38,132 74,602 78,094
See Notes to Unaudited Condensed Consolidated Financial Statements
NATIONAL DATA CORPORATION P. 2 of 2
LIABILITIES AND STOCKHOLDERS' EQUITY ------------ ----------- Current liabilities: business, current portion 1,942 1,958 businesses, current portion 539 1,180 Accrued compensation and benefits 5,326 6,199 Net merchant processing payable 159 2,172 Income tax payable 6,698 7,989 Mortgage payable, current portion 172 164 Other accrued liabilities 10,736 11,149 Total current liabilities 38,625 47,404
Notes payable on acquired business 1,318 2,580
Deferred income taxes 3,193 3,193
Obligations under capital leases 5,207 6,140
Other long-term liabilities 3,488 3,402
Minority interest in equity of subsidiary 586 392
Preferred stock, par value $1.00 per share, 1,000,000 shares authorized; none issued - - Common stock, par value $.125 per share, and 19,306,733 shares issued 2,870 2,413 Capital in excess of par value 100,427 33,145 Cumulative translation adjustment (519) (550) Less: Total Stockholders' Equity 197,693 122,523
Total Liabilities and Stockholders' Equity $260,958 $196,570
See Notes to Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statement of Cash Flows Cash flows from operating activities: ----- ----- Net income $10,708 $ 6,594 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,598 6,748 Amortization of acquired intangibles and goodwill 3,973 3,363 Provision for bad debts 722 201 Loss on disposal of fixed assets 6 34 Changes in assets and liabilities, net of the effects of acquisitions: Increase in accounts receivable, net (1,024) (5,926) Decrease in inventory 3 313 Decrease in prepaid expenses and other assets 127 3,280 and accrued liabilities (4,430) (992) Increase (decrease) in net merchant Increase (decrease) in income taxes payable and deferred income taxes payable (1,291) 323 Net cash provided by operating activities 14,378 14,980
Cash flows from investing activities: Business acquisitions, net of cash acquired - (32,340) Decrease in investments and other Proceeds from the sale of equipment 75 - Net cash used in investing activities (4,776) (34,494)
Cash flows from financing activities: Payments on notes payable (1,277) - Principal payments under mortgage, capital lease arrangements and other long-term debt (1,512) (1,188) Principal payments on earn-out payable (1,016) (1,627) Net proceeds from secondary public offering 63,652 - Net proceeds from the issuance of stock under employee stock plans 4,087 1,611 Effect of exchange rates on cash 29 16 Net cash provided by (used in) financing activities 60,545 (3,984)
Increase (decrease) in cash and cash equivalents 70,147 (23,498) Cash, beginning of period 30,740 38,012 Cash, end of period $ 100,887 $ 14,514
Supplemental schedule of noncash investing and financing activities: Promissory notes entered into in exchange for capital stock - $ 3,006 Capital leases entered into in exchange for property and equipment 332 6
See Notes to Unaudited Condensed Consolidated Financial Statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements included herein have been prepared by the Company, without audit, pursuant 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, although the Company believes the disclosures are adequate to make the information presented not misleading. In addition, certain reclassifications have been made to the fiscal 1995 consolidated financial statements to conform to the fiscal 1996 presentation. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K for the fiscal year ended May 31, 1995.
In the opinion of management, the information furnished reflects all adjustments necessary to present fairly the results for such interim periods.
NOTE 2 - EARNINGS PER SHARE:
Primary earnings per common share and common equivalent share are computed by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during the period. Common equivalent shares represent stock options that, if exercised, would have a dilutive effect on earnings per share. All options with an exercise price less than the average market share price for the period are assumed to have a dilutive effect on earnings per share.
Fully diluted earnings per common and common equivalent share are computed by the same method as described for primary earnings per share except that the higher of (1) the ending market share price for the period or (2) the average market share price for the period is used to compute the fully diluted earnings per share, as compared to the average market share price for primary earnings per share. Earnings per share calculations are presented in the accompanying financial statements.
The primary and fully diluted number of common and common equivalent shares outstanding is as follows (in thousands):
Quarter Ended November 30, Six Months Ended November 30,
Primary 24,328 20,157 24,226 19,946 Fully Diluted 24,346 20,178 24,260 20,115
NOTE 3 - COMMON STOCK OFFERING:
In June, 1995, the Company completed a secondary public offering of 3,162,500 shares of its Common Stock. The stock was sold at a price of $21.25 per share. This transaction, net of underwriting discount and expenses associated with this offering, added approximately $63,652,000 in cash to the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The second quarter of fiscal 1996, ended November 30, 1995 compared to the same quarter last year is reflected as follows:
FY 1996 FY 1995 Inc.(Dec.) $ % $ % % --- --- --- --- ----------- Revenue: Payment Systems 36.2 55% 33.5 56% 8% Health Care 23.6 36% 20.0 33% 18% Information Systems & Services 5.7 9% 6.3 11% (9%) ------ ----- ------ ----- ------- Total Revenue 65.5 100% 59.8 100% 10%
Operations 25.9 39% 25.6 43% 1% Depreciation & Amortization 5.0 8% 4.2 7% 19% Hardware Sales 3.2 5% 3.0 5% 7% ------ ----- ------ ----- ------- Total Cost of Service 34.1 52% 32.8 55% 4%
Gross Margin 31.4 48% 27.0 45% 16%
Administrative 23.3 36% 21.1 35% 10% ------ ----- ------ ----- ------- Operating Margin 8.1 12% 5.9 10% 37%
Interest and Other Income 1.2 2% 0.3 - 300% Interest and Other Expense (0.6) (1%) (0.7) (1%) (14%) ------ ----- ------ ----- ------- Income Before Income Taxes 8.7 13% 5.5 9% 58%
Provision for Income Taxes 3.0 4% 2.0 3% 50% ------ ----- ------ ----- ------- Net Income 5.7 9% 3.5 6% 63% ------ ----- ------ ----- -------
The first six months of fiscal 1996, ended November 30, 1995 compared to the same period last year is reflected as follows:
FY 1996 FY 1995 Inc.(Dec.) $ % $ % % --- --- --- --- ----------- Revenue: Payment Systems 73.3 56% 65.8 57% 11% Health Care 46.5 35% 36.8 32% 26% Information Systems & Services 11.3 9% 13.0 11% (13%) Other - - .2 - - ------ ----- ------ ----- ------- Total Revenue 131.1 100% 115.8 100% 13%
Operations 52.1 40% 50.0 43% 4% Depreciation & Amortization 10.0 8% 8.2 7% 22% Hardware Sales 5.9 4% 5.3 5% 11% ------ ----- ------ ----- ------- Total Cost of Service 68.0 52% 63.5 55% 7%
Gross Margin 63.1 48% 52.3 45% 21%
Administrative 47.6 36% 41.5 36% 15% ------ ----- ------ ----- ------- Operating Margin 15.5 12% 10.8 9% 44%
Interest and Other Income 2.3 2% 0.8 1% 188% Interest and Other Expense (1.3) (1%) (1.3) (1%) - ------ ----- ------ ----- ------- Income Before Income Taxes 16.5 13% 10.3 9% 60%
Provision for Income Taxes 5.8 5% 3.7 3% 57% ------ ----- ------ ----- ------- Net Income 10.7 8% 6.6 6% 62% ------ ----- ------ ----- -------
Total revenue for the second quarter of fiscal 1996 was $65,510,000, an increase of $5,698,000 (10%) from the same period of the prior year. The revenue increase in the second quarter was the result of increased revenue in Health Care, $3,532,000 (18 %), and Payment Systems, $2,728,000 (8%), partially offset by a decrease in Information Systems and Services revenue of $547,000 (9%).
Total revenue for the six months ended November 30, 1995 was $131,135,000, an increase of $15,354,000 (13%) from the same period of the prior year. The revenue increase was the result of increased revenue in Health Care, $9,682,000 (26%) and Payment Systems, $7,497,000 (11%), partially offset by a decrease in Information Systems and Services revenue of $1,650,000 (13%).
Health Care. Revenue increased 18% in the second quarter and 26% for the six months ended November 30, 1995. Revenue growth was related to (i) increases in electronic claim processing and (ii) increases in revenue for the Company's practice management systems for the pharmacy, dental, physician and institutional sectors, including the impact of acquisitions completed after the first quarter of fiscal 1995.
Payment Systems. Payment Systems revenues increased 8% in the second quarter and 11% for the six months ended November 30, 1995 compared to the same periods last year. Direct Payment Systems revenue increased due to higher volume of merchant sales processed and equipment sales as well as increased volume in the check verification/guarantee business. Offsetting this increase, revenue in the Indirect Payment Services (distribution through banks) business decreased for the second quarter and for the first six months of fiscal 1996, as a result of price adjustments generally made in return for increased volume and term commitments.
Information Systems and Services. Revenue decreased 9% for the second quarter and 13% for the first six months of fiscal 1996 primarily as a result of a decline in revenue associated with software licenses for electronic data interchange (EDI) applications.
Other. As a result of the Company's decision to exit the communication services market in 1991, there is no longer any residual revenue from these activities. The customer contracts associated with this business expired in the first quarter of fiscal 1995.
Total cost of service for the second quarter of fiscal 1996 was $34,125,000, an increase of $1,278,000 (4%) from the same period last year. While the cost of operations increased $253,000 (1%), the cost of operations as a percentage of revenue decreased from 43% last year to 39% this year. Depreciation and amortization as a percentage of revenue increased 19%, primarily as a result of acquisitions made during fiscal 1995. Cost of hardware sold was 5% for both periods.
Cost of service for the six month period ended November 30, 1995 was $68,053,000, an increase of $4,548,000 (7%) from the same period last year. Total cost of service as a percentage of revenue decreased to 52% this year from 55% last year. Cost of operations increased $2,263,000 (4%). Cost of operations as a percentage of revenue decreased to 40% for the first six months of this fiscal year as compared to 43% for the same period last year. Depreciation and amortization as a percentage of revenue increased 22%, primarily as a result of acquisitions made during 1995. Cost of hardware decreased to 4% of revenue as compared to 5% last year.
Gross margin increased to 48% from 45% in both the second quarter and the six months ended November 30, 1995.
Sales, general and administrative expenses were $23,273,000 in the quarter. This is an increase of $2,163,000 (10%) from the prior year. Sales, general and administrative expense increased $6,135,000 (15%) for the six month period. These increases are primarily due to increased product development and sales expansion programs in the Payment Systems and Health Care areas as well as increased sales, general, administrative and product development expenses associated with acquired businesses.
Interest and other income for the second quarter of fiscal 1996 was $1,177,000, an increase of $829,000 (238%) from last year. Interest and other income for the first six months of fiscal year 1996 was $2,304,000 an increase of $1,501,000 (187%). These increases are principally the result of increased cash balances associated with the secondary stock offering completed in the first quarter of fiscal 1996.
Interest and other expense for the second quarter of fiscal 1996 decreased $107,000 (15%) as a result of lower interest expense due to fewer capital leases. Interest and other expense for the six months ended November 30, 1995 was essentially flat.
The provision for income taxes, as a percentage of taxable income, was 34% and 36% for the quarters ended November 30, 1995 and 1994, respectively and 35% and 36% for the six month periods ended November 30, 1995 and 1994, respectively. These decreased tax rates are a result of research and development tax credits and tax exempt interest income.
Net income for the second quarter of fiscal 1996 was $5,734,000, an increase of $2,217,000 (63%), as compared to the same period of the prior year. Earnings per share for the quarter ended November 30, 1995 and 1994 were $0.24 and $0.17, respectively . The fully diluted number of common and common equivalent shares outstanding for the second quarter of fiscal 1996 was 24,346,000, an increase of 4,168,000 (21%) as compared to the same period last year. This increase is primarily a result of 3,162,500 shares issued in the supplementary stock offering completed in June, 1995, and shares issued under Company stock plans.
Net income for the first six months of fiscal 1996 was $10,708,000, an increase of $4,114,000 (62%), as compared to the same period of the prior year. Earnings per share for the six months ended November 30, 1995 and 1994 were $0.44 and $0.33, respectively. The fully diluted number of common and common equivalent shares outstanding for the six month period was 24,260,000, an increase of 4,145,000 (21%) as compared to the same period last year. This increase is primarily a result of 3,162,500 shares issued in the supplementary stock offering completed in June, 1995, and shares issued under Company stock plans.
Net cash provided by operating activities was $14,378,000 for the six months ended November 30, 1995, a decrease of $602,000 (4%). Cash flows from operations for the first six months of fiscal 1996, consisting of net income adjusted for depreciation, amortization and provision for bad debts, totaled $23,001,000, an increase over the same period in the previous fiscal year of $6,095,000, offset by a reduction of accounts payable and merchant processing liabilities.
Cash used in investing activities was $4,776,000 compared to the prior year of $34,494,000. In the first six months of fiscal 1995, four business acquisitions were made totaling $32,340,000, net of cash acquired.
Net cash provided by financing activities was $60,545,000, an increase of $64,529,000 over the prior year. The net proceeds from the issuance of stock under the secondary offering (as discussed in Note 3) were $63,652,000. Net proceeds from employee stock purchases increased $2,476,000 over the same six month period last year. Dividends of approximately $3,418,000 and $2,796,000 were paid in the six month periods ending November 30, 1995 and 1994, respectively.
The Company has entered into a $15,000,000, committed working capital line of credit expiring in August 1996. In addition, the Company has a $40,000,000 committed acquisition line of credit which expires in August 1996. The Company believes funds generated from operations along with its committed lines of credit and the $100,887,000 cash on hand is adequate to meet normal business operating needs, including possible acquisitions.
Stockholders' equity increased $75,170,000 (62%), from May 31, 1995 to $197,693,000 at November 30, 1995, principally the result of the secondary offering as discussed in Note 3.
ITEM 1 - PENDING LEGAL PROCEEDINGS
ITEM 2 - OTHER INFORMATION
ITEM 3 - EXHIBITS AND REPORTS FILED ON FORM 8-K
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on October 26, 1995. At the annual meeting, the stockholders of the Company approved the following items:
1. Election of two directors in Class III, Don W. Sands and J. Veronica Biggins, to serve until the annual meeting of stockholders in 1998 and thereafter until their successors are duly elected and qualified;
2. Amendment of the Company's 1987 Stock Option Plan to increase the number of shares that may be issued thereunder from 3,787,500 to 5,287,500, and to limit total grants of options thereunder to any individual to not more than 1,500,000 shares;
3. Amendment of the Company's 1983 Restricted Stock Plan to increase the number of shares that may be issued thereunder from 487,500 to 750,000, and to add a performance-based award feature to the plan;
4. Adoption of the Company's 1995 Non-Employee Director Compensation
5. Amendment of the Company's 1984 Non-Employee Director Stock Option Plan to provide for a new series of five additional grants of stock options to purchase 5,000 shares per grant to non-employee directors, to extend exercise rights to the expi ration date of the option and to establish a five year vesting schedule;
6. Adoption of the Company's 1995 Performance-Based Executive Officer
7. Amendment of the Company's Certificate of Incorporation to increase the number of shares of Common Stock of the Company authorized for issuance from 30,000,000 to 60,000,000.
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 15, 1996 By: /s/ Jerry W. Braxton | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T08:19:00 |
0000950116-96-000015 | 0000950116-96-000015_0000.txt | Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 2, 1996
(Exact name of registration as specified in charter)
(State or other (Commission (I.R.S. Employer jurisdiction of File Number) Identification No.)
Flying Hills Corporate Center #6, Reading, Pennsylvania 19607 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-775-5199
(Former name or former address, if changed since last report.)
Item 2. Changes in Control of Registrant.
On January 2, 1996, European American Bank ("EAB") acquired all the outstanding capital stock of the registrant by means of a merger (the "Merger") of a wholly-owned subsidiary of EAB into the registrant. EAB is an indirect, wholly-owned subsidiary of ABN AMRO Bank, N.V., a Dutch bank. The consideration paid and payable in connection with the Merger (all of which is payable in cash) is subject to final determination but is currently estimated to be approximately $45,869,000. The registrant is advised that the source of the consideration is EAB's cash on hand. Before the Merger, the registrant was not controlled by any individual or "group." By arrangement with EAB, John F. Horrigan, Jr. and Arthur A. Haberberger will continue as directors of the registrant. Immediately before the effectiveness of the Merger, the registrant distributed to its shareholders (1) all the capital stock of its wholly-owned subsidiary, American Real Estate Investment and Development Co. ("ARE"), and (2) certain intercompany debt owed to the registrant by ARE.
Also on January 2, 1996, the registrant gave notice of redemption to holders of its outstanding Subordinated Investment Certificates, specifying a redemption date of February 1, 1996.
Immediately following the completion of the Merger, the registrant changed its name from "Horrigan American, Inc." to "EAB Leasing Corp."
Item 7. Financial Statements, Pro Forma Financial Information, and Exhibits
1. Acquisition Agreement dated as of January 2, 1996, between Horrigan American, Inc. and EAB Leasing Corp. (Schedule, reflecting certain arrangements concerning employee benefits, is omitted but will be furnished supplementally to the Commission on
2. Agreement and Plan of Merger dated as of January 2, 1996 between Horrigan American, Inc. and EAB Leasing Corp. (Exhibits A (agreed-upon procedures for post-closing adjustments to merger consideration) and C (form of articles of merger) are omitted but will be furnished supplementally to the Commission on
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/ Arthur A. Haberberger | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-16T09:25:23 |
0000898430-96-000124 | 0000898430-96-000124_0000.txt | <DESCRIPTION>FORM 10-Q FOR PERIOD ENDED 12/02/95
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
FOR THE QUARTERLY PERIOD ENDED: DECEMBER 2, 1995
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
FOR THE TRANSITION PERIOD FROM TO
(Exact name of registrant as specified in its charter)
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
22600 SAVI RANCH PARKWAY, YORBA LINDA, CALIFORNIA 92687 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 921-2640
AUTOCLAVE ENGINEERS, INC., 2930 WEST 22ND STREET, ERIE, PA 16506 (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 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.
CLASSES OUTSTANDING AT DECEMBER 31, 1995: COMMON STOCK $.15 PAR VALUE... 4,079,497
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
See accompanying notes to condensed consolidated financial statements.
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
See accompanying notes to condensed consolidated financial statements.
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME December 2, 1995 and November 30, 1994 (amounts in thousands, except share data)
See accompanying notes to condensed consolidated financial statements.
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended December 2, 1995 and November 30, 1994
See accompanying notes to condensed consolidated financial statements.
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein are based in part on estimates and include such adjustments (consisting solely of normal, recurring adjustments) which management believes are necessary for a fair presentation of the Company's financial position at December 2, 1995 and May 31, 1995, and the results of its operations for the three and six- month periods ended December 2, 1995 and November 30, 1994. The consolidated financial statements and related notes are condensed and have been prepared in accordance with generally accepted accounting principles applicable to interim periods; consequently, they do not include all generally accepted accounting disclosures required for complete annual financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended May 31, 1995.
The results of operations for the period presented are not necessarily indicative of results to be expected for the entire fiscal year. Certain prior year items have been reclassified to conform to the current year presentation.
Inventories at December 2, 1995 and May 31, 1995 consisted of the following:
3. Sale of Autoclave Engineers Group
The Company sold its Autoclave Engineers Group during the second quarter for a total consideration of $16,250,000, which consisted of cash in the amount of $15,500,000 and a five-year promissory note for $750,000.
The Company has identified ground water and soil contamination at its previously owned Erie, Pennsylvania operation of Autoclave Engineers Group. As of December 2, 1995, the Company has accrued $685,000 for the probable cost of remediation, further analysis and other related costs. At this time, the Company is not able to determine if remediation activities will be required and, if so required, the extent of these remediation efforts.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
The following discussion and analysis should be read in conjunction with Unit Instruments, Inc.'s condensed consolidated financial statements and related notes included herein.
THREE MONTHS ENDED DECEMBER 2, 1995 COMPARED TO THREE MONTHS ENDED NOVEMBER 30,
Sales from continuing operations for the second fiscal quarter ended December 2, 1995 increased 49% to $15,546,000 from $10,402,000 for the comparable prior year period. This increase in sales reflects, in part, the continued strong demand in the semiconductor equipment market, as well as enhanced market position for the Company. Shipments to OEM's and End Users were up 44% and 95%, respectively, for the quarter while sales of the Company's metal seal mass flow controllers, used in more demanding applications, advanced 75% from the comparable prior year period.
Gross profit margin increased to 40% for the current quarter from 36% for the same quarter last year. This improvement in the gross profit margin is attributable to slightly higher average selling prices, more favorable product mix, increases in productivity and higher utilization of manufacturing facilities which resulted in higher absorption of fixed overhead costs.
Selling, general and administrative ("S,G&A") expenses increased to $3,745,000 in the second quarter of the current fiscal year from $2,839,000 in the comparable prior year period. However, as a percent of sales, S,G&A fell to 24% for the current period from 27% for the prior year's comparable quarter. The Company closed its Erie, Pennsylvania corporate office on September 29, 1995 and transferred all corporate office functions during the second quarter to Unit Instruments' headquarters in Yorba Linda, California. The Company anticipates that it will realize cost savings of approximately $1 million per year with the relocation of the corporate office and other elements of the previously announced restructuring.
A restructuring charge of $290,000 was recorded in the current quarter for additional legal fees, employee severance expenses and other additional expense items resulting from restructuring activities and the closure of the Erie, Pennsylvania corporate office during the second quarter.
Research, development and engineering ("R,D&E") expenses increased to $821,000 for the current quarter from $629,000 for the prior year. These higher expenditures reflect increased new product development charges to support current and anticipated future sales.
The Company believes that the continued timely development of new products and enhancements to its existing products is essential to maintaining its competitive position within the industry. Accordingly, the Company anticipates that such expenses will continue to increase in absolute dollars and possibly as a percent to sales in subsequent periods.
Interest income increased substantially for the current quarter to $197,000 from $21,000 for the prior year period. This increase in interest income results primarily from the restructuring activities of the past four quarters which involved the sale of Burton Corblin and Autoclave Engineers Group and the resultant increase in cash balances. Interest expense declined for the quarter to $30,000 from $96,000 because debt outstanding against a domestic bank line of credit was paid off during the current quarter.
Income from continuing operations before income taxes increased dramatically to $1,578,000 for the current quarter from $272,000 for the prior year period. Income taxes for continuing operations were provided for at a 39% rate for the second quarter as compared to a 41% rate for in the prior year's second quarter.
Income from continuing operations was $968,000 for the current period or $.22 per share as compared to $160,000 or $.04 per share for the year ago quarter.
Income from discontinued operations during the phase down period for the current fiscal quarter reflects the results of Autoclave Engineers Group for the period from September 1, 1995 through September 22, 1995. For the prior year's comparable period, discontinued operations reflected the results of operations for both Autoclave Engineers Group and the Burton Corblin compressor business segment based in France. Burton Corblin was sold in January, 1995 and Autoclave Engineers Group was sold on September 22, 1995. For the second quarter, income from discontinued operations during the phase down period was $146,000, net of income tax provision of $223,000. For the prior year period, income from discontinued operations during the phase down period was $590,000, net of income tax provision of $494,000. The Company sold its Autoclave Engineers Group during the second quarter and recorded a gain on sale of $1,454,000, net of tax provision of $1,011,000. Total net income from discontinued operations was $1,600,000 for the quarter or $.36 per share.
Net income for the second quarter of fiscal 1996, including income from discontinued operations, was $2,568,000 or $.58 per share, which compares favorably to net income for the prior year period of $750,000 or $.17 per share. The Company concluded its restructuring activities during the second quarter with the sale of Autoclave Engineers Group and the relocation of the corporate office functions to Unit Instruments in California. Accordingly, the Company does not expect to record additional material restructuring charges or discontinued operating results in subsequent quarters.
SIX MONTHS ENDED DECEMBER 2, 1995 COMPARED TO SIX MONTHS ENDED NOVEMBER 30, 1994
Sales from continuing operations for the six-month period ended December 2, 1995 increased 54% to $30,569,000 from $19,877,000 for the comparable prior year period. This increase in sales is attributable, in part, to the continued strong demand for semiconductor fabrication equipment, as well as enhanced market position for the Company's mass flow controllers. Shipments to OEM's and End Users were up 53% and 78%, respectively, while sales of metal seal mass flow controllers were up 96% for the six-month period compared to the same prior year period.
Gross profit margins increased to 40% for the current year from 36% last year because of slightly higher average selling prices, more favorable product mix, increased productivity and higher utilization of manufacturing facilities, which resulted in higher absorption of fixed overhead costs.
Selling general and administrative expenses increased 36% to $7,437,000 for the first half but fell as percent of sales to 24% for the current six-month period from 28% for the prior year period. The Company closed its Erie, Pennsylvania corporate office during the second quarter and transferred all corporate office functions to Unit Instruments' headquarters in Yorba Linda, California. The Company anticipates that it will realize cost savings of approximately $1 million per year with the relocation of the corporate office and other elements of the previously announced restructuring.
A restructuring charge of $373,000 was incurred during the first half of the current fiscal year for employee severance expense, additional legal fees and other expenses resulting from restructuring activities for the period, including the closure of the Erie, Pennsylvania corporate office.
Research, development and engineering expenses increased 47% for the comparative six-month period reflecting new product development efforts and higher staffing levels in these departments. The Company believes that the continued timely development of new products and enhancements to its existing products is essential to maintaining its competitive position within the industry. Accordingly, the Company anticipates that such expenses will continue to increase in absolute dollars and possibly as a percent to sales in subsequent periods.
Interest income increased substantially to $278,000 from $42,000 the prior year because of much higher cash balances resulting from the divestiture of Burton Corblin and Autoclave Engineers Group. Interest expense declined for the comparative period because of lower levels of borrowing outstanding as all domestic credit facilities were repaid during the second quarter of the current fiscal year.
Income from continuing operations before income taxes increased dramatically to $2,854,000 for the current six-month period from $450,000 for the prior year period. Income taxes for continuing operations were provided for at a 41% rate compared to a 43% rate for the prior year's period.
Income from continuing operations was $1,684,000 for the current period or $.38 per share as compared to $256,000 or $.06 per share for the prior year six-month period.
Income from discontinued operations during the phase down period for the current fiscal period reflects the results of Autoclave Engineers Group through September 22, 1995. For the prior year's comparable period, discontinued operations reflected the results of operations for both Autoclave Engineers Group and the Burton Corblin compressor business segment based in France. Burton Corblin was sold in January, 1995 and Autoclave Engineers Group was sold on September 22, 1995. For the current year, income from discontinued operations during the phase down period was $750,000, net of income tax provision of $521,000. For the prior year period, income from discontinued operations during the phase down period was $637,000, net of income tax provision of $533,000. The Company sold its Autoclave Engineers Group during the second quarter and recorded a gain on sale of $1,454,000, net of income tax provision of $1,011,000. Total net income from discontinued operations was $2,204,000 for the six-month period or $.49 per share.
Net income for the first half of the current fiscal year, including income from discontinued operations, was $3,888,000 or $.87 per share, which compares favorably to net income for the prior year period of $893,000 or $.21 per share, including income from discontinued operations. The Company concluded its restructuring activities during the second quarter with the sale of Autoclave Engineers Group and the relocation of the corporate office functions to Unit Instruments in California. Accordingly, the Company does not expect to record additional material restructuring charges or discontinued operating results in subsequent quarters.
The Company's results of operations may be affected in the future by a variety of factors including: the dependency of sales on a few large customers, product mix, new product introductions by the Company and its competitors, operating expenses and the "nominations" of end users for the brand of mass flow controllers on new equipment orders. In addition, the Company's results could be affected by demand for semiconductor equipment, which has experienced strong growth the past two years, and technology changes in the market.
The Company sold its Autoclave Engineers Group during the second quarter for a total consideration of $16,250,000, which consisted of cash in the amount of $15,500,000 and a five-year promissory note for $750,000. In conjunction with this transaction, the Company repurchased 220,000 shares of common stock during the quarter for a total consideration of $2,584,000. In addition, the Company repaid all outstanding borrowings under it existing domestic credit facility which consumed $666,000 of the cash received from the sale.
For the six months, cash was used for higher inventory and accounts receivable balances and to liquidate accrued liabilities primarily associated with restructuring activities. Capital expenditures were $3,169,000 for the period and consisted of approximately $1.5 million for a fourth cleanroom "tunnel", $1.1 million for offshore facility expansions, and approximately $.6 million for other items. The Company expects to spend between $5 and $6 million on capital projects this fiscal year to support current and future activity levels.
With the sale of Autoclave Engineers Group, the Company's liquidity position improved considerably. Cash and cash equivalents were $15.1 million as of December 2, 1995 and all borrowings under the domestic credit facility have been repaid. The Company's only debt outstanding is a Yen denominated credit facility through Unit Japan for approximately $2 million. The Company expects that these current cash resources and cash generated from continuing operations will be adequate to fund the Company's anticipated near-term capital requirements.
Subsequent to fiscal year-end 1995, the Company received the findings of further environmental study on its previously owned property in Erie, PA. These studies indicated that there existed some soil contamination around one of the buildings of the Autoclave Engineers Group facility on the Erie, PA site. The study further revealed the presence of VOC's, in one of the monitoring wells, that was in excess of Level 1 standards established by the Pennsylvania Department of Environmental Protection. The Company accrued additional amounts during the second quarter for possible remediation efforts along with further study costs and other related expenses. At this time, the Company has not determined whether remediation activities will be required and, if remediation is required, the extent and cost of such remediation.
Item 4. Submission of Matters to a Vote of Shareholders.
At the Annual Meeting of Shareholders, which was held on November 10, 1995, Messrs. James C. Levinson and A. Wade Blackman were reelected directors of the Company. Continuing as directors were Messrs. Michael J. Doyle, George Boyadjieff and Edward Rogas, Jr. The Shareholders also approved, by an affirmative vote of 3,200,187 versus votes against of 12,460, to change the Corporation's state of incorporation from Pennsylvania to California pursuant to a Plan of Merger which provided for the Corporation to be merged into its wholly-owned subsidiary, Unit Instruments, Inc. Shareholders also approved the appointment of Price Waterhouse LLP as the auditors for the fiscal year ending May 31, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11.1 - Computation of Earnings Per Share
(b) Two reports on Form 8-K were filed during the quarter. The first report on Form 8-K dated September 22, 1995 concerned the sale of the Company's Autoclave Engineers Group to Snap-tite, Inc. and the repurchase of 220,000 shares of the Company's common stock from the Registrant's largest shareholder.
The second report on Form 8-K dated November 10, 1995 concerned Shareholder approval of a reincorporation merger and Plan of Merger whereby Autoclave Engineers, Inc. was merged into Unit Instruments, Inc. which served to change the state of incorporation of the Company from Pennsylvania to California. The report further disclosed that the Company's listing on the NASDAQ was changed to Unit Instruments, Inc. from Autoclave Engineers, Inc. with a new trading symbol of UNII.
UNIT INSTRUMENTS, INC. AND SUBSIDIARIES
Pursuant to the requirement 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, 1995 /s/ Michael J. Doyle
Date: January 12, 1995 /s/ Gary N. Patten | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T12:22:57 |
0000079326-96-000002 | 0000079326-96-000002_0006.txt | CONTACTS: Robert L. Guenther Gregory R. Venne
POLAROID ANNOUNCES PLAN TO CHANGE FUNDAMENTALLY ITS OPERATING STRUCTURE, IMPROVE PROFITABILITY, AND SHARPEN
Company Will Take Total Pre-Tax Charge of $195 million, $155 million in 1995 Fourth Quarter and $40 million in 1996
Cambridge, Mass., -- December 19, 1995 -- Polaroid Corporation (NYSE: PRD) today announced a broad plan of action designed to change fundamentally its operating structure and to sharpen its strategic focus, improving the company's profitability, productivity and product commercialization process for both the near and long-term.
Gary T. DiCamillo, chairman and chief executive officer, said, "After a thorough initial review, it is clear to me that Polaroid's business has real potential for meaningful growth. The actions we are taking today will refocus our considerable assets and resources on areas with the greatest potential for commercialization, and bring costs and investments more in line with near-term revenues and realistic projected rates of growth. These steps will enable our photographic imaging business to devote more resources to existing product platforms, globalization of markets, and advertising and marketing.
Polaroid Plan to Change Structure -- 2
Our plan also will enhance the prospects that our electronic imaging systems, medical imaging and graphic arts imaging businesses will turn profitable sooner while maintaining the flexibility to add infrastructure as market conditions demand."
The plan will result in a total pre-tax special charge of $195 million. $155 million will be charged in the fiscal 1995 fourth quarter, and $40 million in fiscal 1996. The plan will reduce operating expenses by approximately $90 million on an annualized basis. A majority of these annual savings will be realized in 1996.
"We currently expect our 1995 fourth quarter operating profit, excluding special charges, to be below our 1995 third- quarter operating profit, due to higher overhead spending and less than expected increases in our business. Combined with a significantly higher effective tax rate, we expect to report near break-even results for the 1995 fourth quarter," DiCamillo said. "This past year the company made major changes in the ways it sells and distributes its products in almost every market around the world -- inventory adjustment programs in the United States and Europe, direct distribution in Japan, increased investments in emerging markets, and increased promotional expenses. These initiatives likely will result in increased retail sales in the fourth quarter as compared to the same period last year, and revenues will not be burdened with the significant year-end loading that occurred last year. However, the costs associated with these programs were designed to achieve higher revenues than will be the case."
"The expected fourth quarter results will also reflect increased spending relating to the introduction of the company's new line of graphic arts imaging products and its new Helios 1417 medical imaging system," DiCamillo said.
The restructuring plan features three principal components -- program reductions in certain product, research and manufacturing areas; strategic refocusing of the company's high-resolution imaging businesses for the medical diagnostic and graphic arts markets; and a reduction in corporate overhead expenses. Specific actions being taken include:
Polaroid Plan to Change Structure -- 3
. The company will scale back manufacturing of the Captiva camera and write-off certain assembly equipment and fixed assets. The company will continue to sell and service Captiva cameras and will continue to manufacture instant film for Captiva. In addition, the company is curtailing several major research programs and shifting research resources to projects with the greatest and most immediate commercial potential. The company also is consolidating its coating facilities, shifting capacity from some of its oldest to its newer, more efficient facilities. This step will enhance product quality and reduce production costs without sacrificing manufacturing flexibility.
. The company is also refocusing its high-resolution imaging businesses for the medical and graphic arts markets. The intent of this step is to produce a better alignment of the infrastructure of these businesses with their near-term prospects without impinging on their ability to bring current product development projects to market.
. The company is sharply downsizing its corporate overhead area and will reduce expenses in various service and administrative groups.
Overall, these changes will result in the elimination of about 1,300 jobs. Employees in areas affected by the restructuring are being offered voluntary severance packages. In addition, eligible employees companywide may take advantage of an enhanced early retirement program, and some employees will be eligible for both. The workforce reduction program will be complete before the end of the first quarter. If the two voluntary programs do not achieve the necessary reductions, the company will initiate layoffs.
Polaroid Plan to Change Structure -- 4
"Obviously these are difficult steps, but we take them with a view toward the future. Today's actions will strengthen our foundation for growth, and while I am excited about the businesses in which Polaroid participates, my next task is to move the organization toward achieving its strategic goals," DiCamillo said.
Polaroid Corporation, with annual sales in excess of $2 billion, is the worldwide leader in instant imaging. The company supplies instant photographic cameras and films, conventional cameras and films, videotapes, and electronic imaging products to markets worldwide, including amateur and professional photography, industry, graphic arts, science, medicine, government, and education. | 8-K | EX-99 | 1996-01-16T00:00:00 | 1996-01-16T15:48:09 |
0000875626-96-000020 | 0000875626-96-000020_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: The First Trust Special Situations Trust Series 093
3. Investment Company Act File Number: 811-05903
Securities Act File Number: 33-53273
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
8. Number and amount of securities registered during the fiscal year other than pursuant to rule 24f-2: -0-
9. Number and aggregate sale price of securities sold during the fiscal year: 691,004 7,462.467.60
10. Number and aggregate sale price of securities sold during the fiscal year in reliance upon registration pursuant to
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): -0-
12. Calculation of registration fee:
(i) Aggregate sale price of securities sold during the fiscal year in reliance on rule 24f-2 (from Item 10): $7,462.467.60
(ii) Aggregate price of shares issued in connection (from Item 11, if applicable): -0-
(iii)Aggregate price of shares redeemed or repurchased during the fiscal year (if applicable): -$607,949.48
(iv) Aggregate price of shares redeemed or repurchased and previously applied as a reduction to filing fees pursuant to rule 24e-2 (if applicable): -0-
(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): $6,854,518.12
(vi) Multiplier prescribed by Section 6(b) of the Securities Act of 1933 or other applicable law or regulation (see instruction C.6): x1/29th
(vii)Fee due (line (i) or line (v) multiplied by
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). : X :
Date of mailing or wire transfer of filing fees to the Commission's lockbox depository: January 12, 1996
This report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated. | 24F-2NT | 24F-2NT | 1996-01-16T00:00:00 | 1996-01-16T17:08:10 |
0000806176-96-000007 | 0000806176-96-000007_0000.txt | PREMIER STATE MUNICIPAL BOND FUND, TEXAS SERIES Dear Shareholder: We are pleased to provide you with this report on the Premier State Municipal Bond Fund, Texas Series. For its semi-annual reporting period ended October 31, 1995, your Series' Class A and Class B shares produced total returns of 6.70% and 6.37%, respectively.* Federally tax-free income dividends of approximately $.610 per share for Class A shares and $.555 per share for Class B shares were paid.** This amounts to an annualized tax-free distribution rate per share of 5.39% for Class A shares and 5.14% for Class B shares.*** Class C shares, from their introduction on August 15, 1995 through October 31, provided a total return of 4.25%,* and paid tax-free income dividends of approximately $.222 per share** amounting to an annualized tax-free distribution rate per share of 4.84%.*** Concerns about lagging economic growth prompted the Federal Reserve Board to ease the Fed Funds rate in July. The bond market has been well ahead of the Federal Reserve in perceiving that inflation was under control. Long-term interest rates have fallen for nearly 12 months and, accordingly, bond investors have enjoyed significant price appreciation. Economic indicators remain mixed, some causing concern about possible recession, while others point toward continued expansion. During times of business uncertainty, attention often shifts to the consumer sector of the economy, particularly regarding the consumer's ability to spend. There are some indications that consumers are being pinched. There is little doubt that the economic recovery has been productivity-driven. That is, corporations have succeeded in paring expenses from their cost of doing business. With this reduction in overhead, bottom line profits have grown dramatically. Yet little of this corporate prosperity has spilled over into the consumer sector of the economy. Wages and salaries grew less than 3% over the past year, barely keeping pace with inflation. An additional consumer concern, new job creation, is at the slowest pace of the post-World War II era. Recent retail sales reports were the weakest since June 1991, when the economy was in recession. Also, there is worry that the coming holiday season will be a poor one for retailers, since debt-burdened consumers may spend cautiously. Yet, there are also significant signs of continued growth. Despite indications of a potential slowdown in consumer spending, measures of consumer confidence remain high. Business capital spending and home-building activity have continued, providing substantial fuel for economic growth. Business investment in durable equipment, when calculated as a percentage of Gross Domestic Product (GDP), is at a 35-year high with no sign of a letup. No wonder industrial production is booming! And while job and wage growth is slow, the index of hours worked (a key determinant of GDP growth and income generation) is rising. Providing additional confidence is the fact that the four-and-a-half-year recovery has been well balanced: corporate debt issuance has been moderate and the banking system is not overstretched. We are encouraged by the Federal Reserve's successful handling of several crises (Mexico, derivatives, Japanese banking), any one of which could have threatened the monetary system in the U.S. and/or abroad. The municipal bond market recovered strongly in 1995 as long-term interest rates fell. If economic conditions remain sluggish and Congress is able to arrive at an acceptable budget accord, there may be a good chance that the Fed will ease further. We believe this indicates a favorable outlook for bond markets in general, particularly with inflation under control. But inflation can only go so low, and we are wary that the bond market's strength may be counting too much on continued improvement on the price front. Thus, while we remain confident in this market environment, we are alert to the effect of easing monetary policy and are watchful for any signs of rekindling inflation. Our primary task -to maximize current income exempt from Federal personal income taxes to the extent consistent with the preservation of capital - continues to guide our portfolio management decisions. While the municipal market and the Series have performed very well this year, results for municipal securities have been trailing other fixed income markets. Concerns about tax reform may be limiting investor enthusiasm for tax exempt securities. Since April, when serious tax reform proposals began to surface, the municipal rally has lagged, resulting in an increase in municipal yields as a percentage of comparable taxable bond yields. Today, long-term municipal bonds are yielding nearly 90% of U.S. Treasuries, which is a greater yield ratio than existed before the onset of talk about tax reform. While it could be years before an actual change in the tax code is adopted, the market's reaction so early in the proposal cycle suggests to us that the ultimate legislation, if any, may have a less radical effect on the market than feared. This year's impressive price move has more than offset 1994's decline. During the summer, in view of both the municipal market's strong showing and the degree of volatility exhibited in bond prices, we decided to "book some profits" and take a more cautious approach until a clearer economic picture developed. The current environment provides us with an opportunity to rebalance the portfolio so that it continues to own securities which we believe have the greatest potential for performance and income. Our trading activity will continue to concentrate on purchasing bonds which possess desirable liquidity, call and coupon characteristics. The municipal market, despite the normal year-end increase in new issue supply and ongoing concern over tax reform, continues to move higher. We expect that the issuance of Texas bonds will remain modest next year. This will provide a positive technical impetus, but will also challenge us in our search for appropriate securities. The high level of volatility exhibited by the market in recent years underscores the need to maintain a disciplined and long-term focus. Solid market performance thus far in 1995 has rewarded the patient investor. Included in this report is a series of detailed statements about your Series' holdings and its financial condition. We hope they are informative. Please know that we appreciate greatly your continued confidence in the Series and in The Dreyfus Corporation. [Richard J. Moynihan signature logo] New York, N.Y. * Total return includes reinvestment of dividends and any capital gains paid, without taking into consideration the maximum initial sales charge in the case of Class A shares or the applicable contingent deferred sales charge imposed on redemptions in the case of Class B or Class C shares. **Some income may be subject to the Federal Alternative Minimum Tax (AMT) for certain shareholders. Income may be subject to some state and local taxes for non-Texas residents. ***Annualized distribution rate per share is based upon dividends per share paid from net investment income during the period, divided by the maximum offering price per share in the case of Class A shares or net asset value per share in the case of Class B and C shares at the end of the period.
NOTES TO STATEMENT OF INVESTMENTS:
(a) Wholly held by custodian as collateral for delayed delivery security. (b) Bonds which are prerefunded are collateralized by U.S. Government securities which are held in escrow and are used to pay principal and interest on the municipal issue and to retire the bonds in full at the earliest refunding date. (c) Purchased on a delayed delivery basis. (d) Secured by letters of credit. (e) Securities payable on demand. The interest rate, which is subject to change, is based upon bank prime rates or an index of market interest rates. (f) Fitch currently provides creditworthiness information for a limited number of investments. (g) Securities which, while not rated by Fitch, Moody's or Standard & Poor's have been determined by the Manager to be of comparable quality to those rated securities in which the Series may invest.
See independent accountants' review report and notes to financial statements.
See independent accountants' review report and notes to financial statements.
See independent accountants' review report and notes to financial statements.
See independent accountants' review report and notes to financial statements.
PREMIER STATE MUNICIPAL BOND FUND, TEXAS SERIES Contained below is per share operating performance data for a share of Beneficial Interest outstanding, total investment return, ratios to average net assets and other supplemental data for each period indicated. This information has been derived from the Series' financial statements.
See independent accountants' review report and notes to financial statements.
PREMIER STATE MUNICIPAL BOND FUND, TEXAS SERIES Contained below is per share operating performance data for a share of Beneficial Interest outstanding, total investment return, ratios to average net assets and other supplemental data for each period indicated. This information has been derived from the Series' financial statements.
See independent accountants' review report and notes to financial statements.
PREMIER STATE MUNICIPAL BOND FUND, TEXAS SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) NOTE 1-SIGNIFICANT ACCOUNTING POLICIES: Premier State Municipal Bond Fund (the "Fund") is registered under the Investment Company Act of 1940 ("Act") as a non-diversified open-end management investment company and operates as a series company currently offering fifteen series including the Texas Series (the "Series"). Premier Mutual Fund Services, Inc. (the "Distributor") acts as the distributor of the Fund's shares. The Distributor, located at One Exchange Place, Boston, Massachusetts 02109, is a wholly-owned subsidiary of FDI Distribution Services, Inc., a provider of mutual fund administration services, which in turn is a wholly-owned subsidiary of FDI Holdings, Inc., the parent company of which is Boston Institutional Group, Inc. The Dreyfus Corporation ("Manager") serves as the Fund's investment adviser. The Manager is a direct subsidiary of Mellon Bank, N.A. The Fund accounts separately for the assets, liabilities and operations of each series. Expenses directly attributable to each series are charged to that series' operations; expenses which are applicable to all series are allocated among them on a pro rata basis. The Series offers Class A, Class B and Class C shares. Class A shares are subject to a sales charge imposed at the time of purchase, Class B shares are subject to a contingent deferred sales charge imposed at the time of redemption on redemptions made within five years of purchase and Class C shares are subject to a contingent deferred sales charge imposed at the time of redemption on redemptions made within one year of purchase. Other differences between the three Classes include the services offered to and the expenses borne by each Class and certain voting rights. (A) PORTFOLIO VALUATION: The Series' investments (excluding options and financial futures on municipal and U.S. treasury securities) are valued each business day by an independent pricing service ("Service") approved by the Board of Trustees. Investments for which quoted bid prices are readily available and are representative of the bid side of the market in the judgment of the Service are valued at the mean between the quoted bid prices (as obtained by the Service from dealers in such securities) and asked prices (as calculated by the Service based upon its evaluation of the market for such securities). Other investments (which constitute a majority of the portfolio securities) are carried at fair value as determined by the Service, based on methods which include consideration of: yields or prices of municipal securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions. Options and financial futures on municipal and U.S. treasury securities are valued at the last sales price on the securities exchange on which such securities are primarily traded or at the last sales price on the national securities market on each business day. Investments not listed on an exchange or the national securities market, or securities for which there were no transactions, are valued at the average of the most recent bid and asked prices. Bid price is used when no asked price is available. (B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are recorded on a trade date basis. Realized gain and loss from securities transactions are recorded on the identified cost basis. Interest income, adjusted for amortization of premiums and original issue discounts on investments, is earned from settlement date and recognized on the accrual basis. Securities purchased or sold on a when-issued or delayed-delivery basis may be settled a month or more after the trade date. The Series 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 Series.
PREMIER STATE MUNICIPAL BOND FUND, TEXAS SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(C) DIVIDENDS TO SHAREHOLDERS: It is the policy of the Series to declare dividends daily from investment income-net. Such dividends are paid monthly. Dividends from net realized capital gain are normally declared and paid annually, but the Series may make distributions on a more frequent basis to comply with the distribution requirements of the Internal Revenue Code. To the extent that net realized capital gain can be offset by capital loss carryovers, if any, it is the policy of the Series not to distribute such gain. (D) FEDERAL INCOME TAXES: It is the policy of the Series to continue to qualify as a regulated investment company, which can distribute tax exempt dividends, by complying with the applicable provisions of the Internal Revenue Code, and to make distributions of income and net realized capital gain sufficient to relieve it from substantially all Federal income and excise taxes. NOTE 2-MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES: (A) Pursuant to a management agreement ("Agreement") with the Manager, the management fee is computed at the annual rate of .55 of 1% of the average daily value of the Series' net assets and is payable monthly. The Agreement provides for an expense reimbursement from the Manager should the Series' aggregate expenses, exclusive of taxes, brokerage, interest on borrowings and extraordinary expenses, exceed the expense limitation of any state having jurisdiction over the Series for any full fiscal year. However, the Manager has undertaken from May 1, 1995 to waive receipt of the management fee payable to it by the Series until such time as the net assets of the Series exceed $100 million, regardless of whether they remain at that level. The management fee waived, pursuant to the undertaking, amounted to $235,634 for the six months ended October 31, 1995. The undertaking may be modified by the Manager from time to time, provided that the resulting expense reimbursement would not be less than the amount required pursuant to the Agreement. (B) Under the Distribution Plan adopted pursuant to Rule 12b-1 under the Act, the Series pays the Distributor for distributing the Series' Class B and Class C shares at an annual rate of .50 of 1% of the value of the average daily net assets of Class B shares and .75 of 1% of the value of the average daily net assets of Class C shares. During the period ended October 31, 1995, $43,350 was charged to the Series for the Class B shares and $2 was charged to the Series for the Class C shares. (C) Under the Shareholder Services Plan, the Series pays the Distributor at an annual rate of .25 of 1% of the value of the average daily net assets of Class A, Class B and Class C shares for the provision of certain services. The services provided may include personal services relating to shareholder accounts, such as answering shareholder inquiries regarding the Series and providing reports and other information, and services related to the maintenance of shareholder accounts. The Distributor may make payments to Service Agents in respect of these services. The Distributor determines the amounts to be paid to Service Agents. For the period ended October 31, 1995, $85,430, $21,675 and $1 were charged to Class A, Class B and Class C shares, respectively, by the Distributor pursuant to the Shareholder Services Plan. (D) Each trustee who is not an "affiliated person" as defined in the Act receives from the Fund an annual fee of $2,500 and an attendance fee of $250 per meeting. The Chairman of the Board receives an additional 25% of such compensation.
PREMIER STATE MUNICIPAL BOND FUND, TEXAS SERIES NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The aggregate amount of purchases and sales of investment securities amounted to $38,528,972 and $38,361,304, respectively, for the six months ended October 31, 1995, and consisted entirely of long-term and short-term municipal investments. At October 31, 1995, accumulated net unrealized appreciation on investments was $3,069,278, consisting of $3,296,203 gross unrealized appreciation and $226,925 gross unrealized depreciation. At October 31, 1995, the cost of investments for Federal income tax purposes was substantially the same as the cost for financial reporting purposes (see the Statement of Investments).
PREMIER STATE MUNICIPAL BOND FUND, TEXAS SERIES REVIEW REPORT OF ERNST & YOUNG LLP, INDEPENDENT ACCOUNTANTS SHAREHOLDERS AND BOARD OF TRUSTEES PREMIER STATE MUNICIPAL BOND FUND, TEXAS SERIES We have reviewed the accompanying statement of assets and liabilities, including the statement of investments, of Premier State Municipal Bond Fund, Texas Series (one of the Series constituting the Premier State Municipal Bond Fund) as of October 31, 1995, and the related statements of operations and changes in net assets and financial highlights for the six month period ended October 31, 1995. These financial statements and financial highlights are the responsibility of the Fund'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 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, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements and financial highlights 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 interim financial statements and financial highlights 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 statement of changes in net assets for the year ended April 30, 1995 and financial highlights for each of the five years in the period ended April 30, 1995 and in our report dated June 6, 1995, we expressed an unqualified opinion on such statement of changes in net assets and financial highlights.
(Ernst & Young LLP signature)
The Bank of New York First Data Investor Services Group, Inc.
in the Prospectus, which must precede or accompany this report. | N-30D | N-30D | 1996-01-16T00:00:00 | 1996-01-16T15:08:25 |
0000950135-96-000119 | 0000950135-96-000119_0002.txt | QUADRAX CORPORATION, a Delaware corporation (the "Company"), for value received, hereby promises to pay to Robert K. Cole (the "Holder"), residing at 63025 O. B. Riley Road #20, Bend, Oregon 97701, or order, upon the terms and conditions of this Note, until December 31, 2001, up to the amount of One Million Two Hundred Fifty Thousand Dollars ($1,250,000).
1. PAYMENT OF AMOUNTS DUE PURSUANT TO THE NOTE.
Payment of the amounts due on this Note shall be made in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts.
The amount due pursuant to this Note each year (up to an aggregate maximum of One Million Two Hundred Fifty Thousand Dollars) shall be one-third of the annual pre-tax profits of Lion Golf of Oregon, Inc., an Oregon corporation, including the operations of McManis Sports Associates, Inc. (together, "Lion Golf") for each year beginning with the year ending December 31, 1996 and ending with the year ending December 31, 2001. The payment of each annual installment shall be due on March 31 of the year following the calendar year in question.
"Pre-tax profits" shall mean the net income before taxes of Lion Golf for each calendar year. In determining the pre-tax profits of Lion Golf for purposes of determining Quadrax's obligations on this Note and Lion Golf's obligation on the Debt Repayment Note, the following shall be excluded:
(a) Any liabilities and/or expenses of Lion Golf incurred after the closing which are not approved by Robert Cole which approval shall not be unreasonably withheld.
In accordance with the Debt Repayment Note, pre-tax profits shall be paid first on this Unsecured Promissory Note.
Subject to the foregoing, pre-tax profits of Lion Golf for each calendar year shall be determined by the Company's regular independent public auditors, utilizing the same accounting principles which such auditors use in the preparation of the Company's annual financial statements filed with the Securities and Exchange Commission.
If any payment is not paid within ten (10) days of when due, the Company shall pay Holder a late charge equal to four percent (4%) of such late payment.
The Company will pay or cause to be paid all sums becoming due hereon by check or checks as directed by Holder, sent to Holder's above address or to such other address as Holder may designate for such purpose from time to time by written notice to the Company, without any requirement for the presentation of this Note or making any notation thereon except that the Holder thereof agrees that payment of the final amount due shall be made only upon surrender of this Note to the Company for cancellation.
It shall be an Event of Default with respect to this Note upon the occurence and continuation uncured of any of the following events:
(a) A default in the payment of any installment of this Note, when and as the same shall become due and payable, and said default continues uncured for a period of ten (10) days after the date fixed for the making of such payment; or
(b) Default in the performance, or breach, of any covenant of the Company in this Note.
If an Event of Default occurs, the Holder may institute such actions of proceedings in law or equity as it shall deem expedient for the protection and enforcement of its rights, and shall be entitled to receive therefrom payment of the amount due on this Note, plus interest at 10% per annum to the date of payment plus reasonable expenses of collection, including attorneys' fees.
4.1 NOTICES. All communications provided hereunder shall be in writing and, if to the Company, delivered or mailed by registered or certified mail addressed to Quadrax Corporation, 300 High Point Avenue, Portsmouth, Rhode Island 02871, Attn.: James J. Palermo, or, if to the Holder, at the address shown for the Holder on the face of this Note or at such other address as Holder shall provide by notice as provided in this section.
4.2 GOVERNING LAW. This Note shall be construed in accordance with and governed by the laws of the State of Oregon without giving effect to conflict of laws principles. | 8-K | EX-2.2 | 1996-01-16T00:00:00 | 1996-01-16T15:53:28 |
0000950135-96-000122 | 0000950135-96-000122_0003.txt | Pro Forma Combined Balance Sheet and Income Statements
On October 31, 1995, Houghton Mifflin Company ("Company") acquired certain assets and assumed certain liabilities of D.C. Heath and Company ("Heath") from Raytheon Company ("Raytheon") in a cash transaction. The total cost of the acquisition is estimated at $459 million, of which $455 million represents the contractual purchase amount and $4 million represents estimated professional and other fees directly related to the acquisition.
The Company financed $345 million of the acquisition with short-term bank debt. The Company intends to refinance this debt with long-term debt securities to be issued under a shelf registration. Accordingly, the Pro Forma Combined Balance Sheet classifies the bank borrowings as long-term obligations.
Operating cash of $114 million was also applied to the acquisition. The September 30, 1995 historical balance sheet shows cash and marketable securities of $110 million. As a result, the remaining $4 million is shown on the Pro-Forma Combined Balance Sheet as short-term borrowings.
Basis of Accompanying Unaudited Pro Forma Financial Statements
The acquisition will be accounted for as a purchase. Accordingly, the results of Heath will be included in the Company's operating results as of October 31, 1995, the date of acquisition. The Pro Forma Balance Sheet combines the audited combined balance sheet of Heath at October 31, 1995 with the Company's consolidated balance sheet as of September 30, 1995. The Pro Forma Combined Income Statements assume that the acquisition occurred on January 1, 1994 and January 1, 1995. Cost savings that may be recognized from the combination of the Company and Heath are not included.
The intangible assets shown in the accompanying balance sheet as a result of the acquisition amount to approximately $346 million and are being amortized over the expected life estimated at twenty years. The actual allocation of the purchase price, including the allocation of intangibles to assets acquired, may be different from that reflected in the pro forma financial data.
This unaudited pro forma combined financial information does not purport to be indicative of the results which actually would have been obtained if the acquisition had been effected on the date indicated or of those results which may be obtained in the future. The pro forma combined financial information should be read in conjunction with the consolidated financial statements of Houghton Mifflin Company included in the Company's Annual Report on Form 10-K for the year ended December 31, 1994.
The unaudited pro forma combined income statements do not include certain non-recurring charges which may result from the transaction and the integration of Heath into the Company. The Company expects such items to be charged to operations during the period ended December 31, 1995. Such charges include integration expenses related to personnel, facilities, and assets. The unaudited pro forma combined balance sheet does contain these adjustments.
f) To record estimated net interest expense (in 1995 for nine months) at 7% associated with the acquisition financing. This rate is an estimate of the interest rate of the debt securities to be issued under the Company's shelf registration.
g) To record intangible asset amortization expense (in 1995 for nine months) using an amortization period of approximately 20 years.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT (In thousands, except per share amounts)
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT For the twelve months ended December 31, 1994 (In thousands, except per share amounts) | 8-K/A | EX-99.2 | 1996-01-16T00:00:00 | 1996-01-16T16:45:09 |
0000950152-96-000097 | 0000950152-96-000097_0004.txt | [MetLife Capital Financial Corporation Letterhead]
MAX & ERMA'S RESTAURANTS, INC.
MetLife Capital Financial Corporation or its assigns ("METLIFE") is pleased to inform you that your request for mortgage financing has been approved subject to the usual terms, conditions, and remedies contained in METLIFE's customary loan documents (subject to the BORROWER'S approval, as hereafter provided) and subject to the following terms and conditions:
BORROWER. Max & Erma's Restaurants, Inc., a Delaware corporation
PROPERTY AND IMPROVEMENTS. The loan will be secured by a first deed of trust or mortgage on Property and Improvements consisting of: (1) a 9,000 square foot restaurant building; (2) a 7,300 square foot restaurant building; (3) a 7,300 square foot restaurant building; and (4) a 7,300 square foot restaurant building ("Improvements"), located on a: (1) 66,200 square foot (1.52 acre); (2) 102,000 square foot (2.34 acre); (3) 78,800 square foot (1.81 acre); and (4) 65,800 square foot (1.51 acre) site commonly referred to as (1) 1904 Lake Club Drive, Columbus, Ohio; (2) 6930 Miller Lane, Dayton, Ohio; (3) 2475 Higgins Road, Hoffman Estates, Illinois; and (4) 447 N. Milwaukee Avenue, Vernon Hills, Illinois, including any easements or rights of way serving the land (collectively, the "Property"). BORROWER shall furnish METLIFE with the exact legal description of the Property.
BORROWER may make a one-time request that METLIFE approve a substitution of one or more of the Properties and Improvements secured by a first deed of trust or mortgage, for property and improvements acceptable to METLIFE and of equal or greater value. BORROWER will provide all necessary documentation as reasonably requested by METLIFE, and all fees and expenses shall be for the account of the BORROWER.
LOAN AMOUNT. $6,000,000.00; 90% of the purchase price or cost to construct (which cost specifically includes the purchase price of the real estate as above provided but excludes developer's overhead and any leasing fees not paid to independent third parties); 75% of appraised value (which appraisal shall be subject to METLIFE's approval as outlined further herein); or the amount obtained when using the monthly market rents per appraisal (as described below) less a 3% vacancy factor divided by a 1.10 debt service coverage ratio with that product divided by the actual mortgage constant; whichever is less.
LOAN FEE. $500.00 to be paid at loan closing.
NONUTILIZATION FEE. In the event the BORROWER exercises the option to fix the interest rate prior to the closing of the loan and subsequently fails to borrow substantially all of the Loan Amount as reasonably determined by METLIFE, and for any reason other than METLIFE's failure or refusal to close and fund the loan, then BORROWER shall pay METLIFE a nonutilization fee. The nonutilization fee will equal 7.3% of the Loan Amount for every 1% (or pro rata fraction of 1%) decrease in the weekly average yield of 10-Year U.S. Treasury Notes from the Friday immediately preceding the date that the option to fix the interest rate was exercised to the Friday immediately preceding the earlier of (a) the date METLIFE cancels this commitment pursuant to the terms hereof, and (b) the Expiration Date Of Commitment set forth below, as extended if applicable. The nonutilization fee is in addition to and not in substitution for any claim METLIFE may have against the Deposit or any other fee paid by BORROWER.
INTEREST RATE. 8.39% per annum.
INTEREST RATE AND PAYMENT ADJUSTMENTS. The Interest Rate expressed above will be increased or decreased by the amount of the increase or decrease (expressed in basis points) in the current weekly average yield of 10-Year U.S. Treasury Notes as published in Federal Reserve Statistical Release H.15 (519) from the Friday immediately preceding the date of this commitment letter to the Friday immediately preceding the date the loan is funded; provided that in no event shall the Interest Rate exceed the highest lawful rate of interest. The current weekly average yield of the U.S. Treasury Notes referred to in this paragraph, as of the Friday immediately preceding the date of this commitment letter, is 6.04%.
BORROWER will have the option, to be exercised only once, upon written notice to METLIFE at 10900 N.E. 8th Street, Suite 1300, Bellevue, WA 98004, Attn: Real Estate Department, and subject to payment of a fee to be quoted by METLIFE at the time of this notification, to request that METLIFE fix the Interest Rate in accordance with the formula described above. Ten (10) business days after METLIFE's receipt of such written notice, METLIFE shall fix the Interest Rate based on the weekly average yield of 10-Year U.S. Treasury Notes in effect as of the immediately preceding Friday. If BORROWER does not request that the Interest Rate be fixed prior to loan closing, then the Interest Rate shall be fixed at loan closing based on the weekly average yield of 10-Year U.S. Treasury Notes in effect as of the immediately preceding Friday. BORROWER will be furnished with the adjusted payment amount reflecting the fixed Interest Rate.
PAYMENT SCHEDULE. Interest only shall be paid in advance for the month in which loan closing occurs followed by 179 principal and interest payments due and payable, in arrears, commencing on the first day of the second month following the date of loan closing and every succeeding month thereafter, with all unpaid principal and interest due on the 180th installment date. Amortization of the loan will be based on a 15-year schedule.
PAYMENT PROVISIONS. Payments shall be due on the first day of each month except that if the loan is closed on any day after the first day of the month, BORROWER will pay at loan closing the interest for the balance of the month. Interest shall be computed on the basis of a 360-day year composed of twelve 30-day months.
PREPAYMENT PROVISIONS. Upon not less than thirty (30) days advance written notice to METLIFE at any time after the fourth (4th) anniversary of the due date of the first monthly principal and interest payment due under the promissory note, and upon payment of a prepayment premium, BORROWER shall have the right to prepay all, but not less than all, of the outstanding balance of the loan on any regularly scheduled principal and interest payment date. The prepayment premium shall be determined by (i) calculating the decrease (expressed in basis points) in the current weekly average yield of 10-Year U.S. Treasury Notes as published in Federal Reserve Statistical Release H.15 (519) ("Index"), from the Friday immediately preceding the date the interest rate is fixed per the terms of this commitment letter to the Friday immediately preceding the week in which the prepayment is made, (ii) dividing the decrease by 100, (iii) multiplying the result by the following described applicable "Premium Factor", and (iv) multiplying the product by the principal balance to be prepaid. If the Index is unchanged or has increased from the Friday immediately preceding the date of the proposal letter to the Friday immediately preceding the prepayment date, no prepayment premium shall be due. The Premium Factor shall be the amount shown on the following chart for the month in which prepayment occurs:
If the Federal Reserve Board ceases to publish Statistical Release H.15 (519), then the decrease in the weekly average yield of 10-Year U.S. Treasury Notes will be determined from another source designated by METLIFE.
Prepayment prior to the fourth (4th) anniversary of the due date of the first monthly principal and interest payment due under the promissory note will not be permitted. METLIFE may elect to accelerate the loan at any time after BORROWER's default, after applicable notice and the expiration of applicable cure period, in which event BORROWER shall, subject to the terms of the promissory note, be obligated to pay a prepayment premium equal to the amount determined in accordance with the foregoing schedule unless METLIFE thereafter agrees to decelerate the loan maturity. No prepayment premium shall be payable with respect to condemnation awards or insurance proceeds from fire or other casualty which METLIFE applies to prepayment, nor with respect to BORROWER's prepayment of the loan in full during the last three (3) months of its term unless an event of default has occurred, after applicable notice and the expiration of applicable cure period. BORROWER expressly acknowledges that METLIFE's damages in the event of any prepayment by BORROWER are difficult to ascertain, and that such prepayment premium is not a penalty but is intended solely to compensate METLIFE for the loss of its bargain and the reimbursement of internal expenses and administrative fees and expenses incurred by METLIFE.
Notwithstanding the above, in the event of a sale or merger of the BORROWER, upon not less than thirty (30) days advance written notice to METLIFE and upon payment of a prepayment premium described above and an early prepayment fee described below, BORROWER shall have the right to prepay all, but not less than all, of the outstanding balance of the loan on any regularly scheduled principal and interest payment date prior to the fourth (4th) anniversary of the due date of the first monthly principal and interest payment due under the promissory note. The early prepayment fee shall be determined by multiplying the loan balance at the original date of funding by the following described applicable "Fee Factor". The Fee Factor shall be the amount shown on the following chart for the month in which the early prepayment occurs:
RECOURSE. METLIFE shall have full recourse to the BORROWER for any failure to make payments as and when due on the promissory note and for the breach of any of the representations, warranties, indemnities and covenants contained in the loan documents.
DEFAULT RIGHTS. In the event of default, after applicable notice and the expiration of applicable cure period, and at METLIFE's sole option at any time thereafter, unless and until such default is cured, BORROWER shall pay in addition to each monthly payment on the loan one-twelfth of the annual real estate taxes, assessments, insurance premiums, water and sewer rates, and other charges (and ground rents if applicable) payable with respect to the Property and Improvements (as reasonably estimated by METLIFE based on the cost of such years), to be held by METLIFE without interest to BORROWER, for the payment of such obligations.
METLIFE shall be entitled to collect a late charge of five percent (5.00%) of any payment not paid by the tenth (10th) day of the month in which it is due, or the highest late charge permitted by law, whichever is less.
Upon the occurrence of any of the events of default outlined in the loan documents, after notice and the expiration of any applicable cure period, METLIFE shall have the option to declare the entire amount of principal and accrued interest thereon due under the promissory note immediately due and payable, and METLIFE may exercise any of its rights under the promissory note and any document executed or delivered therewith. After acceleration or in the event of nonpayment of the final installment, BORROWER shall pay interest on the outstanding principal balance at the rate of five percent (5.00%) per annum above Chase Manhattan Bank's prime interest rate in effect from time to time, or fifteen percent (15.00%) per annum, whichever is higher, provided such interest rate shall not exceed the maximum interest rate permitted by law. The Default Rights stated herein are not exclusive and such other rights as METLIFE deems appropriate shall be included in the loan documents.
REQUIRED DOCUMENTS. To evidence and secure this loan, BORROWER shall deliver, not less than three (3) business days prior to the loan closing, the properly executed documents appropriate, in the opinion of METLIFE's counsel, to accomplish the commitment requirements. The documents shall be in the customary form then generally used by METLIFE in the state in which the Property is located, except as such customary forms may be modified by METLIFE to effect the intent of specific requirements of this commitment or as reasonably necessary to protect the interest of METLIFE as determined by METLIFE's counsel and shall incorporate provisions requiring cross default and cross collateralization. The documents may include, without limitation, a promissory note, deed of trust or mortgage, assignment of rents and leases, and certificate and indemnity agreement regarding hazardous substances. All documents shall be subject to approval of METLIFE's counsel.
In the event BORROWER requests any modifications to the loan documents, such requested modifications shall be provided to METLIFE in written form.
APPRAISAL. As a condition of loan closing, BORROWER shall furnish METLIFE with a satisfactory appraisal report of the Property and Improvements prepared by an MAI certified appraiser acceptable to METLIFE. Such appraisal shall be furnished to METLIFE no later than five (5) days prior to loan closing.
If the appraisal report is prepared for someone other than METLIFE, then the report must be supplemented with an acknowledgment by the appraiser that (i) the report is being used by METLIFE for lending purposes, (ii) the appraiser has read and understood the METLIFE Appraisal
Policy Guidelines and Procedures, and (iii) the reported opinion of value would not change if the appraisal were made under METLIFE Appraisal Policy Guidelines and Procedures.
LEASING. All present and future tenants and leases, if any, shall be subject to METLIFE's approval. Although such leases may have been received for review by METLIFE prior to the date hereof, and although METLIFE may have conducted a preliminary review and made comments to BORROWER or BORROWER's counsel with respect thereto, such leases remain subject to METLIFE's approval based on a complete review of such leases by METLIFE's outside counsel following the date hereof. BORROWER shall furnish for METLIFE's approval such financial information on each tenant as METLIFE shall deem reasonably necessary. All tenants must execute an estoppel letter in form and substance acceptable to METLIFE certifying among other things that they are in occupancy and open for business, there are no defaults under their lease, and they have commenced full rental payments without rental concessions or other inducements. In addition, METLIFE may require that some or all tenants execute subordination and attornment agreements in form and substance satisfactory to METLIFE.
TITLE. BORROWER shall furnish METLIFE with an ALTA Loan Policy of Title Insurance, or the equivalent thereof if an ALTA policy is unavailable, insuring METLIFE's interest as a first lien and including an ALTA Extended Coverage Endorsement, an Address and Improvement Type Endorsement, an Environmental Lien Endorsement and such other endorsements as METLIFE may reasonably require. The insurer, the form of title insurance policy and endorsements, and any exceptions to coverage shall be subject to METLIFE's reasonable approval. If the Property is a leasehold then the lease shall be subject to METLIFE's approval.
SURVEY. METLIFE shall be furnished with a current ALTA survey satisfactory to METLIFE and title insurer by a registered public surveyor showing the location of the Improvements and all other matters affecting the title, including without limitation, all easements and encroachments, prepared in accordance with current ALTA/ACSM standards for ALTA surveys, and containing a certification as reasonably required by METLIFE. If any of the surveys disclose a state of facts unacceptable to METLIFE, METLIFE may cancel this commitment and the Deposit and any and all other sums deposited with METLIFE by the BORROWER shall be returned to the BORROWER, less METLIFE'S expenses.
PERSONAL PROPERTY. BORROWER shall execute a security agreement and financing statements which shall be a first lien covering all leases, rents, security deposits, and personal property owned by BORROWER and described on Exhibit A attached hereto and incorporated herein by reference.
CONSULTING ENGINEER. METLIFE will select an independent consulting engineer to make an inspection of the Property and Improvements to insure that the Property and Improvement's condition is satisfactory to METLIFE, in an aggregate cost not to exceed $5,000.
METLIFE shall have the right to require reasonable repairs to the Improvements based upon the recommendations of the consulting engineer. Neither METLIFE nor the consulting engineer shall have any responsibility whatsoever to any person for design/structural failure or other architectural or engineering inadequacies.
HAZARDOUS MATERIALS. The Property and Improvements shall neither contain, nor incorporate, nor be threatened with contamination from outside sources, nor be used in connection with the handling, storage or disposal of asbestos, PCBs, ureaformaldehyde, or other hazardous materials, except as used and stored in the ordinary course of BORROWER's business and in accordance with all applicable laws and regulations. "Hazardous Materials" means any flammable, explosive, or radioactive materials, petroleum products, or materials defined under federal or state laws and regulations as "hazardous substances," "hazardous materials," or "toxic substances". BORROWER represents and warrants that there are no Hazardous Materials on or about the Property or the Improvements, except as used and stored in the ordinary course of BORROWER's business and in accordance with all applicable laws and regulations. METLIFE shall receive satisfactory evidence of compliance with the foregoing, which evidence shall include the execution of a certificate and indemnity agreement regarding hazardous substances or environmental indemnity agreement including representations and warranties reasonably acceptable to METLIFE and the receipt of a Phase I environmental audit in form and content reasonably acceptable to METLIFE.
SITE INSPECTION. METLIFE's obligation to fund the loan shall be conditioned upon an on-site inspection by a representative of METLIFE and METLIFE's approval of the site, general location, and if the Improvements are existing, quality and maintenance thereof within 60 days after execution hereof (and METLIFE shall notify BORROWER thereof) and the site's condition being the same condition at closing.
BORROWER'S EXISTENCE AND RELATED MATTERS. METLIFE shall be furnished with all appropriate documentation evidencing the qualification of signatories to execute the loan documents, and BORROWER's legal existence, organization, good standing, and qualification to engage in any transaction or business in connection with which the loan is made.
LEGAL COMPLIANCE AND UTILITIES. METLIFE shall be furnished with satisfactory proof of compliance with any applicable laws and regulations including particularly any licensing or zoning requirements and with a copy of the unconditional, permanent certificate(s) of occupancy. METLIFE shall also be furnished with satisfactory evidence that all utilities necessary for the full use and enjoyment of the Property are available to the Property, and that water and sanitary sewer systems are provided to the Property and maintained by governmental authorities or by applicable public utilities.
LEGAL COUNSEL. Special counsel of METLIFE's selection will be used for the drafting of documents and other attorney's services relating to the transaction. METLIFE estimates that the fees and disbursements for such counsel shall not exceed $10,000.00 barring unforeseen circumstances. BORROWER's counsel must deliver to METLIFE a legal opinion satisfactory to counsel, which opinion shall include but not be limited to, a confirmation of the legal validity and enforceability of the loan, and a statement that the loan is not usurious. All legal matters, including title status, leases, loan documentation, and status of zoning shall be subject to approval by METLIFE. All fees and expenses of METLIFE's special counsel shall be paid by BORROWER regardless of whether or not the loan actually closes.
INSURANCE. BORROWER shall furnish certificates of policies for such property, rental loss, liability and other insurance in such amounts as METLIFE may from time to time require. The policy(ies) shall be written by a corporate insurer(s) having a Best's rating of A:X or better. Initially the property insurance shall be in an amount not less than the full replacement cost of the Property and Improvements (less a deductible not to exceed $25,000.00) with "all risk" coverage, 90% co-insurance, "agreed amount," "inflation guard," "replacement cost," and waiver of subrogation endorsements and a lender's loss payable endorsement (Form 438BFU or equivalent); and, as applicable, rental loss insurance or business interruption insurance shall be in an amount sufficient to cover any loss of rents (including expenses payable by tenants) or profits for up to six months. Initially, the liability insurance shall be in an amount not less than $2,000,000.00 combined single limit for personal injury and property damage with provision for at least 30 days written notice to METLIFE before cancellation and naming METLIFE as an additional insured. In flood or earthquake hazard areas, METLIFE may require flood or earthquake insurance. All insurance policies shall be subject to METLIFE's approval and shall include any endorsements which METLIFE may reasonably require.
ANNUAL STATEMENTS. BORROWER will furnish to METLIFE, and will cause any guarantor of BORROWER's obligation to furnish to METLIFE on request, within 90 days after the close of its fiscal year (i) annual balance sheet and profit and loss statements prepared in accordance with generally accepted accounting principles and practices consistently applied and, if METLIFE so requires, accompanied by the annual audit report of an independent certified public accountant reasonably acceptable to METLIFE, and (ii) an annual operating statement for BORROWER, and (iii) all other financial information and reports that METLIFE may from time to time reasonably request, including, if METLIFE so requires, income tax returns of BORROWER and any guarantor of BORROWER's obligation hereunder, and financial statements of any tenant designated by METLIFE.
DUE ON SALE, CHANGE OF TITLE, OR ADDITIONAL FINANCING. The loan will be accelerated if the title to the Property and Improvements is changed without the prior written consent of METLIFE, which consent shall be at METLIFE's sole discretion. Any transfer of any interest in the Property and Improvements or in the income therefrom, by sale, lease (except for leases to tenants in the ordinary course of managing income property which are approved by METLIFE pursuant to the loan documents), contract, mortgage, deed of trust, further encumbrance or otherwise (including any such transfers as security for additional financing of the Property and Improvements), and any change in the ownership interests in BORROWER because of acquisition by BORROWER of twenty-five percent or more of its issued and outstanding common stock, except ((a) through or because of any corporate reorganization or merger involving assets and which does not effect a dissolution or material adverse change in the successor BORROWER's financial statements, or (b) transfers and changes in ownership by devise or descent, neither of which shall be considered a change of title) shall be considered a change of title. METLIFE may condition its consent to any change of title upon payment of a transfer fee of 1% of the then outstanding loan balance. Notwithstanding the above and any other term of this commitment letter, if BORROWER is sold or merged with another company at any time, the loan may be prepaid, subject to the prepayment premium and early prepayment penalty defined above, within 90 days of such sale or merger.
FINANCIAL RESPONSIBILITY. BORROWER must, in the opinion of METLIFE, be "financially responsible" at the time of loan closing. "Financially responsible" shall mean: having no material adverse change in financial condition from the financial condition previously disclosed to METLIFE; having no outstanding defaults, liens, court actions, or liabilities (including contingent liabilities) which could, in the opinion of METLIFE, result in insolvency or bankruptcy, and not "insolvent" or a "debtor" within the meaning of the Bankruptcy Code.
COSTS PAYABLE BY BORROWER. BORROWER shall pay all reasonable costs associated with the loan, including (without limitation) a $500.00 documentation/site inspection fee for each site, the fees and costs of special counsel, the cost of any environmental audits, the fees of the consulting engineer, appraisal costs, any loan, escrow, recording and transfer fees and taxes, title charges, survey costs, realty tax service fee, and all other costs incurred for the documents and services described herein, whether the loan is closed or not, unless the reason that the loan is not closed is because of the failure or negligence or willful misconduct of METLIFE to close and fund.
RECEIPT OF DOCUMENTATION. BORROWER hereby acknowledges its responsibility to provide all items required by this commitment letter in a timely manner. All such items shall be in form and content acceptable to METLIFE and be provided to METLIFE not less than three (3) business days prior to loan closing.
WIRE TRANSFER DEADLINE. All loans funded by METLIFE are subject to a wire transfer deadline of 12:00 p.m. Pacific Time.
ASSIGNMENT. This commitment shall not be assignable by BORROWER. Any change in the ownership interests in BORROWER shall be considered an assignment. Transfers of stock of the Company shall not be considered a transfer of ownership.
CONDEMNATION. At the time of loan closing, no proceeding shall have been threatened or commenced by any authority having the power of eminent domain to condemn any part of the Property which METLIFE, in its sole judgment, deems material.
CANCELLATION. Any breach or default by the BORROWER in the performance of any undertaking, obligation or requirement imposed on the BORROWER by the terms hereof shall constitute an event upon the occurrence of which METLIFE may cancel this commitment.
METLIFE may cancel this commitment prior to closing for the disclosure of facts materially impairing the security offered (in such an event, METLIFE shall return BORROWER'S deposit, less expenses) or if METLIFE discovers that any of the financial information or financial statements submitted to METLIFE in connection with this transaction were not true, correct and complete.
BROKERAGE. METLIFE shall not be required to pay any brokerage fee or commission arising from this commitment, and the BORROWER agrees to defend, indemnify and hold METLIFE harmless against any and all expenses, liabilities, and losses arising from such claims in connection therewith, including payment of reasonable attorney's fees.
DEPOSIT. BORROWER has previously paid METLIFE a noninterest bearing Deposit in the amount of $30,000.00, and upon acceptance of this commitment, shall pay METLIFE an additional noninterest bearing deposit in the amount of $30,000.00. This Deposit will be returned to BORROWER, less all costs incurred by METLIFE in connection with the loan: (i) upon loan closing, which includes receipt of all properly executed documentation, which documentation shall include the final Policy of Title Insurance; or (ii) in the event that METLIFE and BORROWER fail to agree upon a material provision of the loan documentation for this transaction which is not already agreed upon herein, or (iii) upon METLIFE's termination of this transaction because of a materially adverse change in BORROWER'S, guarantors' (if any), or credit tenants' (if any) financial condition, or (iv) upon the occurrence of any of the other conditions for termination set forth herein. If this transaction is not fully closed by the Expiration Date of Commitment for any other reason, then METLIFE will retain the Deposit as liquidated damages.
PRIOR NEGOTIATIONS. This commitment constitutes the entire agreement between METLIFE and BORROWER relating to the loan. Any and all prior proposals, commitments, agreements, representations, and warranties made by METLIFE, whether oral or written, are deemed superseded hereby. No extension, amendment, or waiver of this commitment shall be valid or enforceable unless it is made in writing and signed by both METLIFE and BORROWER.
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
COMMITMENT ACCEPTANCE. Subject to the terms and conditions herein stated, this commitment is an offer that may be accepted by you until November 10, 1995. Effective acceptance requires actual receipt by METLIFE of a fully executed counterpart of this commitment letter, without any changes thereto, on or before such date.
EXPIRATION DATE OF COMMITMENT. This commitment will expire on June 30, 1996. METLIFE will not be obligated to disburse the funds after this date. Notwithstanding the foregoing, and subject to METLIFE's approval, BORROWER shall have one (1) option to extend the expiration date of this commitment for an additional sixty (60) days upon written request by BORROWER and payment of an extension fee of .50% of the Loan Amount on or before June 30, 1996. The extension fee is in addition to any other Loan Fee or Forward Commitment Fee and is payable upon the exercising of such extension by BORROWER and shall be held and disbursed in the same manner as the Deposit.
Senior Real Estate Credit Analyst
The undersigned hereby accepts the foregoing commitment letter and agrees that it will comply with all of the terms and conditions herein.
31-1041397 MAX & ERMA'S RESTAURANTS, INC.
Date: November 9, 1995 BY: /s/ William C. Niegsch, Jr. William C. Niegsch, Jr. Its: Executive Vice President and CFO
All buildings, structures, improvements, parking areas, landscaping, equipment, fixtures and any other personal property incorporated into the structure of the building on the Property (herein the "Premises") as defined in the Commitment Letter dated November 1, 1995 from MetLife Capital Financial Corporation to Max & Erma's Restaurants, Inc. (to which this Exhibit "A" is attached) and necessary for the habitable use and occupation of the building on the Premises, including and similar to, without being limited to, all heating, air conditioning, and incinerating apparatus and equipment; all boilers, engines, motors, dynamos, generating equipment, piping and plumbing fixtures, water heaters, cooling, ventilating, sprinkling and vacuum cleaning systems, fire extinguishing apparatus, carpeting, floor coverings, underpadding, elevators, escalators, partitions, mantels, built-in mirrors, window shades, blinds, draperies, screens, storm sash, awnings, and shrubbery and plants, and including also all interest of any owner of the Premises in any of such items hereafter at any time acquired under conditional sale contract, chattel mortgage or other title retaining or security instrument, all of which property mentioned in this paragraph shall be referred to as the "Improvements" and shall be deemed part of the realty and not severable wholly or in part without material injury to the freehold of the Premises. | 10-K | EX-10.FF | 1996-01-16T00:00:00 | 1996-01-16T09:56:33 |
0000912057-96-000478 | 0000912057-96-000478_0000.txt | Quarterly Report Under Section 13 or 15 (d) of The Securities
For the fiscal quarter ended December 2, 1995
(Exact name of registrant as specified in its charter)
(State of incorporation) (IRS employer ID number)
One Oxmoor Place, 101 Bullitt Lane, Louisville, Kentucky 40222 (Address of principal executive offices)
Registrant's telephone number with area code: (502) 426-4351
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 Registrant's classes of Common Stock as of the last practicable date.
Class - Common Stock, Par Value $.10 per Share
Outstanding at December 2, 1995 - 2,991,358
Part I. Financial Information Page
Consolidated Balance Sheets - December 2, 1995 and September 2, 1995 3, 4
Consolidated Statements of Operations - Three Months Ended December 2, 1995 and November 26, 1994 5
Consolidated Statements of Cash Flows - Three Months Ended December 2, 1995 and November 26, 1994 6, 7
Notes to Consolidated Financial Statements 8-10
of Financial Condition and Results
Part II. Other Information 14
11. Calculations of Earnings Per Share 15
27. Financial Data Schedule 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes to Consolidated Financial Statements
(1) FINANCIAL STATEMENTS AND ORGANIZATION
The consolidated financial statements include DMI Furniture, Inc. and its wholly owned subsidiary, DMI Management, Inc. ("Company"). The financial statements included herein at December 2, 1995 and for the three months ended December 2, 1995 and November 26, 1994 are unaudited but include all adjustments which are, in the opinion of management, necessary to a fair presentation of the results of operations and financial position for the periods covered herein. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K.
The results of operations for the interim periods are not necessarily an indication of the results to be expected for the full 1996 fiscal year.
During the first quarter of fiscal 1994, the Company adopted Statement of Financial Accounting Standard No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109"). SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. In accordance with this statement, the Company recognized deferred tax assets reflecting the benefit expected to be realized from the utilization of net operating loss carryforwards ("NOLs"), alternative minimum tax credits carryforwards, and deductible temporary differences.
In adopting SFAS No. 109, as of August 29, 1993, the Company recorded approximately $1,931,000 of deferred tax assets and $136,000 of deferred tax liabilities, resulting in a net deferred tax asset of $1,795,000. Such amount has been reflected during the first quarter of fiscal 1994 in the Consolidated Statements of Income as the cumulative effect of an accounting change.
Income tax expense consisted of the following (in thousands):
The deferred tax provision relates mainly to the utilization of the Company's NOLs.
The provision for income taxes differs from that computed at the federal statutory corporate tax rate as follows (in thousands):
(3) EARNINGS PER COMMON SHARE
Earnings per common share are based on the weighted average number of common and common equivalent shares outstanding during the period, and assumes the conversion of the Series C Preferred Stock into common stock. For the first quarter of fiscal 1996, since the effect of the assumption of the conversion of the Series C Preferred Stock into common stock would be anti-dilutive, those common equivalent shares were not included in the calculation of earnings per common share.
Inventories were comprised of the following at December 2, 1995 and November 26, 1994:
The Company has been identified as a potentially responsible party in six government investigations and actions relating to waste disposal facilities which may be subject to remedial action under Superfund. These proceedings are based on allegations that the Company had hazardous waste substances disposed of at the state permitted facilities in question. These proceedings under Superfund involve many waste generators in addition to the Company and seek to allocate or recover costs associated with site investigation and cleanup, which costs could be substantial. As of December 2, 1995 the Company accrued approximately $148,000 for these potential environmental liabilities.
The dividends on Series C Preferred Stock accrued in a fiscal year are not payable until the following fiscal year.
On September 29, 1995 the Company announced its plan to permanently close its Gettysburg, Pennsylvania manufacturing plant and consolidate the production of that plant into its Huntingburg, Indiana facilities by December 31, 1995, and close its Gettysburg warehouse during 1996. The Company recorded a pre-tax charge of approximately $995,000 in the first quarter of fiscal 1996 related to this closing. The charge includes book provisions of approximately $725,000 for asset impairment and $145,000 for future pension costs, and $125,000 for severance pay.
In the absence of this special book charge; Operating Profit would have been $1,150,000 compared to $1,304,000 for the first quarter of fiscal 1995; Net Income would have been $460,000 for the first quarter of fiscal 1996 compared to $538,000 for the first quarter of fiscal 1995; and Earnings Per Common Share would have been $.08 for the first quarter of fiscal 1996 compared to $.09 for the first quarter of fiscal 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenue - Net sales for the first quarter of fiscal 1996 decreased $994,000 or 5% from the first quarter of fiscal 1995. This decrease was the result of decreased sales of bedroom furniture in a weak furniture retail environment partially offset by increased sales of residential desks, computer desks, home office furniture, and chairs, as well as increased sales to outside trade customers of lumber and fabricated wood parts by the Company's sawmill/dimension parts plant.
Gross Margin - The Company's gross margin in the first quarter of fiscal 1996 was 18.2% compared to 19.0% in the first quarter of fiscal 1995, and compared to 16.2%, 17.1%, and 16.9% in the fourth, third, and second quarters respectively of fiscal 1995. This decrease in gross margin from the first quarter of fiscal 1995 was primarily the result of decreased profit at the Gettysburg facility as it proceeded towards its closing. (See Note 7.)
Selling, General and Administrative (S,G&A) Expense - For the first quarter of fiscal 1996, S,G&A expense amounted to $2,073,000 or 11.7% of sales compared to $2,262,000 or 12.1% of sales for the first quarter of fiscal 1995. This decrease was the result of lower commission and design royalty expense, as well as general administrative expenses.
Interest Expense - For the first quarter of fiscal 1996, net interest was $420,000 compared to $468,000 for the first quarter of fiscal 1995. This decrease was primarily the result of lower bank debt balances than in the previous year as a result of cash flow from the inventory reduction program and improved accounts receivable collection cycle.
On September 29, 1995 the Company announced its plan to permanently close its Gettysburg, Pennsylvania manufacturing plant and consolidate the production of that plant into its Huntingburg, Indiana facilities by December 31, 1995, and close its Gettysburg warehouse during 1996. The Company recorded a pre-tax charge of approximately $995,000 in the first quarter of fiscal 1996 related to this closing. The charge includes book provisions of approximately $725,000 for asset impairment and $145,000 for future pension costs, and $125,000 for severance pay.
In the absence of this special book charge; Operating Profit would have been $1,150,000 compared to $1,304,000 for the first quarter of fiscal 1995; Net Income would have been $460,000 for the first quarter of fiscal 1996 compared to $538,000 for the first quarter of fiscal 1995; and Earnings Per Common Share would have been $.08 for the first quarter of fiscal 1996 compared to $.09 for the first quarter of fiscal 1995.
Liquidity and Capital Resources - Demands for funds relate to payments for raw materials and other operating costs, debt obligations, accrued preferred stock dividends and capital expenditures. The Company's ability to generate cash adequate to meet short and long term needs is dependent on the collection of accounts receivable and from its ability to borrow funds.
The Company's days of sales outstanding of accounts receivable averaged 48 days for the first quarter of fiscal 1996 compared to 55 days for the first quarter of fiscal 1995. This improvement in the collection period is primarily the result of increased business with and more timely payments by a major customer. The Company's average days of inventory on hand averaged 72 days for the first quarter of fiscal 1996 compared to 91 days for the first quarter of fiscal 1995. This decrease is due to the success of the inventory reduction program initiated in the fourth quarter of fiscal 1995. The Company's order backlog at December 2, 1995 was approximately $6,816,000, a 9% decrease from approximately $7,470,000 at the same time last year.
During the first quarter of fiscal 1996 , the Company provided cash flows from operating activities of $4,709,000 compared to cash flows used of $548,000 the previous year primarily due to the success of the Company's inventory reduction program and improved accounts receivable collection cycle. Investing activities required $54,000 during the first quarter of fiscal 1996 and $149,000 during the first quarter of fiscal 1995 primarily for capital expenditures. Financing activities used $4,696,000 during the first quarter of fiscal 1996 primarily in reduction of debt compared to provided $653,000 the same quarter previous year which were primarily borrowings under the Company's line-of-credit agreement to finance inventories and accounts receivable.
The Company has been identified as a potentially responsible party ("PRP") by the Environmental Protection Agency ("EPA") or other parties in six government investigations and actions relating to waste disposal facilities which may be subject to remedial action under Superfund or similar state statutes. These proceedings are based on allegations that the Company had hazardous waste substances disposed of at these sites. At each site, many other parties have been named as PRPs or identified as potentially responsible for remediation, and the group of PRPs undertaking remediation includes many companies, including "Fortune 500" companies, believed to have substantial financial resources. The Company has not determined to what extent, if any, any potential environmental liabilities may be covered by insurance. The Company has paid a portion of the costs of preliminary investigation and remediation at three sites, and has agreed to settle claims against it made by PRPs at two sites. With respect to these sites, the total amount paid by the Company to date or subject to possible settlement is less than $39,000. The Company has recorded a reserve of approximately $148,000 against potential environmental liabilities. For further information regarding the Company's involvement in environmental proceedings, see Item 3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 2, 1995.
The Company does not believe any events are probable which would materially change its present liquidity position, which is adequate to satisfy known demands for funds for operations and to pay bank and other debt.
The Company is involved in six environmental proceedings at this time. Due to the limited nature of the Company's involvement in these proceedings, the availability of certain defenses, and the involvement of other parties with substantial financial resources in the proceedings, the Company does not believe there is a reasonable likelihood that the potential liabilities the Company may incur in connection with these proceedings will have a material adverse effect on the Company's future financial condition or results of operations. For further information regarding the Company's involvement in environmental proceedings, see Item 3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 2, 1995.
Item 6. Exhibits and Reports on Form 8-K
11. Calculations of earnings per share.
(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.
Date: January 16, 1996 /s/Joseph G. Hill | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T08:36:32 |
0000784056-96-000002 | 0000784056-96-000002_0003.txt | BARRETT ROCKETT HINES & MONE LLP
380 Madison Avenue, Suite 2300 New York, New York 10017
You have requested that we render an opinion to Tax-Free Trust of Arizona (the "Trust") with respect post-effective amendment No. 11 (the "Amendment") to the Registration Statement of the Trust under the Securities Act of 1933 (the "1933 Act") and No. 13 under the Investment Company Act of 1940 (the "1940 Act") which you propose to file with the Securities and Exchange Commission (the "Commission"). The purpose of the Amendment is to redesignate existing shares of the Trust as Front- Payment Class Shares ("Class A Shares") and to designate two new classes of shares to be offered by the Trust as Level-Payment Class Shares ("Class C Shares") and Institutional Class Shares ("Class Y Shares").
We have examined originals or copies, identified to our satisfaction as being true copies, of those corporate records of the Trust, certificates of public officials, and other documents and matters as we have deemed necessary for the purpose of this opinion. We have assumed without independent verification the authenticity of the documents submitted to us as originals and the conformity to the original documents of all documents submitted to us as copies.
Upon the basis of the foregoing and in reliance upon such other matters as we deem relevant under the circumstances, it is our opinion that the Class A Shares, Class C Shares and Class Y Shares of the Trust as described in the Amendment, when issued and paid for in accordance with the terms set forth in the prospectus and statement of additional information of the Trust forming a part of its then effective Registration Statement as heretofore, herewith and hereafter amended, will be duly issued, fully-paid and non-assessable to the extent set forth therein.
This letter is furnished to you pursuant to your request and to the requirements imposed upon you under the 1933 Act and 1940 Act and is intended solely for your use for the purpose of completing the filing of the Amendment with the Commission. This letter may not be used for any other purpose or furnished to or relied upon by any other persons, or included in any filing made with any other regulatory authority, without our prior written consent.
We hereby consent to the filing of this opinion with the Amendment.
BARRETT ROCKETT HINES & MONE LLP | 485APOS | EX-23 | 1996-01-16T00:00:00 | 1996-01-12T17:54:29 |
0000793973-96-000001 | 0000793973-96-000001_0000.txt | <DESCRIPTION>THIS IS AN 8-K FOR TREAT COMMONS
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
Date of Report (Date of earliest event reported) December 28, 1995
PaineWebber Equity Partners Two Limited Partnership (Exact name of registrant as specified in its charter)
(State or other jurisdiction) (Commission (IRS Employer of incorporation File Number) Identification No.)
265 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 439-8118
(Former name or address, if changed since last report)
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
ITEM 2 - Disposition of Assets
Treat Commons - Phase II, Walnut Creek, California
Disposition Date - December 28, 1995
On December 28, 1995, TCR Walnut Creek L.P., a joint venture (the "Venture") in which Paine Webber Equity Partners Two Limited Partnership ("the Partnership") has an interest, sold the property known as the Treat Commons Phase II Apartments located in Walnut Creek, California, to an independent third party, Security Capital Pacific Trust, a Maryland real estate investment trust, for approximately $12.1 million. The Partnership received net proceeds of approximately $4.1 million after deducting closing costs and the repayment of the existing mortgage note of approximately $7.3 million. Management of the Partnership is currently evaluating the Partnership's liquidity in light of the potential future capital needs of its commercial properties in order to determine whether a portion of the proceeds of this transaction should be retained by the Partnership. The amount of distributable proceeds from the sale of the Treat Commons property will be announced in the Partnership's quarterly report for the period ended December 31,1995, and the payment of such distribution will be made during the fourth quarter of fiscal 1996.
ITEM 7 - Financial Statements and Exhibits
(1) Purchase and Sale Agreement
(4) Assignment of Agreements and Service Contracts
(5) Assignment of Space Lease Deposits
(6) Assignment of Space Leases
(7) Bill of Sale and General Assignment
(8) Partnership Grant Deed and Statement of Documentary Transfer
(9) Partnership Quitclaim Deed and Statement of Documentary Transfer
PAINEWEBBER EQUITY PARTNERS TWO LIMITED PARTNERSHIP
Pursuant to the requirements of the Securities and 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/ Walter V. Arnold
AGREEMENT dated as of October 26, 1995 between TCR WALNUT CREEK LIMITED PARTNERSHIP ("Seller"), with an address of c/o PaineWebber Properties, Inc., 265 Franklin Street, Boston, Massachusetts 02110, Attention: Peter Sullivan, Telecopier No. 617/345-8725 and SECURITY CAPITAL PACIFIC TRUST, a Maryland real estate investment trust ("Buyer"), with an address of 125 Lincoln Avenue, Santa Fe, New Mexico 87501, Attention: Mark P. Peppercorn, Telecopier No. 505/982-7802, and Karen Scanland, Telecopier No. 505/820-0643.
In consideration of the mutual undertakings and covenants herein contained, Seller and Buyer hereby covenant and agree as follows:
SALE OF PROPERTY AND ACCEPTABLE TITLE
1.1 Agreement to Buy and to Sell; Property. Seller shall sell to Buyer, and Buyer shall purchase from Seller, at the price and upon the terms and conditions set forth in this Agreement the following:
(a) that certain tract or parcel of land located in the City of Walnut Creek, Contra Costa County, California, more particularly described in Schedule A attached hereto (the "Land");
(b) all improvements, fixtures, facilities, amenities, structures, parking areas, driveways and walkways, all of which have been constructed on or affixed to the Land (collectively, the "Improvements");
(c) all right, title and interest of Seller in and to any alleys, strips or gores adjoining the Land, and any easements, rights-of-way or other interests in, on, over, under, across or to, any land, highway, street, road, right-of-way or avenue, open or proposed, in front of, abutting or adjoining the Land, and all right, title and interest of Seller in and to any awards for damage thereto by reason of a change of grade thereof;
(d) all accessions, appurtenant rights, privileges, benefits, easements, entitlements, tenements, hereditaments, appurtenances and all other estate and rights of Seller in and to or otherwise appertaining to any of the property described in the immediately preceding clauses (a), (b) and/or (c);
(e) the personal property listed in Schedule B attached hereto (the "Joint Personal Property") and in Schedule B-1 attached hereto and any other personal property owned by Seller and located on or in or used in connection with the Land or Improvements as of the Closing, as hereinafter defined
(f) all of Seller's interest (in each case, to the extent assignable) in any trade style or name now used in connection with the Land, the Improvements or the Personal Property (excluding, however, the names "Crow," "Trammell Crow Residential," "TCR," "PaineWebber" and "PaineWebber Properties," and any variants thereof, and the respective Trammell Crow Residential and PaineWebber logos) and any contract rights, escrow or security deposits, warranties, governmental permits, approvals and licenses, telephone exchange numbers, operating records and utility agreements related to the ownership or use and operation of the Property, as hereinafter defined, excluding accounts receivable that accrue prior to the date of Closing (see Section 11.2 for application of rent payments as to certain receivables), cash on hand or in accounts and other similar accounts and receivables (collectively, the
(g) the landlord's interest under all leases of the Improvements (the "Leases"), including leases that may be made by Seller after the date hereof and prior to Closing as permitted by this Agreement.
All of the items described in clauses (a), (b), (c), (d), (e), (f) and (g) above are collectively the "Property".
1.2 Title. Seller shall convey to Buyer by grant deed (the "Deed") Seller's title to the Property in accordance with the terms of this Agreement, and Buyer's obligation to accept said title shall be conditioned upon Buyer then being conveyed good and clear record and marketable fee simple title to the Property, subject only to the Permitted Exceptions (as hereinafter defined).
(a) Within five days from the date of this Agreement, or as soon thereafter as Chicago Title Insurance Company (the "Title Insurer") may prepare same, Seller shall furnish Buyer with a title report contemplating issuance of a Commitment For Title Insurance for an ALTA Owner's Form B Title Insurance Policy (the "Title Policy") and legible copies of all instruments and plans mentioned therein as exceptions to title (all of such items are hereinafter collectively referred to as the "Commitment"). The Commitment shall be in the amount of the Purchase Price (as defined in Section hereof). Should such Commitment contain any title exceptions which are not acceptable to Buyer, in its sole discretion, Buyer shall, prior to the expiration of the Inspection Period (as defined in Section ), notify Seller if any such exceptions are unacceptable. If Buyer fails to so notify Seller of any unacceptable exceptions as described above, the exceptions set forth in Schedule B of the Commitment shall be deemed accepted by Buyer and included as the "Permitted Exceptions". If any exceptions are unacceptable to Buyer and Buyer timely notifies Seller in writing of such fact as above provided, Seller, in Seller's sole discretion, shall have 20 days from the date Seller receives notice of such unacceptable exceptions to remove or cure such exceptions and the date of Closing shall be extended, if necessary. Seller shall be deemed to have refused to remove or cure any unacceptable exceptions, which Seller may so do in its sole discretion, unless Seller, within five days after receipt of notice from Buyer, shall notify Buyer in writing that Seller will attempt to remove or cure such unacceptable exceptions. If Seller fails or refuses to remove or cure said unacceptable exceptions within the time period above provided, Buyer may (i) terminate this Agreement and the Deposit (as hereinafter defined) shall be returned to Buyer, or (ii) waive such exceptions and accept title subject thereto, in which event such exceptions shall be included as Permitted Exceptions and there shall be no reduction in the Purchase Price.
(b) Notwithstanding anything to the contrary in clause (a) above, Seller shall remove or cure any exceptions or encumbrances to title that are created voluntarily by Seller after the date of this Agreement. If Seller fails or refuses to remove or cure any such exceptions or encumbrances as of the Closing, Buyer may (i) terminate this Agreement and the Deposit shall be returned to Buyer, or (ii) waive such exceptions or encumbrances and accept title subject thereto, in which event such exceptions or encumbrances shall be included as Permitted Exceptions and there shall be no reduction in the Purchase Price.
(c) The Title Policy shall have ALTA General Exceptions 1 through 5 deleted, shall have any exclusion for creditors' rights deleted, and shall include the following endorsements: (i) owner's comprehensive; (ii) access; (iii) location (survey legal matches title legal); (iv) legal lot; (v) contiguity (with the tract or parcel of land upon which Phase I of the apartment complex commonly known as Treat Commons Apartments ["Phase I"] is constructed); and (vi) such other endorsements as Buyer may reasonably require based on its review of the Commitment and the Survey (as hereinafter defined).
(d) If due to a change in the title to the Property as a result of any matter arising by, through or under Seller, the Title Insurer revises the Commitment after the expiration of the Inspection Period to add or modify exceptions or to delete any endorsement or to modify the conditions to obtaining any endorsement requested by Buyer during the Inspection Period, and such additions, modifications or deletions are not acceptable to Buyer in its sole discretion and the same are not removed by the Closing, Buyer may (i) terminate this Agreement and the Deposit shall be returned to Buyer, or (ii) waive such additions, modifications or deletions and accept the Title Policy subject thereto, in which event there shall be no reduction in the Purchase Price.
Simultaneously with the delivery of the Deed, Seller shall deliver to Buyer a special warranty bill of sale and instrument of transfer and assignment (the "General Instrument"), in form and substance reasonably satisfactory to Seller's and Buyer's counsel, assigning and transferring all of Seller's right, title and interest in and to all of the Personal Property and the Intangible Property.
1.3 Survey. Within five days from the date of this Agreement, Seller will provide Buyer with the most recent as-built survey of the Property in Seller's possession. Buyer may obtain an as-built survey (the "Survey") of the Land and the Improvements by a registered land surveyor acceptable to Buyer. If Buyer does not obtain an ALTA survey, Buyer shall not have the right to terminate this Agreement based on the presence in the Title Policy of those title insurance exceptions to coverage that the Title Insurer will not remove because of the absence of a current or updated ALTA survey.
Should such Survey contain any encumbrances, encroachments or other survey defects (collectively "survey matters") which are not acceptable to Buyer in its sole discretion, Buyer shall, prior to the expiration of the Inspection Period, notify Seller if any such survey matters are unacceptable. If Buyer fails to so notify Seller of the unacceptable survey matters as described above, the Survey shall be deemed accepted by Buyer. If any survey matters are unacceptable to Buyer and Buyer timely notifies Seller in writing of such fact as above provided, Seller, in Seller's sole discretion, shall have 20 days from the date Seller receives notice of such unacceptable survey matters to cure such survey matters and the date of Closing shall be extended, if necessary. Seller shall be deemed to have refused to cure any unacceptable survey matters, which Seller may so do in its sole discretion, unless Seller, within five days after receipt of notice from Buyer, shall notify Buyer in writing that Seller will attempt to cure such unacceptable survey matters. If Seller fails or refuses to cure said unacceptable survey matters within the time period provided, Buyer may (i) terminate this Agreement and the Deposit shall be returned to Buyer, or (ii) waive such survey matters and accept title subject thereto, in which event there shall be no reduction in the Purchase Price.
DEPOSIT AND ESCROW OF DEPOSIT
2.1 Purchase Price. The purchase price ("Purchase Price") to be paid by Buyer to Seller for the Property is $12,124,500.00.
2.2 Payment of Purchase Price. The Purchase Price shall be paid as follows:
(a) Upon delivery at Closing by the Escrow Agent (as defined below in Section ) of the $121,245.00 deposit (the "Deposit") being this day paid to the Escrow Agent, Buyer shall receive a credit against the Purchase Price in the
(b) Subject to the provisions of Section , an amount equal to the outstanding principal balance of the Existing Financing (as hereinafter defined) as of Closing (approximately $7,310,000.00) shall be paid through Buyer's assumption of the Existing Financing; and
(c) The balance of the Purchase Price shall be paid at least one business day prior to the Closing by wire transfer to the Escrow Agent.
2.3 Existing Financing. Seller has notified Buyer that the Property is currently subject to liens of various security instruments serving as security for an approximate $7,310,000.00 loan (the "Existing Financing") made by The Prudential Insurance Company of America (the "Existing Lender"). It shall be a condition to Buyer's obligation to purchase the Property that all of the following be satisfied or waived by Buyer at the Closing: (i) the Existing Lender shall have consented in writing to Buyer's assumption of the Existing Financing, pursuant to documents and instruments reasonably satisfactory to Buyer and Buyer's counsel; (ii) Seller shall have paid, and the Existing Lender shall have agreed to accept, up to $300,000.00 as an interest rate buy-down sufficient to cause the Existing Lender to modify the terms of the Existing Financing to provide for a fixed per annum interest rate of 7.5% over the remaining loan term (debt service is based on a 25-year amortization); (iii) if required by the Existing Lender, Seller shall have paid to the Existing Lender an assumption fee not to exceed 1% of the outstanding principal of the Existing Financing; (iv) Buyer shall be solely responsible to pay for the first $10,000.00 of the Existing Lender's expenses, including administrative and review fees, reasonable legal and other third party fees and associated costs of the Existing Lender (but expressly excluding any assumption fees) incurred in connection with Buyer's assumption of the Existing Loan and Seller shall be solely responsible to pay for all such expenses in excess of $10,000.00; it being understood and agreed that if, for any reason other than a default by Buyer hereunder, the Closing does not occur and this Agreement is terminated, Seller shall be obligated to reimburse Buyer for all amounts paid by Buyer under this clause (iv); (v) Buyer and Buyer's counsel shall have reasonably approved all other terms of the Existing Loan in existence as of the date of this Agreement; (vi) Buyer and Buyer's counsel shall have reasonably approved any new or modified terms of the Existing Loan and any conditions being imposed by the Existing Lender as a condition to Buyer's assumption of the Existing Financing; and (vii) Buyer and Buyer's counsel shall have reasonably approved an indemnification agreement from PaineWebber Equity Partners Two Limited Partnership ("PWEP2") pertaining to known or unknown liabilities that have accrued as a result of, or may result from, events that have occurred prior to the date of Closing that Buyer may be required by the Existing Lender to assume under the Hazardous Substances Remediation and Indemnification Agreement ("HSRIA"), one of the instruments documenting the Existing Financing (such instruments being collectively referred to as the "Existing Financing Documents"). If any of the foregoing, other than the condition specified in clause (v), has not been satisfied as of the scheduled Closing, the Closing shall be automatically extended for up to 15 days in order to permit Buyer to continue seeking satisfaction of the same. If, after such extension, any of the conditions specified in clauses (i), (ii), (iii), (iv), (vi) and (vii) still have not been satisfied, Buyer may terminate this Agreement by written notice to Seller given on or before the expiration of such 15-day period, and the Deposit shall be returned to Buyer. Further, it shall be a condition to Seller's performance under this Agreement that, as of Closing, the Existing Lender shall have delivered to Seller an instrument evidencing the Existing Lender's release of Seller from Seller's obligations under or relating to the Existing Financing Documents that pertain to claims, liabilities, costs, or expenses that may accrue under the Existing Financing Documents as a result of, or in connection with, events, acts or omissions that occur after the effective date of the assumption by Buyer and that is otherwise reasonably acceptable to Seller. If the foregoing release has not been obtained by the date scheduled for Closing in form reasonably acceptable to Seller, Seller may terminate this Agreement and the Deposit shall be returned to Buyer.
2.4 Deposit; Escrow Agent. The Deposit shall be delivered by Buyer to Chicago Title Insurance Company (the "Escrow Agent") simultaneously with the complete execution of this Agreement. Upon receipt from Buyer of the Deposit, Escrow Agent shall invest the Deposit in an interest-bearing account or money market fund agreeable to Buyer. Buyer's federal taxpayer identification number is 74-6056896. All interest on the Deposit shall accrue to the Buyer, except as otherwise provided in Section hereof (all references in this Agreement to the "Deposit" shall include all interest that may accrue thereon). At the Closing, Escrow Agent shall release the Deposit to Seller, which Deposit shall be credited against the Purchase Price. Escrow Agent shall agree to hold and dispose of the Deposit in accordance with the terms and provisions of this Agreement.
2.5 Escrow Provisions. The Closing shall be accomplished through an escrow established with the Escrow Agent. All deliveries of sums and closing documents provided for in this Agreement shall be made to the Escrow Agent. By execution of the attached Receipt, Escrow Agent acknowledges receipt of the Deposit paid by Buyer to be applied on the Purchase Price of the Property under the terms hereof. Escrow Agent agrees to hold, keep and deliver said Deposit and all other sums or documents delivered to it pursuant hereto in accordance with the terms and provisions of this Agreement. Escrow Agent shall be liable only to hold said sums or documents and deliver the same to the parties named herein in accordance with the provisions of this Agreement, it being expressly understood that by acceptance of this Agreement Escrow Agent is acting in the capacity of a depository only and shall not be liable or responsible to anyone for any damages, losses or expenses unless same shall have been caused by the gross negligence or willful malfeasance of Escrow Agent. In the event of any disagreement between Buyer and Seller resulting in any contrary claims and demands being made in connection with or for the sums or documents involved herein or affected hereby, Escrow Agent shall be entitled to refuse to comply with any such claims or demands so long as such disagreement may continue; and in so refusing Escrow Agent shall make no delivery or other disposition of any of the sums or documents then held by it under the terms of this Agreement, and in so doing Escrow Agent shall not become liable to anyone for such refusal; and Escrow Agent shall be entitled to continue to refrain from acting until (a) the rights of the adverse claimants shall have been finally adjudicated in a court of competent jurisdiction of the monies and documents involved herein or affected hereby, or (b) all differences shall have been adjusted by agreement between Seller and Buyer, and Escrow Agent shall have been notified in writing of such agreement signed by the parties hereto. Escrow Agent shall not be required to distribute any of the sums or documents held by it under this Agreement unless in accordance with either a joint written instruction of Buyer and Seller or an Escrow Demand from either Buyer or Seller in accordance with the provisions hereinafter. Upon receipt by Escrow Agent from either Buyer or Seller (the "Notifying Party") of any notice or request (the "Escrow Demand") to perform any act or disburse any portion of the monies and documents held by Escrow Agent under the terms of this Agreement, Escrow Agent shall give written notice to the other party (the "Notified Party"). If within five days after the giving of such notice, Escrow Agent does not receive any written objection to the Escrow Demand from the Notified Party, Escrow Agent shall comply with the Escrow Demand. If Escrow Agent does receive written objection from the Notified Party in a timely manner, Escrow Agent shall take no further action until the dispute between the parties has been resolved pursuant to either clause (a) or (b) above. Further Escrow Agent shall have the right at all times to deposit all sums or documents held by it into any court of competent jurisdiction after a dispute between or among the parties hereto has arisen, whereupon Escrow Agent's obligations hereunder shall terminate.
3.1 Closing. Except as otherwise provided in this Agreement, the delivery of all documents necessary for the closing of this transaction pursuant to this Agreement (the "Closing") shall take place in the offices of Escrow Agent, 700 South Flower Street, Suite 900, Los Angeles, California 90017, Attention: Rose Martinez, Telephone No. 213/488-4353, Telecopier No. 213/488-4384, or such other place as Seller and Buyer shall mutually agree, at 10:00 A.M. local time on December 11, 1995, unless the date of Closing is extended pursuant to the terms of this Agreement. It is agreed that time is of the essence of this Agreement.
Seller shall furnish to Buyer for inspection and approval by Buyer the following (collectively, the "Property Information"):
4.1 Leases. Seller shall provide Buyer with access on-site to the originals of all Leases and related Lease files.
4.2 Permits. Copies of all certificates of occupancy (if any), and other permits and licenses (if any) required for the occupancy and operation of the Property.
4.3 Taxes. A copy of 1994 and 1995 (if available) real estate and personal property tax statements for the Property, together with evidence of payment of any taxes reflected in such statements that became due before the date of this Agreement.
4.4 Current Rent Roll. A list of the current rents now being collected on each of the apartment units in the Improvements which includes: apartment number, unit type, unit status, tenant name, commencement and termination dates, market rent, lease rent, deposits and details of any concessions.
4.5 Service Contracts. Copies of all service, maintenance, supply and management contracts that, to Seller's knowledge, affect in any material respect the use, ownership, maintenance and/or operation of the Property.
4.6 Utility Bills. Copies of all utility bills (gas, electric, water and sewer) relating to the Property received by Seller or its property manager for the Property (the "Manager") for the immediately prior 12 month period.
4.7 Financial Information. Operating statements of the Property for the 36 months preceding this Agreement ("Operating Statements") and financial statements (balance sheet, income, expenses and capital improvements) for the Property for the two years preceding this Agreement and year-to-date for the current year.
4.8 Lease Form. Seller's standard lease form.
4.9 Maintenance Records. All available maintenance work orders for the 12 months preceding this Agreement.
4.10 Environmental Reports. Any environmental reports, if any, in Seller's possession related to the Property.
4.11 Plans and Specifications. All construction plans and specifications, if any, in Seller's possession relating to the original development of the Property and any major capital repairs or tenant improvements.
4.12 Existing Title Policy. Copy of Seller's existing title insurance policy.
4.13 Pre-Closing Leasing Audit. Before the expiration of the Inspection Period, Buyer may conduct an audit or review of the books and records of Seller related to the current operation of the Property. Buyer may terminate this Agreement and receive a refund of the Deposit by giving notice to Seller on or before the expiration of the Inspection Period if the audit or review indicates that: (i) the physical occupancy rate (the percentage of apartment space actually occupied by tenants under Leases) is less than 90%; (ii) the rent collected for the current month (or preceding month if the audit or review was conducted between the first and tenth of the month) is less than $125,400.00; or (iii) the number of apartment units leased on a month-to-month basis exceeds 21% of the total number of apartment units within the Improvements.
4.14 Existing Financing. Copies of all documents or instruments evidencing, securing or pertaining to the Existing Financing (including any insurance certificates provided to the Existing Lender), together with a list of appropriate persons to contact at the Existing Lender and/or its loan servicer.
Seller shall promptly provide to Buyer any Property Information coming into Seller's possession or produced by Seller after the initial delivery to Buyer of the Property Information and shall continue to provide same during the pendency of this Agreement (including an updated rent roll each month during the pendency of this Agreement).
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as of the date hereof as follows:
5.1 Ownership. Seller is the sole owner of the Property. Seller and Liberty Walnut Creek Limited Partnership, the owner of Phase II, are joint owners of the personal property listed in Schedule B (the "Joint Personal Property").
5.2 Leases. As of the date of the Agreement there are no leases, subleases, licenses or other rental agreements or occupancy agreements (written or verbal) which grant any possessory interest in and to any space situated on or in the Improvements or that otherwise give rights with regard to use of the Improvements other than the Leases described in Schedule C attached hereto (the "Rent Roll") and the laundry lease with Reliable Laundry. The Rent Roll is true, accurate and complete as of the date hereof. Except as otherwise specifically set forth in the Rent Roll or elsewhere in this Agreement:
(a) the Leases are in full force and effect and none of them has been modified, amended or extended;
(b) Seller has neither sent written notice to any tenant of the Property, nor received any notice from any such tenant, claiming that such tenant, or Seller, as the case may be, is in default, which default remains uncured other than as shown on Schedule C attached hereto;
(c) to the best knowledge of Seller, no action or proceeding instituted against Seller by any tenant of any unit in the Property is
(d) there are no security deposits or other deposits other than those set forth in the Rent Roll;
(e) no rent has been paid more than 30 days in advance under any Lease other than as shown on the Rent Roll; and
(f) no leasing commission shall be due for any period subsequent to the Closing other than for tenants who have executed a Lease prior to Closing but do not move in until after the Closing, which commissions shall be paid by Buyer.
5.3 Service and Management Contracts. Schedule D attached hereto lists all service, maintenance, supply and management contracts (collectively, "Service Contracts") that, to Seller's knowledge, affect in any material respect the operation of the Property. To the knowledge of Seller, neither Seller nor any other party is in default under any Service Contract.
5.4 Ability to Perform. Seller has full partnership power to execute, deliver and carry out the terms and provisions of this Agreement and has taken all necessary partnership and corporate action, as applicable, to authorize the execution, delivery and performance of this Agreement, and this Agreement constitutes the legal, valid and binding obligation of Seller enforceable in accordance with its terms. Except as set forth in this Agreement, no order, permission, consent, approval, license, authorization, registration or validation of, or filing with, or exemption by, any governmental agency, commission, board or public authority is required to authorize, or is required in connection with, the execution, delivery and performance of this Agreement by Seller or the taking by Seller of any action contemplated by this Agreement.
5.5 No Actions. There are no pending, or to Seller's knowledge, threatened legal actions or proceedings against or relating to Seller or the ownership of the Property.
5.6 No Violation Notice. Seller has not received written notice:
(a) from any federal, state, county or municipal authority alleging any fire, health, safety, building, pollution, environmental, zoning or other violation of law in respect of the Property or any part thereof, which has not
(b) concerning the possible or anticipated condemnation of any part of the Property, or the widening, change of grade or limitation on use of streets abutting the same or concerning any special taxes or assessments levied or to be levied against the Property or any part thereof;
(c) from any insurance company or bonding company of any defects or inadequacies in the Property or any part thereof, which would adversely affect the insurability of the same or cause the imposition of extraordinary premiums or charges therefor or of any termination or threatened termination of any policy of insurance or bond; or
(d) concerning any change in the zoning classification of the Property or any part thereof.
5.7 No Management Contracts, Employment Contracts, Unions, Pension Plans. Seller has not entered into any management contracts, employment contracts or labor union contracts and has not established any retirement, pension or profit sharing plans relating to the operation or maintenance of the Property which shall survive the Closing or for which Buyer shall have any liability or obligation.
5.8 Liens. Seller agrees to keep the Property free from mechanics' and materialmen's liens as of the Closing.
5.9 Operating Statements. The Operating Statements were prepared in the ordinary course of Seller's business in accordance with the standards customarily applied by Seller in preparing same for the Property. At Buyer's request, at any time before or after the Closing, Seller agrees to provide to Buyer's designated independent auditor access to the books and records of the Property and all related information regarding the period for which Buyer is required to have the Property audited under the regulations of the Securities and Exchange Commission. The provisions of the foregoing sentence shall survive the Closing for a period of 180 days.
Any reference in this Section to Seller's knowledge, or notice of any matter, shall only mean such knowledge or notice that is actually known by or has actually been received by William W. Thompson, the authorized agent of Seller, after reasonable inquiry of the Manager. Any knowledge or notice given, had or received by any of Seller's agents, servants or employees (including those questioned), other than William W. Thompson, shall not be imputed to Seller.
6.1 As-Is. Buyer acknowledges and agrees that, except as may otherwise be specifically set forth elsewhere in this Agreement, Buyer will be purchasing the Property based solely upon its inspection and investigations of the Property and that Buyer will be purchasing the Property "AS IS" and "WITH ALL FAULTS" based upon the condition of the Property as of the date of Closing. Without limiting the foregoing, Buyer acknowledges that, except as may otherwise be specifically set forth elsewhere in this Agreement, neither Seller nor its consultants or agents have made any other representations or warranties of any kind upon which Buyer is relying as to any matters concerning the Property, including, but not limited to, the condition of the Land or any of the Improvements, the Personal Property, or the Intangible Property, the existence or nonexistence of asbestos, toxic water or any hazardous material, the tenants of the Property or the Leases, economic projections or market studies concerning the Property, any development rights, taxes, bonds, covenants, conditions and restrictions affecting the Property, water or water rights, topography, drainage, soil or subsoil of the Property, the utilities serving the Property or any zoning, environmental or building laws, rules or regulations affecting the Property. Seller makes no representation that the Property complies with Title III of the Americans with Disabilities Act, or the Fair Housing Amendments Act of 1989, or any fire codes or building codes. Buyer hereby releases Seller and the other Released Parties from any and all liability in connection with any claims Buyer may have (or may acquire as a result of Buyer's purchase of the Property) relating directly or indirectly to the condition of any of the Property, except liability for claims regarding environmental matters, which are addressed in the next two sentences. Buyer hereby releases Seller in its capacity as "Owner of the Property" (as used herein, such term shall have the meaning, and be used, as defined under CERCLA) and its partners and their affiliates and the respective shareholders, partners, officers, directors, agents (other than contractors of Seller) and employees of each of them (collectively, together with Seller, the "Released Parties") when Seller or any of the other Released Parties is acting or is deemed to be acting in the capacity as "Owner of the Property" from any and all liability in connection with any claims which Buyer may have or may acquire as a result of Buyer's purchase of the Property, including without limitation, any claims against Seller, and the other Released Parties (or any of them), in each case, when Seller or any of the other Released Parties is acting or is deemed to be acting in the capacity as "Owner of the Property", and Buyer hereby agrees not to assert any claims, for contribution, cost recovery or otherwise, against Seller, and the other Released Parties (or any of them), in each case, when Seller or any of the other Releassed Parties is acting or is deemed to be acting in the capacity as "Owner of the Property", relating directly or indirectly to (i) the existence of asbestos or hazardous materials or hazardous substances on, or environmental conditions of, the Property, (ii) compliance with laws relating to environmental matters (except if the claim is based on a penalty or sanction arising under environmental law) or (iii) the condition of any of the Property. Except as set forth in the immediately preceding sentence, nothing in this Section is intended to alter, modify, adjust or otherwise affect the respective obligations and/or liability of Buyer and Seller under any Environmental Laws (including without limitation any claim against Seller or any of the other Released Parties in the capacity, if ever applicable, as an Operator of a Facility, as such terms are defined under CERCLA). As used herein, the term "hazardous materials" or "hazardous substances" means (iv) hazardous wastes, hazardous substances, hazardous constituents, toxic substances or related materials, whether solids, liquids or gases, including but not limited to substances defined as "hazardous wastes," "hazardous substances," "toxic substances," "pollutants," "contaminants," "radioactive materials," or other similar designations in, or otherwise subject to regulation under, any of the following (the "Environmental Laws") the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), 42 U.S.C. ss.9601 et seq.; the Toxic Substance Control Act ("TSCAS"), 15 U.S.C. ss.2601 et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. ss.1802; the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. ss.9601, et seq.; the Clean Water Act ("CWA"), 33 U.S.C. ss.1251 et seq.; the Safe Drinking Water Act, 42 U.S.C. ss.300f et seq.; the Clean Air Act ("CAA"), 42 U.S.C. ss.7401 et seq.; or any rules, regulations or ordinances adopted, or other criteria and guidelines promulgated pursuant to the preceding laws or other similar federal, state or local laws, regulations, rules or ordinance now or hereafter in effect relating to environmental matters.
6.2 No Financial Representation. Seller is providing to Buyer certain [un]audited Operating Statements and other unaudited financial statements regarding the Property and/or Seller relating to certain periods of time in which Seller owned the Property. Seller and Buyer hereby acknowledge that such Operating Statements and other financial statements have been provided to Buyer at Buyer's request solely as illustrative material. Seller makes no representation or warranty that such Operating Statements and other financial statements are complete or accurate or that Buyer will achieve similar financial or other results with respect to the operations of the Property, it being acknowledged by Buyer that Seller's operation of the Property and allocations of revenues or expenses may be vastly different than Buyer may be able to attain. Buyer acknowledges that it is a sophisticated and experienced purchaser of real estate and further that Buyer has relied upon its own investigation and inquiry with respect to the operation of the Property and releases Seller from any liability with respect to such Operating Statements and other financial statements, except for intentional misstatements by Seller.
7.1 Maintenance of Insurance. Until the Closing, Seller shall maintain its present insurance on the Property in the amounts as currently insured. Subject to the provisions of Section , the risk of loss in and to the Property shall remain vested in Seller until the Closing. Buyer will obtain its own insurance on the Property at Closing.
7.2 Casualty or Condemnation. If prior to the Closing, the Improvements or any material portion thereof (having a replacement cost equal to or in excess of $200,000.00 in the case of an insured casualty or having a replacement cost equal to or in excess of $10,000.00 in the case of an uninsured casualty or a co-insured casualty) are damaged or destroyed by fire or casualty, or any material part of the Property is taken by eminent domain by any governmental entity, then Buyer shall have the option, exercisable by written notice given to Seller at or prior to the Closing, to terminate this Agreement, whereupon all obligations of all parties hereto shall cease, the Deposit shall be returned to Buyer and this Agreement shall be void and without recourse to the parties hereto except for provisions which are expressly stated to survive such termination. If Buyer does not elect to terminate this Agreement or if such damage or destruction or taking has a replacement cost or is in an amount of less than $200,000.00, Buyer shall proceed with the purchase of the Property without reduction or offset of the Purchase Price, and in such case, unless Seller shall have previously restored the Property to its condition prior to the occurrence of any such damage or destruction, Seller shall pay over to Buyer or assign to Buyer, with the affected insurance company's acknowledgment of such assignment, all amounts received or due from, and all claims against, any insurance company or governmental entity as a result of such destruction or taking, and Buyer shall receive a credit at Closing for any deductible (but not for any uninsured or co-insured) amount under Seller's insurance. As used in this Section, "material part of the Property" includes, without limitation, a taking that (i) impairs on a permanent basis access to the Property, (ii) reduces the currently existing number of parking spaces for the Property to below legal limits, (iii) reduces the currently existing number of residential units for the Property and (iv) results in the portion of the Property remaining after the taking being in violation of legal requirements.
SELLER'S OBLIGATIONS PRIOR TO CLOSING
Seller covenants that between the date of this Agreement and the Closing:
8.1 No Lease Amendments. Seller shall not, without Buyer's prior written consent (a) enter into any new lease for an apartment unit with a first-time tenant unless the Lease is for a period of not less than six months and no more than one year and the rent shall be not less than 97% of the amount of the market rent noted on the Rent Roll for the respective apartment; or (b) enter into, amend, renew or extend any Lease for an apartment unit with an existing tenant unless the Lease is for a period of not more than one year and that the rent for the amended, renewal or extension term shall not be less than the amount of rent noted on the Rent Roll, for the respective apartment; or (c) terminate any Lease except by reason of a default by the tenant thereunder or by reason of the provisions contained in the Lease. Additionally, Seller agrees to use commercially reasonable efforts to convert any currently existing month-to-month tenancies to tenancies of at least six months.
8.2 Continuation of Service Contracts. Seller shall not modify or amend any Service Contract or enter into any new Service Contract for the Property, without the prior written consent of Buyer, which consent shall not be unreasonably withheld or delayed, provided the same is terminable without penalty by the then owner of the Property upon not more than 30 days' notice.
8.3 Replacement of Personal Property. No personal property included as part of the Property shall be removed from the Property unless the same is replaced with similar items of at least equal quality prior to the Closing.
8.4 Tax Procedure. Seller shall not withdraw, settle or otherwise compromise any protest or reduction proceeding affecting real estate taxes assessed against the Property for any fiscal period in which the Closing is to occur or any subsequent fiscal period without the prior written consent of Buyer. Real estate tax refunds and credits received after the Closing which are attributable to the fiscal tax year during which the Closing occurs shall be apportioned between Seller and Buyer, after deducting the expenses of collection thereof, based upon the relative time periods each owns the Property, which obligation shall survive the Closing.
8.5 Access. Seller shall allow Buyer or Buyer's representatives access to the Property, the Leases and other documents required to be delivered under this Agreement upon reasonable prior notice at reasonable times.
8.6 Listings and Other Offers. During the pendency of this Agreement, Seller will not list the Property with any broker or otherwise accept or solicit any offers to sell the Property, or enter into any contracts or agreements (whether binding or not) regarding any disposition of the Property.
8.7 Maintenance of Improvements. From and after the date of this Agreement, Seller shall continue to maintain all Improvements in accordance with Seller's customary prior practice. As of Closing, Seller shall place any apartment which has been vacant for four days or more in condition reasonably required to making each apartment ready for re-lease in accordance with Seller's customary prior practice, which shall include painting, shampooing of carpeting and general cleaning of each such apartment unit.
9.1 Closing, Deliveries and Obligations. At the Closing, Seller shall deliver to Buyer or cause to be delivered to Buyer the following:
(a) Deed. The Deed and the General Instrument, in form reasonably satisfactory to Buyer's and Seller's counsel, duly executed and acknowledged, which together convey the Property to Buyer. It is a condition to Buyer's performance of its obligations under this Agreement that the Property be conveyed subject only to Permitted Exceptions; provided, however, as to the Joint Personal Property, Seller shall only be required to convey to Buyer Seller's right, title and interest in such property.
(b) Assignment of Leases and Security Deposits. An assignment and assumption of the Leases and Security Deposits in form reasonably satisfactory to Buyer's and Seller's counsel.
(c) Lease Records. Original copies of all Leases, and related documents in the possession or under the control of Seller. Such records shall include a schedule of all cash security deposits and a check or credit to Buyer in the amount of such security deposits held by Seller at the Closing under the Leases together with appropriate instruments of transfer or assignment with respect to any lease securities which are other than cash and a schedule updating the Rent Roll and setting forth all arrears in rents and all prepayments of rents.
(d) Permits. Seller shall deliver, to the extent in the possession of Seller: original copies of all certificates, licenses, permits, authorizations and approvals issued for or with respect to the Property by governmental authorities having jurisdiction, except that photocopies may be substituted if the originals are posted at the Property.
(e) Service Contracts. Except for the laundry lease, Seller shall terminate all Service Contracts to which Seller or the Manager is a party on or prior to Closing and pay all amounts due thereon through the Closing. Buyer may, at its option, reinstate all or any of said Service Contracts in Buyer's name from and after Closing.
(f) Title Affidavits. Such affidavits (without indemnity) as the Title Insurer may reasonably require in order to omit from the Title Policy all exceptions for (i) parties in possession other than under the rights to possession granted under the Leases; and (ii) mechanics' liens.
(g) Files. Seller shall make all of its files and records relating to the Property available to Buyer at the Property upon reasonable prior notice for copying, which obligation shall survive the Closing.
(h) Notices of Sales. Sufficient letters, executed by Seller, advising the tenants under the Leases of the sale of the Property to Buyer and directing that all rents and other payments thereafter becoming due under the Leases be sent to Buyer or as Buyer may direct.
(i) Non-Foreign Affidavit. Seller shall execute and deliver to Buyer and Buyer's counsel, at Closing, such evidence as may be reasonably required by Buyer to show compliance by Seller with the Foreign Investment and Real Property Tax Act, IRC Section 1445(b)(2), as amended, and California Revenue and Taxation Code Section 18662, as amended.
9.2 Seller's Expenses. Seller shall pay its own counsel fees, Survey costs (up to a maximum of $7,500.00) and one-half of: (i) transfer taxes and documentary stamps, (ii) Title Insurance costs, (iii) escrow and recording fees, and (iv) all other customary closing costs in transactions of this nature in Contra Costa County, California.
At the Closing, Buyer shall:
10.1 Payment of Purchase Price. Deliver to Seller the Purchase Price, as adjusted for (i) apportionments under Section , and (ii) any adjustments thereto required pursuant to the express provisions this Agreement.
10.2 Indemnity. Deliver to Seller assumption agreements signed by Buyer with respect to the performance by Buyer of the landlord's obligations under the Leases, Security Deposits and the Service Contracts assumed by Buyer, in each case in respect of the period from and after the Closing.
10.3 Recording Deed. Cause the Deed to be recorded.
10.4 Other Documents. Deliver any other documents required by this Agreement to be delivered by Buyer.
10.5 Buyer's Expenses. Pay all of its own counsel fees, Survey costs in excess of $7,500.00 and one-half of: (i) transfer taxes and documentary stamps, (ii) Title Insurance costs, (iii) escrow and recording fees, and (iv) all other customary closing costs in transactions of this nature in Contra Costa, California.
APPORTIONMENTS AND ADJUSTMENTS TO PURCHASE PRICE
11.1 Apportionments. The following apportionments shall be made between the parties at the Closing as of the close of the business day prior to the Closing:
(a) prepaid and collected rent;
(c) real estate and personal property taxes, water charges, sewer rents and vault charges, if any, on the basis of the fiscal period for which assessed, except that if there is a water meter on the Property, apportionment at the Closing shall be based on the last available reading, subject to adjustment after the Closing on a per diem basis, when the next reading is
(d) prepayments under the Service Contracts;
(e) all other income and expenses relating to the Property (including, without limitation, appropriate allocation in respect of debt service payments for the month of Closing and any escrow items pertaining to the Existing Financing).
If the Closing shall occur before a new tax rate is fixed, the apportionment of taxes at the Closing shall be upon the basis of the old tax rate for the preceding period applied to the latest assessed valuation. Promptly after the new tax rate is fixed, the apportionment of taxes shall be recomputed. Any discrepancy resulting from such recomputation and any errors or omissions in computing apportionments at the Closing shall be promptly corrected, which obligation shall survive the Closing for a period of one year after Closing.
11.2 Application of Rent Payments. If any tenant is in arrears in the payment of rent at the Closing, rents received from such tenant after the Closing shall be applied in the following order of priority: (a) first to the month in which the Closing occurred, (b) then to the period prior to the month in which the Closing occurred, and (c) then to any month or months following the month in which the Closing occurred. If rents or any portion thereof received by Seller or Buyer after the Closing are payable to the other party by reason of this allocation, the appropriate sum shall be paid to the other party within 30 days from the receipt thereof, which obligation shall survive the Closing.
12.1 Elections. If Seller is unable to give title or to make conveyance, or to satisfy all of Seller's obligations as set forth in this Agreement, Buyer shall have the right to elect, in its sole discretion, at the Closing, to accept such title as Seller can deliver to the Property in its then condition and to pay therefor the Purchase Price without reduction or offset, in which case Seller shall convey such title for such price. If Buyer fails to perform timely its obligations to close under this Agreement, Buyer shall be in default hereunder and Seller as its sole remedies shall have the right to terminate this Agreement and receive the Deposit in accordance with Section .
12.2 Seller's Default. If at the Closing, Seller is unable to give title or to make conveyance, or to satisfy all of Seller's obligations as set forth in this Agreement, and Buyer does not elect to take title as provided in Section , Seller shall be in default under this Agreement and, subject to the next sentence, the Deposit shall be forthwith returned to Buyer. In addition to the foregoing, if Buyer desires to purchase the Property in accordance with the terms of this Agreement and Seller refuses to perform Seller's obligations hereunder, Buyer, at its option, and as Buyer's sole and exclusive remedy, shall have the right to compel specific performance by Seller hereunder in which event any Deposit made hereunder shall be credited against the Purchase Price.
12.3 BUYER'S DEFAULT. IF THE BUYER DEFAULTS IN ITS OBLIGATION TO CLOSE, SELLER MAY TERMINATE THIS AGREEMENT, AND AS SELLER'S SOLE REMEDY RECEIVE THE DEPOSIT (WITH INTEREST THEREON). ACCORDINGLY, THE PARTIES ACKNOWLEDGE THAT IN THE EVENT OF BUYER'S FAILURE TO FULFILL ITS OBLIGATIONS HEREUNDER IT IS IMPOSSIBLE TO COMPUTE EXACTLY THE DAMAGES WHICH WOULD ACCRUE TO THE SELLER IN SUCH EVENT. THE PARTIES HAVE TAKEN THESE FACTS INTO ACCOUNT IN SETTING THE AMOUNT OF THE DEPOSIT, REQUIRED PURSUANT TO SECTION , AND HEREBY AGREE THAT: (i) SUCH AMOUNT IS THE PRE-ESTIMATE OF SUCH DAMAGES WHICH WOULD ACCRUE TO SELLER; (ii) SUCH AMOUNT REPRESENTS DAMAGES AND NOT ANY PENALTY AGAINST BUYER; AND (iii) PAYMENT TO SELLER OF THE DEPOSIT TOGETHER WITH THE INTEREST THEREON SHALL BE SELLER'S FULL AND LIQUIDATED DAMAGES IN LIEU OF ALL OTHER RIGHTS AND REMEDIES WHICH SELLER MAY HAVE AGAINST BUYER AT LAW OR IN EQUITY AS A CONSEQUENCE OF BUYER'S DEFAULT IN ITS OBLIGATION TO CLOSE.
13.1 Brokerage Fees. Seller and Buyer mutually represent and warrant that Marcus and Millichap ("Broker") is the only broker with whom they have dealt in connection with this purchase and sale and that neither Seller nor Buyer knows of any other broker who has claimed or may have the right to claim a commission in connection with this purchase and sale. The commission of the Broker in the sum of $151,550.00 shall be paid by the Seller, but Seller shall be obligated to pay such commission only if, as and when the Deed is recorded and the full Purchase Price paid to Seller. In any event, Buyer shall have no obligation to pay a brokerage commission to Broker or any other broker. Seller and Buyer shall indemnify and defend each other against any costs, claims or expenses, including attorneys' fees, arising out of the breach on their respective parts of any representations, warranties or agreements contained in this Section. The representations and obligations under this Section shall survive the Closing or, if the Closing does not occur, the termination of this Agreement.
14.1 Effective Notices. All notices under this Agreement shall be in writing and shall be delivered personally or shall be sent by Federal Express or other comparable overnight delivery courier, addressed as set forth at the beginning of this Agreement or by telecopier to the telecopier number as set forth at the beginning of this Agreement. Notices shall be deemed effective, when so delivered. Copies of all such notices to Buyer shall be sent to David S. Meyer, Esq., Mayer, Brown & Platt, 350 South Grand Avenue, 25th Floor, Los Angeles, California 90071, Telecopier No. 213/625-0248 and copies of all such notices to Seller shall be sent to William W. Thompson, Trammell Crow Residential, 591 Redwood Hwy., Suite 5275, Mill Valley, California 94941, Telecopier No. 415/381-3046 and E. Peter Kane, Esquire, Hunton & Williams, 1751 Pinnacle Drive, Suite 1700, McLean, Virginia 22102, Telecopier No. 703/714-7410.
15.1 Representations and Warranties. Except as otherwise expressly provided in this Agreement, no representations, warranties, covenants or other obligations of Seller set forth in this Agreement shall survive the Closing, and no action based thereon shall be commenced after Closing. The representations, warranties, covenants and other obligations of Seller set forth in Section shall survive until 180 days after the Closing, and no action based thereon shall be commenced more than 180 days after the Closing.
15.2 Merger. The delivery of the Deed by Seller, and the acceptance and recording thereof by Buyer, shall be deemed the full performance and discharge of each and every obligation on the part of Seller to be performed hereunder and shall be merged in the delivery and acceptance of the Deed, except as provided in Section and except for such other obligations of Seller which are expressly provided herein to survive the Closing.
16.1 Inspection Condition. It shall be a condition of this Agreement that on or before November 27, 1995 (the "Inspection Period"), Buyer shall have obtained all necessary internal approvals and approved in its sole discretion, (i) the matters set forth in Section ; (ii) all zoning, building code and other governmental laws, ordinances, rules, regulations, rulings and decision applicable to the Property; (iii) an appraisal of the Property; (iv) an engineering and physical inspection of the Property; and (v) an inspection of the financial books and records relating to all income and expenses of the Property. In the conduct of its inspection of the Property, Buyer shall not unreasonably interfere with the operation of the Property or the occupancy of the tenants. To the extent any of the inspections disrupt the condition of the Property, Buyer shall restore the Property to its prior condition thereafter. Buyer shall indemnify Seller and the other Released Parties against any loss or damage to person or property arising from the conduct of Buyer's inspection of the Property. The foregoing provisions of this Agreement shall survive the Closing or any termination of this Agreement.
16.2 Consequences of Failure of Inspection Condition. In the event that Buyer fails to obtain any necessary internal approvals or deems any inspection matter unacceptable to Buyer, in Buyer's sole discretion, Buyer shall be entitled to terminate this Agreement by written notice given to Seller on or before the expiration of the Inspection Period, at which time the Deposit shall be promptly returned to Buyer, and, thereafter this Agreement shall be void and without recourse to either party except for provisions which are expressly stated to survive termination of this Agreement. In the event Buyer does not so timely deliver written notice of termination prior to the expiration of the Inspection Period, then the foregoing Inspection Condition set forth in Section shall automatically be deemed waived by Buyer and satisfied in full. In the event Buyer timely elects to terminate this Agreement during the Inspection Period as permitted above, and as additional consideration for Seller granting Buyer the foregoing condition precedent, Buyer shall deliver to Seller with Buyer's notice of termination copies of all studies, surveys, plans, investigations and reports obtained by or prepared by Buyer in connection with Buyer's inspection of the Property. Buyer makes no warranty or representation as to the accuracy of any information contained in such documents.
16.3 Accuracy of Representations and Warranties. It shall be a condition to Buyer's obligation to purchase the Property that the representations and warranties of Seller set forth in this Agreement be true and correct as of the Closing. For purposes of this Section , a representation or warranty shall be false if the factual matter that is the subject to the representation or warranty is inaccurate in any material respect, notwithstanding Seller's lack of knowledge or notice of such inaccuracy. If Buyer learns on or before the date the Closing is scheduled to occur that any representation or warranty of Seller set forth in this Agreement is not true and correct (a "warranty breach"), as Buyer's sole and exclusive remedy, Buyer may elect either (a) to terminate this Agreement and the Deposit shall be promptly returned to Buyer whereupon neither party shall have any further rights or obligations hereunder except for provisions which are expressly stated to survive termination of this Agreement or (b) to accept title to the Property and to pay therefor the Purchase Price without reduction or offset, in which case Seller shall convey the Property for such price to Buyer and Buyer shall be deemed to have waived any claim against Seller and to have released Seller from any liability arising from said warranty breach.
16.4 Phase I Closing. It also shall be a condition to Buyer's obligation to purchase the Property under this Agreement that either (i) Buyer or an affiliate of Buyer shall have closed the acquisition of Phase I or (ii) such closing as to Phase I shall occur simultaneously with Closing hereunder.
17.1 Assignment. Buyer shall be entitled to assign this Agreement and its rights hereunder to a corporation, general partnership, limited partnership or other lawful entity entitled to do business in the state in which the Property provided such corporation, partnership or other entity, shall be controlled, controlling or under the common control with Buyer ("Assignee"). In the event of such an assignment of this Agreement to Assignee (a) Buyer shall notify Seller promptly, (b) Buyer shall not be released from liability under this Agreement from and after such assignment, (c) Assignee shall assume all obligations of Buyer under this Agreement and (d) from and after any such assignment the term "Buyer" shall be deemed to mean the Assignee under any such assignment.
17.2 Limitation of Seller's Liability. Any liability of Seller under or in connection with this Agreement shall be limited strictly to the assets of the Seller. Accordingly, no partner of Seller, nor any of their respective partners, shareholders, officers, directors, agents or employees, or their respective heirs, successors or assigns shall have any personal liability of any kind or nature for or by reason of any matter or thing whatsoever under, in connection with, arising out of or in any way related to this Agreement and the transactions contemplated herein, and Buyer hereby waives for itself and anyone who may claim by, through or under Buyer any and all rights to sue or recover on account of any such alleged personal liability. The provisions of this Section shall survive the Closing or any termination of this Agreement.
17.3 Integration. This Agreement embodies and constitutes the entire understanding between the parties with respect to the transaction contemplated herein, and all prior agreements, understandings, representations and statements, oral or written, are merged into this Agreement. Neither this Agreement nor any provision hereof may be waived, modified, amended, discharged or terminated except by an instrument signed by the party against whom the enforcement of such waiver, modification, amendment, discharge or termination is sought, and then only to the extent set forth in such instrument.
17.4 Governing Law. This Agreement shall be governed by, and construed in accordance with the laws of the state in which the Property is located.
17.5 Captions. The captions in this Agreement are inserted for convenience of reference only and in no way define, describe or limit the scope or intent of this Agreement or any of the provisions hereof.
17.6 Bind and Inure. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns.
17.7 Drafts. This Agreement shall not be binding or effective until properly executed and delivered by both Seller and Buyer.
17.8 Number and Gender. As used in this Agreement, the masculine shall include the feminine and neuter, the singular shall include the plural and the plural shall include the singular, as the context may require.
17.9 Attachments. If the provisions of any schedule or rider to this Agreement are inconsistent with the provisions of this Agreement, the provisions of such schedule or rider shall prevail. Schedules A, B, C and D, attached are hereby incorporated as integral parts of this Agreement.
17.10 Section 1031 Exchange. Buyer may consummate the purchase of the Property as part of a so-called like kind exchange (an "Exchange") pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"), provided that: (i) the Closing shall not be delayed or affected by reason of an Exchange nor shall the consummation or accomplishment of an Exchange be a condition precedent or condition subsequent to Buyer's obligations under this Agreement; (ii) Buyer shall consummate or accomplish an Exchange through a qualified intermediary and Seller shall not be required to take an assignment of the purchase agreement for the exchange property or be required to acquire or hold title to any property for purposes of consummating or accomplishing an Exchange; (iii) Buyer shall pay any additional costs that would not otherwise have been incurred by Buyer or Seller had Buyer not consummated or accomplished its purchase through an Exchange; (iv) Seller shall incur no liability or expense as a result of the Exchange; and (v) Buyer shall indemnify and defend Seller and the other Released Parties from and against any loss, cost, damage or expense which Seller or any one of them may suffer or incur as a result of the Exchange. The provisions of the foregoing sentence shall survive the Closing. Seller shall not by this Agreement or acquiescence to an Exchange (x) have its rights under this Agreement affected or diminished in any manner or (y) be responsible for compliance with or be deemed to have warranted to Buyer than an Exchange in fact complies with Section 1031 of the Code.
17.11 Limitation of Liability of Trustees. Buyer is a Maryland real estate investment trust, and, in accordance with the declaration of trust of Buyer, notice is hereby given that neither the trustees, officer, employees nor shareholders of Buyer assume any personal liability for obligations entered into by or on behalf of Buyer. The provisions of this Section shall survive the Closing or any termination of this Agreement.
17.12 Further Assurances. In addition to the acts and deeds recited herein and contemplated to be performed, executed and/or delivered by Seller to Buyer at Closing, Seller agrees to perform, execute and deliver, but without any obligation to incur any additional liability or expense, on or after the Closing any further deliveries and assurances as may be reasonably necessary to consummate the transactions contemplated hereby or to further perfect the conveyance, transfer and assignment of the Property to Buyer. The provisions of this Section shall survive the Closing for a period of 180 days.
17.13 Confidentiality. The parties shall consult, in good faith, as to the content of any public announcement or disclosure of any information related to the transaction contemplated by this Agreement, provided that under no circumstances shall either party make a public announcement or disclosure of the Purchase Price. Further, each party may make disclosure of the information related to the transaction contemplated by this Agreement to its lenders, creditors, officers, employees and agents as necessary to perform its obligations hereunder. Otherwise, except as may be required by law or the rules or regulations of any exchange that are binding on Seller or Buyer, neither party shall make any public announcement or disclosure of any information related to the transaction contemplated by this Agreement, before or after the Closing, without the prior written specific consent of the other party. The provisions of this Section shall survive the Closing or any termination of this Agreement.
17.14 Attorneys' Fees. Should either party employ attorneys to enforce any of the provisions hereof, the party losing in any final judgment agrees to pay the prevailing party all reasonable costs, charges and expenses, including attorneys' fees, expended or incurred in connection therewith.
17.15 Counterparts. This Agreement may be executed in any number of original counterparts. So long as Seller and Buyer have each signed at least one counterpart of this Agreement, each of such counterparts shall be deemed an original version of this Agreement, but all of such counterparts together shall evidence and constitute a single document.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the date first above written.
[Signatures contained on following page.]
TCR WALNUT CREEK LIMITED PARTNERSHIP
By: PaineWebber Equity Partners Two
By: Second Equity Partners, Inc.,
By: TCR #405 Treat II Limited
By: /s/ William W. Thompson
By: /s/ Anthony R. Arnest
The undersigned Broker joins in the execution of this Agreement to acknowledge and agree to the terms of Section hereof.
The Purchase and Sale Agreement, together with Buyer's Deposit, has been received by the Escrow Agent on this the 13 day of November, 1995, and the Escrow Agent acknowledges the terms thereof and agrees to perform as Escrow Agent in accordance therewith.
Schedule A - Description of Land Schedule B - Joint Personal Property Schedule B-1 - Personal Property Schedule C - Rent Roll Schedule D - Service Contracts
The land referred to in this document is described as follows:
REAL PROPERTY in an unincorporated area, County of Contra Costa, State of California, described as follows:
Lot 1, as shown on Map of Subdivision 6955, filed June 13, 1988, Map Book 322, Page 47, Contra Costa County Records
A non-exclusive easement and right of way as an appurtenance to Parcel One above, as created by the "Mutual Access Easement" dated March 23, 1989 and recorded April 4, 1989 in Book 14979, Page 84, Official Records, by and between TCR Walnut Creek Limited Partnership and Liberty Walnut Creek
TCR Walnut Creek Limited Partnership Security Capital Pacific Trust
By: /s/ Peter F. Sullivan By: /s/ Anthony R. Arnest
The undersigned, Peter Sullivan, being first duly sworn on oath, and under penalty of perjury, hereby certifies as follows:
1. Section 1445 of the Internal Revenue Code provides that a transferee (buyer) of a United States real property interest must withhold tax if the transferor (seller) is a foreign person.
2. The undersigned is a Vice President of Second Equity Partners, Inc., a Delaware corporation which is the managing general partner of PaineWebber Equity Partners Two Limited Partnership, which is a general partner of TCR Walnut Creek Limited Partnership, the Texas limited partnership which is the owner of the property commonly known as Treat Commons Apartments (Phase II), which is legally described as follows:
SEE EXHIBIT "A" ATTACHED HERETO
3. The owner and transferor of said property is TCR Walnut Creek Limited Partnership, a Texas limited partnership.
4. Said property is being transferred to Security Capital Pacific Trust pursuant to that certain Purchase and Sale Agreement dated as of October 26, 1995, between the transferor and Security Capital Pacific Trust.
5. (a) The transferor is not a foreign corporation, foreign partnership, foreign trust, foreign estate or foreign person, as those terms are defined in the Internal Revenue Code and the Income Tax Regulations; and (b) the office address of the transferor is c/o PaineWebber Properties, Inc. 265 Franklin Street, 16th Floor, Boston, Massachusetts 02110
6. The United States taxpayer identification number of the
7. This Affidavit is being given pursuant to Section 1445 of the Code to inform the transferee that withholding of tax is not required upon this disposition of a United States real property interest.
8. The transferor understands that this certification may be disclosed to the Internal Revenue Service by transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.
Under penalties of perjury, I declare that I have examined this Affidavit and it is true, correct and complete.
TCR WALNUT CREEK LIMITED PARTNERSHIP
By: PaineWebber Equity Partners Two
By: Second Equity Partners, Inc.,
SUBSCRIBED AND SWORN to before me this 22nd day of December, 1995.
The undersigned, William Thompson, being first duly sworn on oath, and under penalty of perjury, hereby certifies as follows:
1. Section 1445 of the Internal Revenue Code provides that a transferee (buyer) of a United States real property interest must withhold tax if the transferor (seller) is a foreign person.
2. The undersigned is the general partner of TCR #405 Treat Limited Partnership, which is a general partner of TCR Walnut Creek Limited Partnership, the Texas limited partnership which is the owner of the property commonly known as Treat Commons Apartments (Phase II), which is legally described as follows:
SEE EXHIBIT "A" ATTACHED HERETO
3. The owner and transferor of said property is TCR Walnut Creek Limited Partnership, a Texas limited partnership.
4. Said property is being transferred to Security Capital Pacific Trust pursuant to that certain Purchase and Sale Agreement dated as of October 26, 1995, between the transferor and Security Capital Pacific Trust.
5. (a) The transferor is not a foreign corporation, foreign partnership, foreign trust, foreign estate or foreign person, as those terms are defined in the Internal Revenue Code and the Income Tax Regulations; and (b) the office address of the transferor is c/o PaineWebber Properties, Inc. 265 Franklin Street, 16th Floor, Boston, Massachusetts 02110
6. The United States taxpayer identification number of the
7. This Affidavit is being given pursuant to Section 1445 of the Code to inform the transferee that withholding of tax is not required upon this disposition of a United States real property interest.
8. The transferor understands that this certification may be disclosed to the Internal Revenue Service by transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.
Under penalties of perjury, I declare that I have examined this Affidavit and it is true, correct and complete.
TCR WALNUT CREEK LIMITED PARTNERSHIP
By: TCR #405 Treat II Limited
By: /s/ William W. Thompson
SUBSCRIBED AND SWORN to before me this 22nd day of December, 1995.
ASSIGNMENT OF AGREEMENTS AND SERVICE CONTRACTS
KNOW ALL MEN BY THESE PRESENTS, THAT TCR Walnut Creek Limited Partnership, a Texas limited partnership "Assignor"), with an address of c/o PaineWebber Properties, Inc., 265 Franklin Street, 16th Floor, Boston, Massachusetts 02110, in consideration of Ten Dollars ($10.00) and other good and valuable consideration in hand paid, receipt whereof is hereby acknowledged, by Security Capital Pacific Trust, a Maryland real estate investment trust ("Assignee"), with an address of 125 Lincoln Avenue, Santa Fe, New Mexico 87501, hereby assigns, sells, transfers and sets over unto Assignee:
All of Assignor's right, title and interest in and to all those certain agreements and service contracts and all renewals, modifications and amendments thereof, more particularly described as set forth in Exhibit B hereto annexed (collectively, the "Service Contracts"), which Service Contracts concern the maintenance and/or operation of the parcel of land, together with the buildings and improvements erected thereon, situate, lying and being in the City of Walnut Creek, Contra Costa County, California, commonly known as Treat Commons Apartments (Phase II), and bounded and described as more particularly set forth in Exhibit A annexed hereto and made a part hereof (collectively, the "Premises").
TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns from and after the date of delivery hereof (the "Delivery Date"), subject to the covenants, conditions and provisions also mentioned in each of the said Service Contracts.
Assignee accepts the foregoing assignment and hereby assumes, from and after the Delivery Date, the performance of all of the terms, covenants and conditions of the Service Contracts herein assigned by Assignor and will well and truly perform all the terms, covenants and conditions of the Service Contracts herein assigned.
AND ASSIGNOR REPRESENTS AND WARRANTS TO ASSIGNEE that, as of the Delivery Date, Assignor has not been given notice of the existence of any defaults of Assignor under any of the Service Contracts which remain uncured, and is not aware of the existence of any such default or of the occurrence of any act, omission or event which, with the lapse of time or giving of notice or both, would constitute such a default on the part of Assignor as vendee.
All of the representations and warranties of Assignor herein shall survive the execution and delivery of this Assignment subject to the limitations set forth in Section 15.1 of the Purchase and Sale Agreement dated as of October 26, 1995 between Assignor as Seller and Assignee as Buyer (the "Purchase and Sale Agreement").
Assignor covenants and agrees to indemnify, defend and hold Assignee and its shareholders, officers, directors, licensees, agents, contractors, employees and representatives (collectively, the "Assignee Indemnitees") harmless from and against all claims, demands, causes of action, judgments, damages, costs and expenses (including, without limitation, attorneys' fees and expenses and court costs), deficiencies, settlements and investigations (collectively, "Claims") which may after the Delivery Date be suffered by or asserted against any of Assignee Indemnitees by reason of Assignor's performance or failure to have performed, prior to the Delivery Date, any or all of Assignor's obligations under any of the Service Contracts or by reason of any other Claims accruing prior to the Delivery Date which may be asserted with respect to, arising out of or connected with any of the Service Contracts. In case any action, suit or proceeding is brought against any of the Assignee Indemnitees by reason of any occurrence herein described, Assignor shall, at its sole cost and expense, defend such action, suit or proceeding with counsel reasonably satisfactory to Assignee. The provisions of this paragraph, which expressly provide the nature and scope of Assignor's indemnification of Assignee Indemnitees, shall survive the expiration or early termination of the applicable Service Contract, and any conveyance, assignment or other transfer of Assignor's rights thereunder.
Assignee covenants and agrees with Assignor that Assignee shall provide Assignor with written notice of any legal action against any Assignee Indemnitee that may, under this Assignment, give rise to liability on the part of Assignor within ten (10) business days of Assignee's actual knowledge of the commencement of such a legal action.
Assignee covenants and agrees to indemnify, defend and hold Assignor, its partners and the partners of such partners, and their respective shareholders, officers, directors, licensees, agents, contractors, employees and representatives and any partner of the foregoing (collectively, the "Assignor Indemnitees") harmless from and against all claims, demands, causes of action, judgments, damages, costs and expenses (including, without limitation, attorneys' fees and expenses and court costs), deficiencies, settlements and investigations (collectively "Claims") which may after the Delivery Date be suffered by or asserted against any of Assignor Indemnitees by reason of Assignee's performance or failure to have performed after the Delivery Date, any or all of the obligations under any of the Service Contracts or by reason of any other Claims accruing after the Delivery Date which may be asserted with respect to, arising out of or connected with any of the Service Contracts. In case any action, suit or proceeding is brought against any of the Assignor Indemnitees by reason of any occurrence herein described, Assignee shall, at its sole cost and expense, defend such action, suit or proceeding with counsel reasonably satisfactory to Assignor. The provisions of this paragraph, which expressly provide the nature and scope of Assignee's indemnification of Assignor Indemnitees, shall survive the expiration or early termination of the applicable Service Contract, and any conveyance, assignment or other transfer of Assignee's rights thereunder.
Assignor covenants and agrees with Assignee that Assignor shall provide Assignee with written notice of any legal action against any Assignor Indemnitee that may, under this Assignment, give rise to liability on the part of Assignee within ten (10) business days of Assignor's actual knowledge of the commencement of such a legal action.
Assignor's liability, and that of its partners, hereunder are subject to the limitation on liability provisions set forth in Section 17.2 of the Purchase and Sale Agreement; the benefit of such section is hereby extended to this Agreement as if this Agreement was specifically enumerated in such section as one of the documents with respect to which Assignee's recourse is limited.
This Agreement may be executed in duplicates or counterparts, or both, and such duplicates or counterparts together shall constitute but one original of the Agreement. Each duplicate and counterpart shall be equally admissible in evidence, and each original shall fully bind each party who has executed it.
IN WITNESS WHEREOF, this Assignment of Agreements and Service Contracts has been duly signed and sealed by the parties hereto as of the 22nd day of December, 1995.
[Signatures begin on following page.]
Signature Page of Assignor for Assignment of Agreements and Service Contracts between TCR Walnut Creek Limited Partnership and Security Capital Pacific Trust
Signed, sealed and delivered ASSIGNOR: in the presence of: TCR WALNUT CREEK LIMITED PARTNERSHIP Witness By: PaineWebber Equity Partners /s/ E. Peter Kane Partnership, its General
By: Second Equity Partners, Inc.,
[Signatures as to Assignor continue on following page.]
Signature Page as to Assignor for Assignment of Agreements and Service Contracts between TCR Walnut Creek Limited Partnership and Security Capital Pacific Trust
Signed, sealed and delivered By: TCR #405 Treat II Limited in the presence of: Partnership, its General
/s/ Colleen Dailey By: /s/ William W. Thompson
[Signature of Assignee contained on following page.]
Signature Page of Assignee for Assignment of Agreements and Service Contracts between TCR Walnut Creek Limited Partnership and Security Capital Pacific Trust
Signed, sealed and delivered ASSIGNEE: in the presence of: SECURITY CAPITAL PACIFIC TRUST, a /s/ Joanen Buckley investment trust
/s/ Theresa Mattinez By: /s/ Anthony R. Arnest Witness Name: Anthony R. Arnest
The land referred to in this document is described as follows:
REAL PROPERTY in an unincorporated area, County of Contra Costa, State of California, described as follows:
Lot 1, as shown on Map of Subdivision 6955, filed June 13, 1988, Map Book 322, Page 47, Contra Costa County Records
A non-exclusive easement and right of way as an appurtenance to Parcel One above, as created by the "Mutual Access Easement" dated March 23, 1989 and recorded April 4, 1989 in Book 14979, Page 84, Official Records, by and between TCR Walnut Creek Limited Partnership and Liberty Walnut Creek
(SEE ATTACHED LIST OF SERVICE CONTRACTS)
ASSIGNMENT OF SPACE LEASE DEPOSITS
KNOW ALL MEN BY THESE PRESENTS, THAT TCR Walnut Creek Limited Partnership, a Texas limited partnership ("Assignor"), with an address of c/o PaineWebber Properties, Inc., 265 Franklin Street, 16th Floor, Boston, Massachusetts 02110, in consideration of Ten Dollars ($10.00) and other good and valuable consideration in hand paid, receipt whereof are hereby acknowledged, by Security Capital Pacific Trust, a Maryland real estate investment trust ("Assignee"), with an address of 125 Lincoln Avenue, Santa Fe, New Mexico 87501, hereby assigns unto Assignee:
ALL of Assignor's right, title and interest in and to all those certain Space Lease Deposits, as hereinafter defined, including but not limited to those set forth in Exhibit B hereto annexed, together with accrued interest thereon, if any, paid to and/or held by Assignor under or pursuant to the terms of the "Space Leases", as hereinafter defined, made by Assignor as owner and lessor of the parcel of land, together with the buildings and improvements erected thereon, situate, lying and being in the City of Walnut Creek, Contra Costa County, California, commonly known as Treat Commons Apartments (Phase II), and bounded and described as more particularly set forth in Exhibit A annexed hereto and made a Part hereof (collectively, the "Premises").
TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns from and after the date of delivery hereof (the "Delivery Date").
The term "Space Leases" as used herein shall mean and include all those leases, subleases, agreements to lease or sublease, "binders", licenses, concession agreements or any other form of agreement, howsoever denominated, affecting the use and occupancy of the Premises, or any portion thereof, and all renewals, modifications, amendments and other agreements, if any, affecting such agreements, entered into by Assignor or on behalf of Assignor or by any Persons, corporations or partnerships related to or affiliated with or acting as agent or nominee of Assignor.
The term "Space Lease Deposits" as used herein shall mean and include all sums of money, howsoever denominated, received or due to be received by Assignor from tenants under the Space Leases as security for the faithful performance and observance of the terms, conditions and provisions of the Space Leases and not applied on account of defaults thereunder, including all interest accrued thereon (if any), and any interest which may be required to accrue thereon by law.
AND ASSIGNOR REPRESENTS AND WARRANTS TO ASSIGNEE that, as of the Delivery Date, the schedule of Space Lease Deposits set forth in Exhibit B hereto annexed is a true, accurate and complete schedule of all such Space Lease Deposits. The representations and warranties of Assignor shall survive the execution and delivery of this Assignment subject to the limitations set forth in Section 15.1 of the Purchase and Sale Agreement dated as of October 26, 1995 between Assignor as Seller and Assignee as Buyer (the "Purchase and Sale Agreement").
AND ASSIGNOR COVENANTS AND AGREES TO INDEMNIFY, DEFEND AND HOLD ASSIGNEE and its shareholders, officers, directors, licensees, agents, contractors, employees and representatives (collectively, the "Assignee Indemnitees") harmless from and against all claims, demands, causes of action, judgments, damages, costs and expenses (including, without limitation, attorneys' fees and expenses and court costs), deficiencies, settlements and investigations (collectively, "Claims") which may after the Delivery Date be suffered by or asserted against any of Assignee Indemnitees by reason of Assignor's failure to have properly and diligently administered, prior to the Delivery Date, all or any of the Space Lease Deposits held by Assignor in compliance with applicable California law or by reason of any other Claims accruing prior to the Delivery Date which may be asserted with respect to, arising out of or connected with the Space Lease Deposits. In case any action, suit or proceeding is brought against any of the Assignee Indemnitees by reason of any occurrence herein described, Assignor shall, at its sole cost and expense, defend such action, suit or proceeding with counsel reasonably satisfactory to Assignee. The provisions of this paragraph, which expressly provide the nature and scope of Assignor's indemnification of Assignee Indemnitees, shall survive the expiration or early termination of the applicable Space Lease, and any conveyance, assignment or other transfer of Assignor's rights thereunder.
AND ASSIGNEE COVENANTS AND AGREES WITH ASSIGNOR that Assignee shall provide Assignor with written notice of any legal action against any Assignee Indemnitee that may, under this Assignment, give rise to liability on the part of Assignor within ten (10) business days of Assignee's actual knowledge of the commencement of such a legal action.
AND ASSIGNEE ACCEPTS THE FOREGOING ASSIGNMENT AND COVENANTS AND AGREES WITH ASSIGNOR that, from and after the Delivery Date, Assignee shall hold and apply such Space Lease Deposits listed on Exhibit B in accordance with the terms of the Space Leases in respect of which the same are held and in accordance with the provisions of applicable California law relating to such Space Lease Deposits.
AND ASSIGNEE COVENANTS AND AGREES TO INDEMNIFY, DEFEND AND HOLD ASSIGNOR, its partners and the partners of such partners, and their respective shareholders, officers, directors, licensees, agents, contractors, employees and representatives and any partner of the foregoing (collectively, "Assignor Indemnitees") harmless from and against all claims, demands, causes of action, judgments, damages, costs and expenses (including, without limitation, attorneys' fees and expenses and court costs), deficiencies, settlements and investigations (collectively, "Claims") which may after the Delivery Date be suffered or asserted against any of Assignor Indemnitees by reason of Assignee's failure to properly and diligently administer, subsequent to the Delivery Date, all or any of the Space Lease Deposits in compliance with applicable California law and the applicable Space Lease or by reason of any other claims accruing subsequent to the Delivery Date which may be asserted with respect to, arising out of or connected with the Space Lease Deposits. In case any action, suit or proceeding is brought against any of the Assignor Indemnitees by reason of any occurrence herein described, Assignee shall, at its sole cost and expense, defend such action, suit or Proceeding with counsel reasonably satisfactory to Assignor. The provisions of this paragraph, which expressly provide the nature and scope of Assignee's indemnification of Assignor Indemnitees, shall survive the expiration or early termination of the applicable Space Lease, and any conveyance, assignment or other transfer of Assignee's rights thereunder.
AND ASSIGNOR COVENANTS AND AGREES WITH ASSIGNEE that Assignor shall provide Assignee with written notice of any legal action against any Assignor Indemnitee that may, under this Assignment, give rise to liability on the part of Assignee within ten (10) business days of Assignor's actual knowledge of the commencement of such a legal action.
Assignor's liability, and that of its partners, hereunder are subject to the limitation on liability provisions set forth in Section 17.2 of the Purchase and Sale Agreement; the benefit of such section is hereby extended to this Agreement as if this Agreement was specifically enumerated in such section as one of the documents with respect to which Assignee's recourse is limited.
This Agreement may be executed in duplicates or counterparts, or both, and such duplicates or counterparts together shall constitute but one original of the Agreement. Each duplicate and counterpart shall be equally admissible in evidence, and each original shall fully bind each party who has executed it.
IN WITNESS WHEREOF, this Assignment of Space Lease Deposits has been duly signed and sealed by the parties hereto as of the 22nd day of December, 1995.
[Signatures contained on following page.]
Signature Page of Assignor for Assignment of Space Lease Deposits between TCR Walnut Creek Limited Partnership and Security Capital Pacific Trust
Signed, sealed and delivered TCR WALNUT CREEK LIMITED in the presence of: PARTNERSHIP, a Texas limited Witness By: PaineWebber Equity Partners /s/ E. Peter Kane Partnership, its General
By: Second Equity Partners, Inc.,
[Signatures as to Assignor continue on following page.]
Signed, sealed and delivered By: TCR #405 Treat II Limited in the presence of: Partnership, its General Witness By: /s/ William W. Thompson /s/ Bruce Davidson General Partner
[Signature of Assignee begins on following page.]
Signature Page of Assignee for Assignment of Space Lease Deposits between TCR Walnut Creek Limited Partnership and Security Capital Pacific Trust
Signed, sealed and delivered SECURITY CAPITAL PACIFIC TRUST, in the presence of: a Maryland real estate investment
By: /s/ Anthony R. Arnest /s/ Theresa Mattinez Name: Anthony R. Arnest
The land referred to in this document is described as follows:
REAL PROPERTY in an unincorporated area, County of Contra Costa, State of California, described as follows:
Lot 1, as shown on Map of Subdivision 6955, filed June 13, 1988, Map Book 322, Page 47, Contra Costa County Records
A non-exclusive easement and right of way as an appurtenance to Parcel One above, as created by the "Mutual Access Easement" dated March 23, 1989 and recorded April 4, 1989 in Book 14979, Page 84, Official Records, by and between TCR Walnut Creek Limited Partnership and Liberty Walnut Creek
KNOW ALL MEN BY THESE PRESENTS, THAT TCR Walnut Creek Limited Partnership, a Texas limited partnership ("Assignor"), with an address of c/o PaineWebber Properties, Inc., 265 Franklin Street, 16th Floor, Boston, Massachusetts 02110, in consideration of Ten Dollars ($10.00) and other good and valuable consideration in hand paid, receipt whereof are hereby acknowledged, by Security Capital Pacific Trust, a Maryland real estate investment trust ("Assignee"), with an address of 125 Lincoln Avenue, Santa Fe, New Mexico 87501, hereby assigns, sells, transfers and sets over unto Assignee:
All of Assignor's right, title and interest in and to all those certain "Space Leases", as hereinafter defined, including but not limited to those set forth in Exhibit B hereto annexed, which Space Leases affect the parcel of land, together with the buildings and improvements erected thereon, situate, lying and being in the City of Walnut Creek, Contra Costa County, California, commonly known as Treat Commons Apartments (Phase II), and bounded and described as more particularly set forth in Exhibit A annexed hereto and made a part hereof (collectively, the "Premises").
TO HAVE AND TO HOLD the same unto Assignee, its successors and assigns from and after the date of delivery hereof (the "Delivery Date") subject to the rents, covenants, conditions and provisions also mentioned in each of the said Space Leases.
The term "Space Leases" as used herein shall mean and include all those leases, subleases, agreements to lease or sublease, "binders", licenses, concession agreements or any other form of agreement, howsoever denominated, affecting the use and occupancy of the Premises, or any portion thereof, and all renewals, modifications, amendments and other agreements, if any, affecting such agreements, entered into by Assignor or on behalf of Assignor or by any persons, corporations or partnerships related to or affiliated with or acting as agent or nominee of Assignor.
Assignor represents and warrants to Assignee that, as of the Delivery Date, the schedule of Space Leases set forth in Exhibit B hereto annexed is a true, accurate and complete schedule of all such Space Leases (including without limitation the tenants, the space or unit leased, the commencement and expiration dates, the rents and the security deposits).
The representations and warranties of Assignor herein shall survive the execution and delivery of this Assignment subject to the limitations set forth in Section 15.1 of the Purchase and Sale Agreement dated as of October 26, 1995 between Assignor as Seller and Assignee as Buyer (the "Purchase and Sale Agreement").
Assignor covenants and agrees to indemnify, defend and hold Assignee and its shareholders, officers, directors, agents, licensees, contractors, employees and representatives and any successors and assigns of the foregoing (collectively, the "Assignee Indemnities"), harmless from and against all claims, demands, causes of action, losses, liabilities, judgments, damages, costs and expenses (including, without limitation, attorneys' fees and expenses and court costs), deficiencies, settlements and investigations (collectively, "Claims") which may after the Delivery Date be suffered by or asserted against any of the Assignee Indemnitees by reason of Assignor's performance or failure to have performed, prior to the Delivery Date, any or all of Assignor's obligations as landlord under any of the Space Leases or by reason of any other Claims accruing prior to the Delivery Date which may be asserted with respect to, arising out of or connected with any of the Space Leases. In case any action, suit or proceeding is brought against any of the Assignee Indemnitees by reason of any occurrence herein described, Assignor shall, at its sole cost and expense, defend such action, suit or proceeding with counsel reasonably satisfactory to Assignee. The provisions of this paragraph, which expressly provide the nature and scope of Assignor's indemnification of Assignee Indemnitees, shall survive the expiration or early termination of the applicable Space Lease, and any conveyance, assignment or other transfer of Assignor's rights thereunder.
Assignee covenants and agrees with Assignor that Assignee shall provide Assignor with written notice of any legal action against any Assignee Indemnitee that may, under this Assignment, give rise to liability on the part of Assignor within ten (10) business days of Assignee's actual knowledge of the commencement of such a legal action.
Assignor designates Assignee to receive all notices, certificates, documents and other instruments or communications and to receive all rents and other payments (excluding only the payment of any rents payable from tenants (and only to the extent such rents have been earned) prior to the Delivery Date) which tenants are required or permitted to give, make, pay or deliver to or serve upon the landlord under the Space Leases, and agrees to direct all or any tenants to remit or deliver to Assignee, at its address above, or at such other address as Assignee shall designate, all such notices, certificates, documents and other instruments and all rents and other payments (excluding only the payment of any rents payable from tenants (and only to the extent such rents have been earned) prior to the Delivery Date) now or hereafter due or receivable by the landlord under the Space Leases.
Assignee accepts the foregoing assignment and hereby assumes, from and after the Delivery Date, the performance of all of the terms, covenants and conditions of the Space Leases herein assigned by Assignor and will well and truly perform all the terms, covenants and conditions of the said Space Leases herein assigned.
Assignee covenants and agrees to indemnify, defend and hold Assignor, its partners and the partners of such partners, and their respective shareholders, officers, directors, agents, licensees, contractors, employees and representatives and any partners, successors and assigns of the foregoing (collectively, the "Assignor Indemnitees") harmless from and against all claims, demands, causes of action, losses, liabilities, judgments, damages, costs and expenses (including, without limitation, attorneys' fees and expenses and court costs), deficiencies, settlements and investigations (collectively, "Claims") which may after the Delivery Date be suffered by or asserted against any of the Assignor Indemnitees by reason of Assignee's performance or failure to have performed, subsequent to the Delivery Date, any and all of the obligations as landlord under any of the Space Leases or by reason of any other Claims accruing subsequent to the Delivery Date which may be asserted with respect to, arising out of or connected with any of the Space Leases. In case any action, suit or proceeding is brought against any of the Assignor Indemnitees by reason of any occurrence herein described, Assignee shall, at its sole cost and expense, defend such action, suit or proceeding with counsel reasonably satisfactory to Assignor. The provisions of this paragraph, which expressly provide the nature and scope of Assignee's indemnification of Assignor Indemnitees, shall survive the expiration or early termination of the applicable Space Lease, and any conveyance, assignment or other transfer of Assignee's rights thereunder.
Assignor covenants and agrees with Assignee that Assignor shall provide Assignee with written notice of any legal action against any Assignor Indemnitee that may, under this Assignment, give rise to liability on the part of Assignee within ten (10) business days of Assignor's actual knowledge of the commencement of such a legal action.
Assignor's liability, and that of its partners, hereunder are subject to the limitation on liability provisions set forth in Section 17.2 of the Purchase and Sale Agreement; the benefit of such section is hereby extended to this Agreement as if this Agreement was specifically enumerated in such section as one of the documents with respect to which Assignee's recourse is limited.
This Agreement may be executed in duplicates or counterparts, or both, and such duplicates or counterparts together shall constitute but one original of the Agreement. Each duplicate and counterpart shall be equally admissible in evidence, and each original shall fully bind each party who has executed it.
IN WITNESS WHEREOF, this Assignment of Space Leases has been duly signed and sealed by the parties hereto as of the 22 day of December, 1995. [Signatures contained on following page.]
Signature Page of Assignor for Assignment of Space Leases between TCR Walnut Creek Limited Partnership and Security Capital Pacific Trust
Signed, sealed and delivered TCR WALNUT CREEK LIMITED in the presence of: PARTNERSHIP, a Texas limited Witness By: PaineWebber Equity Partners /s/ E. Peter Kane Partnership, its General
By: Second Equity Partners, Inc.,
[Signatures as to Assignor continue on following page.]
Signed, sealed and delivered By: TCR #405 Treat II Limited in the presence of: Partnership, its General Witness By: /s/ William W. Thompson /s/ Bruce Davidson General Partner
[Signature of Assignee begins on following page.]
Signature Page of Assignee for Assignment of Space Leases between TCR Walnut Creek Limited Partnership and Security Capital Pacific Trust
Signed, sealed and delivered SECURITY CAPITAL PACIFIC TRUST, in the presence of: a Maryland real estate
Witness By: /s/ Anthony R. Arnest /s/ Theresa Mattinez Title: Vice President
The land referred to in this document is described as follows:
REAL PROPERTY in an unincorporated area, County of Contra Costa, State of California, described as follows:
Lot 1, as shown on Map of Subdivision 6955, filed June 13, 1988, Map Book 322, Page 47, Contra Costa County Records
A non-exclusive easement and right of way as an appurtenance to Parcel One above, as created by the "Mutual Access Easement" dated March 23, 1989 and recorded April 4, 1989 in Book 14979, Page 84, Official Records, by and between TCR Walnut Creek Limited Partnership and Liberty Walnut Creek
BILL OF SALE AND GENERAL ASSIGNMENT
TCR Walnut Creek Limited Partnership, a Texas limited partnership ("Seller"), with an address of c/o PaineWebber Properties, Inc., 265 Franklin Street, 16th Floor, Boston, Massachusetts 02110, for and in consideration of Ten Dollars ($10.00) lawful money of the United States, to Seller in hand paid, at or before the delivery of these presents, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, has bargained and sold, and by these presents does grant, bargain, sell, convey, set over, transfer, assign and deliver unto Security Capital Pacific Trust, a Maryland real estate investment trust ("Buyer"), with an address of 125 Lincoln Avenue, Santa Fe, New Mexico 87501, all of Seller's right, title and interest in and to the following (collectively, the Property):
(a) All fixtures, equipment and articles of personal property owned by Seller (including, without limitation, all storm windows and doors, awnings, shutters, wall-to-wall carpeting, venetian blinds, window shades, furnaces, heaters, heating equipment, oil and gas burners and fixtures appurtenant thereto, hot water heaters, heat pumps, plumbing and bathroom fixtures, stoves, ovens, ranges, refrigerators, dishwashers, washing machines, dryers, disposals, trash compactors, electric and other lighting fixtures, outside television antennas, air conditioning equipment, ventilators, wiring, security, electrical and communication systems, fences, trees, shrubs and plants and all other items of tangible personal property, such as equipment, implements, tools and supplies on the premises used for maintenance, repair and/or cleaning) located on or in or used solely in connection with the parcel of land, together with the buildings and improvements erected thereon, commonly known as Treat Commons Apartments (Phase II) in the City of Walnut Creek, Contra Costa County, California, which parcel is more particularly set forth in Exhibit A annexed hereto and made a part hereof (collectively the "Premises"), including those items of personal property listed on Exhibit B annexed hereto and made a part hereof (such fixtures, equipment and articles, together with those items listed in Exhibit B, are hereinafter collectively referred to as the "Personalty").
(b) All those permits and licenses (including any and all presently pending applications therefor) affecting the Premises and/or the Personalty (to the extent assignable), issued to Seller or to its predecessors in interest as fee owner of the Premises and/or the Personalty, by any and all federal, state, county, municipal and local governments, and all departments, commissions, boards, bureaus and offices thereof, having or claiming jurisdiction over the Premises and/or the Personalty, whether or not the same may presently be in full
(c) To the extent owned by Seller and used solely in connection with the Premises and/or the Personalty all of the following: (i) the project name of the Premises, (ii) the goodwill associated with such project name, (iii) the right to use any trade style or name now used in connection with the Premises [excluding, however, as to clauses (i), (ii) and (iii) the names "Crow", "Trammell Crow", "Trammell Crow Residential", "TCR", "PaineWebber" and "PaineWebber Properties" and any rights thereto and any variants thereof and the respective Trammell Crow Residential and PaineWebber logos], (iv) telephone exchange numbers (to the extent assignable), (v) utility agreements, if any, and (vi) all other rights related to the ownership or use and operation of the Premises and/or the Personalty not heretofore expressly set forth in clauses (a), (b) or (c) of this instrument that are to be sold by Seller to Buyer under the Purchase and Sale Agreement dated as of October 23, 1995 between Seller and Buyer (the "Sale Agreement").
TO HAVE AND TO HOLD the same unto Buyer, its successors and assigns forever. And Seller does, for itself, covenant and agree to and with the said Buyer, to warrant and defend the title of said Property hereby sold unto said Buyer, its successors and assigns, against all and every person and persons whatsoever claiming by, through or under Seller.
AND SELLER WARRANTS AND REPRESENTS TO BUYER that as of the date of delivery hereof, except as set forth on Exhibit C attached hereto and made a part hereof, all the Property conveyed hereby is free and clear of any and all liens and encumbrances of whatsoever kind or nature created by, through or under Seller. Said representation of Seller shall survive the execution and delivery of this Bill of Sale and General Assignment.
The survival of Seller's representations and warranties made herein are subject to the provisions set forth in Section 15 of the Sale Agreement. Seller's liability, and that of its partners, hereunder is subject to the provisions set forth in Section 17.2 of the Sale Agreement. The benefits of such sections are hereby extended to this Agreement as if this Agreement was specifically enumerated in such sections as one of the documents with respect to which survival of Seller's representations and warranties and Buyer's recourse are limited.
IN WITNESS WHEREOF, Seller has signed and sealed this Bill of Sale and General Assignment as of the 22nd day of December, 1995.
[Signatures contained on following page.] Signature Page of Seller for Bill of Sale and General Assignment between TCR Walnut Creek Limited Partnership and Security Capital Pacific Trust
Signed, sealed and delivered TCR WALNUT CREEK LIMITED in the presence of: PARTNERSHIP, a Texas limited
Witness By: PaineWebber Equity Partners /s/ E. Peter Kane Partnership, its General
By: Second Equity Partners, Inc.,
[Signatures as to Seller continue on following page.]
Signature Page as to Assignor for Assignment of Agreements and Service Contracts between TCR Walnut Creek Limited Partnership and Security Capital Pacific Trust
Signed, sealed and delivered By: TCR #405 Treat II Limited in the presence of: Partnership, its General
Witness By: /s/ William W. Thompson /s/ Bruce Davidson General Partner
The land referred to in this document is described as follows:
REAL PROPERTY in an unincorporated area, County of Contra Costa, State of California, described as follows:
Lot 1, as shown on Map of Subdivision 6955, filed June 13, 1988, Map Book 322, Page 47, Contra Costa County Records
A non-exclusive easement and right of way as an appurtenance to Parcel One above, as created by the "Mutual Access Easement" dated March 23, 1989 and recorded April 4, 1989 in Book 14979, Page 84, Official Records, by and between TCR Walnut Creek Limited Partnership and Liberty Walnut Creek
(See Attached Schedule of Personal Property)
CERTIFICATE RE: REPRESENTATIONS AND WARRANTIES
Reference is hereby made to that certain Purchase and Sale Agreement ("Agreement") dated as of October 26, 1995 by and between TCR Walnut Creek Limited Partnership, a Texas limited partnership, as Seller, and Security Capital Pacific Trust, as Buyer.
Seller hereby certifies that all representations and warranties made in the Agreement are true and correct as of the date hereof.
The survival of Seller's representations and warranties made herein are subject to the provisions set forth in Section 15.1 of the Agreement. Seller's liability, and that of its partners, hereunder are subject to the limitation as to liability provisions set forth in Section 17.2 of the Agreement. The benefits of such sections are hereby extended to this Certificate as if this Certificate was specifically enumerated in such sections as one of the documents with respect to which survival of Seller's representations and warranties and Buyer's recourse is limited.
TCR WALNUT CREEK LIMITED PARTNERSHIP
By: PaineWebber Equity Partners Two
By: Second Equity Partners, Inc.,
[Signatures as to Seller continue on following page.]
[Signature Page as to Seller Continues]
By: TCR #405 Treat II Limited
By: /s/ William W. Thompson
CERTIFICATE RE: REPRESENTATIONS AND WARRANTIES
Reference is hereby made to that certain Purchase and Sale Agreement ("Agreement") dated as of October 26, 1995 by and between TCR Walnut Creek Limited Partnership, a Texas limited partnership, as Seller, and Security Capital Pacific Trust, as Buyer.
Seller hereby certifies that all representations and warranties made in the Agreement are true and correct as of the date hereof.
This certificate is subject to the survival provisions of Section 15.1 and the limitation as to liability provisions of Section 17.2 of the Agreement.
TCR WALNUT CREEK LIMITED PARTNERSHIP
By: PaineWebber Equity Partners Two
By: Second Equity Partners, Inc.,
[Signatures as to Seller continue on following page.]
[Signature Page as to Seller Continues]
By: TCR #405 Treat II Limited
By: /s/ William W. Thompson
AND WHEN RECORDED MAIL TO:
350 South Grand Avenue - 25th Floor
Documentary transfer tax is (amount of tax due is shown in a separate writing and is not for public record (R&T ss. 11932))
( X ) computed on full value of property conveyed, or
( ) computed on full value less value of liens and encumbrances remaining at time of sale.
( ) Unincorporated area ( x ) City of Walnut Creek
FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, TCR WALNUT CREEK LIMITED PARTNERSHIP, a Texas limited partnership ("Grantor"), hereby GRANTS to SECURITY CAPITAL PACIFIC TRUST, a Maryland real estate investment trust ("Grantee"), whose address is 125 Lincoln Avenue, Santa Fe, New Mexico 87501, the following described real property in the County of Contra Coasta, State of California:
That property specifically described in Exhibit A attached hereto and hereby incorporated, TOGETHER WITH all buildings, structures and other improvements located thereon and all accessions, benefits, tenements, hereditaments, appurtenances, privileges and other estates, rights and interests benefitting or relating thereto (collectively, the "Property"), SUBJECT ONLY TO the matters described in said Exhibit B attached hereto and hereby incorporated.
Grantor hereby represents, warrants and covenants that, except as set forth on Exhibit B, (a) Grantor has not conveyed the Property, or any right, title or interest therein, to any person other than Grantee, and (b) the Property is free and clear from encumbrances done or made by Grantor.
The Grantee herein covenants by and for itself, its heirs, executors, administrators and assigns, and all persons claiming under or through them, that there shall be no discrimination against, or segregation of, any persons or group of persons on account of race, color, creed, religion, sex, marital status, national origin, or ancestry, in the sale, lease, sublease, transfer, use occupancy, tenure or enjoyment of the premises herein conveyed, nor shall the Grantee itself or any person claiming under or through it, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, lessees, subtenants, sublessees, or vendees in the premises herein conveyed. The foregoing covenants shall run with the land.
The herein described land is both benefitted and burdened by that certain Mutual Access Easement recorded on April 4, 1989, as instrument no. 89-59469 which also benefits and burdens the contiguous land which is the subject of a Grant Deed in favor of the Grantee herein recorded concurrently herewith. There are existing interests and possible future interests, including but not limited to security interests, in the subject properties which may be in a position to claim either the benefits, the burdens or both of said Mutual Access Easement. Therefore, to serve the interests of equity and justice, it is the actual and express intent of the Grantee herein, in accepting delivery of this deed, that its interest in the herein described land obtained by this deed shall not be and is not merged with its interest therein under and pursuant to said Mutual Access Easement, the two to remain separate and distinct estates.
[Signatures contained on following page.]
Signature Page to Partnership Grant Deed from TCR Walnut Creek Limited Partnership to
TCR WALNUT CREEK LIMITED PARTNERSHIP
By: PaineWebber Equity Partners Two Limited Partnership of TCR Walnut
By: Second Equity Partners, Inc.,
On December 22, 1995, before me, the undersigned, a Notary Public, personally appeared Peter Sullivan, as Vice President of Second Equity Partners, Inc., managing general partner of PaineWebber Equity Partners Two Limited Partnership, a general partner of TCR Walnut Creek Limited Partnership, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
[Signatures as to Grantor continue on next page.]
By: TCR #405 Treat II Limited Partnership, General Partner of TCR
By: /s/ William W. Thompson
On December 22, 1995, before me, the undersigned, a Notary Public, personally appeared William W. Thompson, as general partner of TCR #405 Treat II Limited Partnership, general partner of TCR Walnut Creek Limited Partnership, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
The land referred to in this document is described as follows:
REAL PROPERTY in an unincorporated area, County of Contra Costa, State of California, described as follows:
Lot 1, as shown on Map of Subdivision 6955, filed June 13, 1988, Map Book 322, Page 47, Contra Costa County Records
A non-exclusive easement and right of way as an appurtenance to Parcel One above, as created by the "Mutual Access Easement" dated March 23, 1989 and recorded April 4, 1989 in Book 14979, Page 84, Official Records, by and between TCR Walnut Creek Limited Partnership and Liberty Walnut Creek
STATEMENT OF DOCUMENTARY TRANSFER TAX DUE AND REQUEST THAT THE AMOUNT PAID NOT BE MADE A PART OF THE PERMANENT RECORD IN THE OFFICE OF THE COUNTY RECORDER
[Pursuant to Section 11932 R&T Code]
To: Contra Costa County Registrar-Recorder
Request is hereby made in accordance with the provisions of the Documentary Transfer Tax Act that this statement showing the amount of tax due not be recorded with the attached deed but be affixed to the deed after the recordation and before return as directed on the deed.
TCR Walnut Creek Limited Partnership, a Texas limited
Security Capital Pacific Trust, a Maryland real estate investment
The property described in the accompanying deed is located in the:
The amount of documentary transfer tax due on the attached deed is $2,655.95.
X Computed on Full Value of Property described, or
Computed on Full Value Less Liens and Encumbrances remaining at time of transfer.
Dated: December 22, 1995 ____________________________ Signature of Party or Agent
NOTE: After the permanent record is made, this form will be affixed to the conveying document and returned with it.
AND WHEN RECORDED MAIL TO:
350 South Grand Avenue - 25th Floor
Documentary transfer tax is (amount of tax due is shown in a separate writing and is not for public record (R&T ss. 11932))
( X ) computed on full value of property conveyed, or
( ) computed on full value less value of liens and encumbrances remaining at time of sale.
( ) Unincorporated area ( x ) City of Walnut Creek
FOR GOOD AND VALUABLE CONSIDERATION, receipt and adequacy of which is hereby acknowledged, TCR WALNUT CREEK LIMITED PARTNERSHIP, a Texas limited partnership ("Grantor"), hereby REMISES, RELEASES AND FOREVER QUITCLAIMS to SECURITY CAPITAL PACIFIC TRUST, a Maryland real estate investment trust ("Grantee"), whose address is 125 Lincoln Avenue, Santa Fe, New Mexico 87501, any and all of the Grantor's right, title and interest in and to the following described real property in the County of Contra Costa, State of California:
That property specifically described in Exhibit A attached hereto and hereby incorporated, TOGETHER WITH all buildings, structures and other improvements located thereon and all accessions, benefits, tenements, hereditaments, appurtenances, privileges and other estates, rights and interests benefitting or relating thereto (collectively, the "Property").
The foregoing conveyance is made without representation, warranty or covenant of any kind.
The Grantee herein convenants by and for itself, its heirs, executors, administrators and assigns, and all persons claiming under or through them, that there shall be no discrimination against, or segregation of, any persons or group of persons on account of race, color, creed, religion, sex, marital status, national origin, or ancestry, in the sale, lease, sublease, transfer, use occupancy, tenure or enjoyment of the premises herein conveyed, nor shall the Grantee itself or any person claiming under or through it, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, lessees, subtenants, sublessees, or vendees in the premises herein conveyed. The foregoing covenants shall run with the land.
The herein described land may be both benefitted and burdened by that certain Mutual Access Easement recorded on April 4, 1989, as instrument no. 89-59469 which also benefits and burdens the contiguous land which is the subject of a Grant Deed in favor of the Grantee herein recorded concurrently herewith. There are existing interests and possible future interests, including but not limited to security interests, in the subject properties which may be in a position to claim either the benefits, the burdens or both of said Mutual Access Easement. Therefore, to serve the interests of equity and justice, it is the actual and express intent of the Grantee herein, in accepting delivery of this deed, that its interest in the herein described land obtained by this deed shall not be and is not merged with its interest therein under and pursuant to said Mutual Access Easement, the two to remain separate and distinct estates.
[Signatures contained on following page.]
Signature Page to Partnership Grant Deed from TCR Walnut Creek Limited Partnership to
TCR WALNUT CREEK LIMITED PARTNERSHIP
By: PaineWebber Equity Partners Two Limited Partnership of TCR Walnut
By: Second Equity Partners, Inc.,
On December 22, 1995, before me, the undersigned, a Notary Public, personally appeared Peter Sullivan, as Vice President of Second Equity Partners, Inc., managing general partner of PaineWebber Equity Partners Two Limited Partnership, a general partner of TCR Walnut Creek Limited Partnership, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
[Signatures as to Grantor continue on next page.]
By: TCR #405 Treat II Limited Partnership, General Partner of TCR
By: /s/ William W. Thompson
On December 22, 1995, before me, the undersigned, a Notary Public, personally appeared William W. Thompson, as general partner of TCR #405 Treat II Limited Partnership, general partner of TCR Walnut Creek Limited Partnership, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
(Phase II of Treat Commons)
LOT 1, AS SHOWN ON THE MAP OF SUBDIVISION 6955 (TREAT COMMONS II), FILED JUNE 13, 1988, MAP BOOK 322, PAGE 47, CONTRA COSTA COUNTY RECORDS.
RIGHT OF WAY GRANTED IN THE DEED FROM PLEASANT HILL PARTNERS, A CALIFORNIA GENERAL PARTNERSHIP, TO TCR WALNUT CREEK LIMITED PARTNERSHIP, A TEXAS LIMITED PARTNERSHIP, DATED DECEMBER 28, 1987 AND RECORDED JANUARY 28, 1988, BOOK 14142, PAGE 227, OFFICIAL RECORDS, AS FOLLOWS:
"AN EASEMENT FOR INGRESS, EGRESS, UTILITY, SEWER AND STORM DRAINAGE PURPOSES OVER, UNDER AND ACROSS" THAT CERTAIN PARCEL OF LAND DESCRIBED AS FOLLOWS:
PORTION OF RANCHO LAS JUNTAS, DESCRIBED AS FOLLOWS:
BEGINNING AT A POINT MARKING THE SOUTHWEST CORNER OF THAT CERTAIN 8.39 ACRE TRACT OF LAND CONVEYED TO J.E. AKIN BY DEED RECORDED IN VOLUME 261 OF DEEDS, AT PAGE 28, IN THE OFFICE OF THE COUNTY RECORDER OF CONTRA COSTA COUNTY; THENCE, FROM SAID POINT OF BEGINNING ALONG THE NORTHERN LINE OF THAT CERTAIN PARCEL OF LAND CONVEYED TO C.O. BISSELL AND NELLIE A. BISSELL BY DEED RECORDED OCTOBER 17, 1916 IN BOOK 279 OF DEEDS, AT PAGE 101, NORTH 89(Degree) 34' 14" WEST (THE BEARINGS OF THIS DESCRIPTION BEING REFERENCED TO THE CALIFORNIA COORDINATE SYSTEM ZONE III) 46.29 FEET; THENCE, LEAVING SAID NORTHERN LINE, NORTH 32(Degree) 10' 18" WEST 395.01 FEET; THENCE, ALONG THE ARC OF A 400.00 FOOT RADIUS CURVE TO THE RIGHT THROUGH A CENTRAL ANGLE OF 12(Degree) 39' 11", AN ARC DISTANCE OF 88.34 FEET TO A POINT OF REVERSE CURVATURE; THENCE, ALONG THE ARC OF A 300.00 FOOT RADIUS CURVE TO THE LEFT THROUGH A CENTRAL ANGLE OF 12(Degree) 39' 11", AN ARC DISTANCE OF 66.25 FEET; THENCE, NORTH 32(Degree) 10' 18" WEST 269.52 FEET; THENCE ALONG THE ARC OF A 30.00 FOOT RADIUS CURVE TO THE LEFT THROUGH A CENTRAL ANGLE OF 41(Degree) 46' 08", AN ARC DISTANCE OF 21.87 FEET TO THE SOUTHEASTERN LINE OF THE "LAS JUNTAS ROAD WIDENING" AS SHOWN ON THE MAP OF SUBDIVISION 6982, CONTRA COSTA COUNTY; THENCE, ALONG SAID LINE, NORTH 57(Degree) 52' 11" EAST 29.62 FEET TO THE SOUTHWESTERN LINE OF SAID AKIN PARCEL (261 D 28); THENCE, ALONG SAID SOUTHWESTERN LINE, SOUTH 32(Degree) 10' 18" EAST 862.78 FEET TO THE POINT OF BEGINNING.
RIGHTS CONVEYED IN THAT CERTAIN MUTUAL ACCESS EASEMENT AGREEMENT, EXECUTED BY AND BETWEEN TCR WALNUT CREEK LIMITED PARTNERSHIP, A TEXAS LIMITED PARTNERSHIP, AND LIBERTY WALNUT CREEK PARTNERS, A MASSACHUSETTS GENERAL PARTNERSHIP, DATED MARCH 23, 1989 AND RECORDED APRIL 4, 1989, BOOK 14979, PAGE 84, OFFICIAL RECORDS, AS FOLLOWS:
"A PRIVATE EASEMENT AND RIGHT-OF-WAY FOR THE PERPETUAL NON-EXCLUSIVE RIGHT OF INGRESS AND EGRESS FOR PEDESTRIAN AND VEHICULAR TRAFFIC OVER, ALONG AND ACROSS SUCH PORTION OF THE SECOND TRACT AS IS PAVED FROM TIME TO TIME FOR VEHICULAR TRAFFIC AND, TO THE EXTENT OF PEDESTRIAN TRAFFIC, WALKWAYS (THE 'SECOND TRACT EASEMENT AREA'), TO HAVE AND TO HOLD SAME FOR THE NON-EXCLUSIVE USES, BENEFITS AND PURPOSES HEREIN SET FORTH."
STATEMENT OF DOCUMENTARY TRANSFER TAX DUE AND REQUEST THAT THE AMOUNT PAID NOT BE MADE A PART OF THE PERMANENT RECORD IN THE OFFICE OF THE COUNTY RECORDER
[Pursuant to Section 11932 R&T Code]
To: Contra Costa county Registrar-Recorder
Request is hereby made in accordance with the provisions of the Documentary Transfer Tax Act that this statement showing the amount of tax due not be recorded with the attached deed but be affixed to the deed after the recordation and before return as directed on the deed.
TCR Walnut Creek Limited Partnership, a Texas limited
Security Capital Pacific Trust, a Maryland real estate investment
The property described in the accompanying deed is located in the:
The amount of documentary transfer tax due on the attached deed is $----------------------.
X Computed on Full Value of Property described, or
Computed on Full Value Less Liens and Encumbrances remaining at time of transfer.
Dated: December 22, 1995 ____________________________ Signature of Party or Agent
NOTE: After the permanent record is made, this form will be affixed to the conveying document and returned with it. | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-16T16:50:18 |
0000354884-96-000001 | 0000354884-96-000001_0000.txt | UNITED STATES SECURITIES AND EXCHANGE COMMISSION
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: SEPTEMBER 30, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter)
(State of organization) (I.R.S. Employer
265 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (617) 439-8118
Securities registered pursuant to Section 12(b) of the Act: Title of each class on which registered
Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTEREST
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 Form 10-K. X
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 ____.
State the aggregate market value of the voting stock held by non-affiliates of the registrant. Not applicable.
Prospectus of registrant dated Part IV December 22, 1981, as supplemented
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
Item 3 Legal Proceedings I-3
Item 4 Submission of Matters to a Vote of Security Holders I-4
Item 5 Market for the Partnership's Limited Partnership Interests and Related Security Holder Matters II-1
Item 6 Selected Financial Data II-1
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations II-2
Item 8 Financial Statements and Supplementary Data II-5
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure II-5
Item 10 Directors and Executive Officers of the Partnership III-1
Item 11 Executive Compensation III-3
Item 12 Security Ownership of Certain Beneficial Owners
Item 13 Certain Relationships and Related Transactions III-3
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K IV-1
Financial Statements and Supplementary Data F-1 to F-27
Paine Webber Income Properties Four Limited Partnership (the "Partnership") is a limited partnership formed in July 1981 under the Uniform Limited Partnership Act of the State of Delaware for the purpose of investing in a diversified portfolio of existing income-producing real properties including shopping centers, office buildings and apartment complexes. The Partnership sold $25,698,000 in Limited Partnership Units (the "Units"), representing 25,698 Units at $1,000 per Unit, during the offering period pursuant to a Registration Statement on Form S-11 filed under the Securities Act of 1933 (Registration No. 2-73602). Limited Partners will not be required to make any additional capital contributions.
As of September 30, 1995, the Partnership had three operating property investments, which were owned through joint venture partnerships, as set forth below:
Name of Joint Venture Date of Name and Type of Property Acquisition Location Size of Interest Type of Ownership (1)
Charter Oak Associates 284 6/8/82 Fee ownership of land and Charter Oak Apartments units improvements (through Creve Coeur, Missouri joint venture)
Arlington Towne Oaks 320 8/23/82 Fee ownership of land and Arlington Towne Oaks joint venture)
Braesridge 305 545 9/30/82 Fee ownership of land and Associates (2) units improvements (through
(1) See Notes to the Financial Statements filed with this Annual Report for a description of the long-term mortgage indebtedness secured by the Partnership's operating property investments, and for a description of the agreements through which the Partnership has acquired these real estate investments.
(2) Subsequent to year-end, on December 29, 1995, the Partnership sold its interest in the Braesridge 305 Associates joint venture to an affiliate of its co-venture partners for net cash proceeds of $1,000,000, as further discussed in Item 7.
The Partnership originally owned interests in five operating investment properties. The Partnership agreed to transfer title to the Yorktown Office Center to the mortgage lender in March of 1991. The decision to forfeit the Partnership's interest in the Yorktown Office Center, a 99,000 square foot building located in a suburb of Chicago, Illinois, was based on the property's inability to generate sufficient income to cover its debt service obligations. The inability of the Yorktown joint venture to meet the debt service requirements of the mortgage loan resulted from the significant oversupply of competing office space in the local suburban real estate market and its negative impact on occupancy and rental rates. Management did not foresee any improvement in the local real estate market for the next several years and believed that the use of cash reserves to fund operating deficits would still not enable the Partnership to recover any meaningful portion of its remaining investment in Yorktown Office Court. As a result of the transfer of title, the Partnership no longer has any ownership interest in this property. In addition, the venture which owned the Glenwood Village Shopping Center, a 41,000 square foot strip center in Raleigh, North Carolina, sold the property to a third party on September 23, 1991. The property was sold for $4,300,000 and, after repaying the outstanding mortgage loan and paying transaction costs, the Partnership's share of the net proceeds was $1,650,000.
The Partnership's original investment objectives were to:
(i) provide the Limited Partners with cash distributions which, to some extent, will not constitute taxable income; (ii) preserve and protect the Limited Partners' capital; (iii) obtain long-term appreciation in the value of its properties; (iv) provide a build-up of equity through the reduction of mortgage loans on its properties.
Through September 30, 1995, the Limited Partners had received cumulative cash distributions totalling approximately $9,492,000, or approximately $387 per original $1,000 investment for the Partnership's earliest investors. Of this amount, approximately $4,497,000, or $175 per original $1,000 investment, represents proceeds distributed from the refinancing of the Charter Oak Apartments in fiscal 1986 and from the sale of the Glenwood Village Shopping Center in November 1991. The remaining distributions have been paid from operating cash flow. A substantial portion of these distributions paid to date has been sheltered from current taxable income. The Partnership suspended the payment of regular quarterly distributions of excess cash flow in fiscal 1987. As of September 30, 1995, the Partnership retained its ownership interest in three of its five original investment properties. Due to the fiscal 1996 sale of the interest in the Braesridge joint venture, which represented 31% of the Partnership's original investment portfolio, for an amount which is substantially lower than the Partnership's investment in Braesridge, combined with the fiscal 1991 foreclosure loss of the Yorktown investment, which represented 16% of the Partnership's original investment portfolio, in all likelihood the Partnership will be unable to return the full amount of the original capital contributed by the Limited Partners. The amount of capital which will be returned will depend upon the proceeds received from the final liquidation of the two remaining investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final disposition, which cannot presently be determined.
All of the properties securing the Partnership's remaining investments are located in real estate markets in which they face significant competition for the revenues they generate. The apartment complexes compete with numerous projects of similar type generally on the basis of price, location and amenities. As in all markets, the apartment project also competes with the local single family home market for prospective tenants. The continued availability of low interest rates on home mortgage loans has increased the level of this competition over the past few years. However, the impact of the competition from the single-family home market has been offset by the lack of significant new construction activity in the multi-family apartment market over this period.
The Partnership has no real estate investments located outside the United States. The Partnership is engaged solely in the business of real estate investment, therefore, presentation of information about industry segments is not applicable.
The Partnership has no employees; it has, however, entered into an Advisory Contract with PaineWebber Properties Incorporated (the "Adviser"), which is responsible for the day-to-day operations of the Partnership. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber").
The general partners of the Partnership (the "General Partners") are Fourth Income Properties Fund, Inc. and Properties Associates. Fourth Income Properties Fund, Inc., a wholly-owned subsidiary of PaineWebber, is the Managing General Partner of the Partnership. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are also officers of the Adviser and the Managing General Partner. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by the Adviser.
The terms of transactions between the Partnership and affiliates of the Managing General Partner of the Partnership are set forth in Items 11 and 13 below to which reference is hereby made for a description of such terms and transactions.
As of September 30, 1995, the Partnership had interests in three operating properties through joint venture partnerships. The joint venture partnerships and the related properties are referred to under Item 1 above to which reference is made for the name, location and description of each property.
Occupancy figures for each fiscal quarter during 1995, along with an average for the year, are presented below for each property:
12/31/94 3/31/95 6/30/95 9/30/95 Average
Charter Oak Apartments 92% 95% 95% 96% 95%
Apartments 87% 91% 94% 94% 92%
Braesridge Apartments 96% 96% 95% 96% 96%
In November 1994, a series of purported class actions (the "New York Limited Partnership Actions") were filed in the United States District Court for the Southern District of New York concerning PaineWebber Incorporated's sale and sponsorship of various limited partnership investments, including those offered by the Partnership. The lawsuits were brought against PaineWebber Incorporated and Paine Webber Group Inc. (together "PaineWebber"), among others, by allegedly dissatisfied partnership investors. In March 1995, after the actions were consolidated under the title In re PaineWebber Limited Partnership Litigation, the plaintiffs amended their complaint to assert claims against a variety of other defendants, including Fourth Income Properties Fund, Inc. and Properties Associates ("PA"), which are the General Partners of the Partnership and affiliates of PaineWebber. On May 30, 1995, the court certified class action treatment of the claims asserted in the litigation.
The amended complaint in the New York Limited Partnership Actions alleges that, in connection with the sale of interests in PaineWebber Income Properties Four Limited Partnership, PaineWebber, Fourth Income Properties Fund, Inc. and PA (1) failed to provide adequate disclosure of the risks involved; (2) made false and misleading representations about the safety of the investments and the Partnership's anticipated performance; and (3) marketed the Partnership to investors for whom such investments were not suitable. The plaintiffs, who purport to be suing on behalf of all persons who invested in PaineWebber Income Properties Four Limited Partnership, also allege that following the sale of the partnership interests, PaineWebber, Fourth Income Properties Fund, Inc. and PA misrepresented financial information about the Partnership's value and performance. The amended complaint alleges that PaineWebber, Fourth Income Properties Fund, Inc. and PA violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the federal securities laws. The plaintiffs seek unspecified damages, including reimbursement for all sums invested by them in the partnerships, as well as disgorgement of all fees and other income derived by PaineWebber from the limited partnerships. In addition, the plaintiffs also seek treble damages under RICO. The defendants' time to move against or answer the complaint has not yet expired.
Pursuant to provisions of the Partnership Agreement and other contractual obligations, under certain circumstances the Partnership may be required to indemnify Fourth Income Properties Fund, Inc., PA and their affiliates for costs and liabilities in connection with this litigation. The Managing General Partner intends to vigorously contest the allegations of the action, and believes that the action will be resolved without material adverse effect on the Partnership's financial statements, taken as a whole.
The Partnership is not subject to any other material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Market for the Partnership's Limited Partnership Interests and
At September 30, 1995 there were 2,064 record holders of Units in the Partnership. There is no public market for the Units, and it is not anticipated that a public market for the Units will develop. The Managing General Partner will not redeem or repurchase Units.
The Partnership made no cash distributions to the Limited Partners during fiscal 1995.
Item 6. Selected Financial Data Paine Webber Income Properties Four Limited Partnership For the years ended September 30, 1995, 1994, 1993, 1992 and 1991 (In thousands, except per Unit data)
1995 1994 1993 1992 1991 ---- ---- ---- ---- ----
Revenues $ 1,656 $ 1,496 $ 1,531 $ 1,577 $ 1,522
Operating loss $ (427) $ (518) $ (322) $ (222) $ (333)
ventures' operations $ 174 $ 34 $ (353) $ (299)$ (605)
gains $ (253) $ (484) $ (675) $ (521)$ (938)
Extraordinary gains - - - - $ 2,499
Net income (loss) $ (253) $ (484) $ (675) $ (521)$ 1,561
extraordinary gains $ (9.75) $(18.65) $(26.01) $ (20.09)$ (36.13)
Extraordinary gains - - - - $ 96.26
Net income (loss) $ (9.75) $(18.65) $(26.01) $(20.09) $ 60.13
from sale proceeds - - - $ 58.00 -
Total assets $ 9,962 $ 10,410 $ 8,849 $ 9,364 $11,089
Long-term debt $ 4,915 $ 4,973 $ 3,337 $ 3,486 $ 3,623
(1) The extraordinary gains recognized in fiscal 1991 related to the foreclosure of the Yorktown Office Court in March of 1991 and the extinguishment of a second mortgage loan secured by the Towne Oaks Apartments.
The above selected financial data should be read in conjunction with the financial statements and the related notes appearing elsewhere in this Annual Report.
The above per Limited Partnership Unit information is based upon the 25,698 Limited Partnership Units outstanding during each year.
Item 7. Management's Discussion and Analysis of Financial Condition and
The Partnership offered Limited Partnership Interests to the public from December 1981 to December 1982 pursuant to a Registration Statement filed under the Securities Act of 1933. Gross proceeds of $25,698,000 were received by the Partnership and, after deducting selling expenses and offering costs, approximately $22,336,000 was originally invested in five operating investment properties through joint ventures. Through September 30, 1995, one of these properties had been lost to foreclosure and another had been sold to a third party. The Partnership does not have any commitments for additional investments but may be called upon to fund its portion of operating deficits or capital improvements of the joint ventures in accordance with the respective joint venture agreements.
Subsequent to year end, on December 29, 1995, the Partnership sold its interest in the Braesridge joint venture to an affiliate of the co-venture partners for net cash proceeds of $1 million. Management had been actively marketing the Braesridge Apartments for sale during fiscal 1995 and received several offers from prospective purchasers. The purchase contract signed with the co-venture partners was at a price which exceeded all third party offers. The net sale price for the Partnership's equity interest was based on an agreed upon fair value of the property of approximately $11.7 million. The agreed upon fair market value is supported by management's most recent independent appraisal of the Braesridge Apartments and by the marketing efforts to third-parties which were conducted during fiscal 1995. Under the terms of the Braesridge joint venture agreement, the co-venture partner had the right to match any third-party offer to purchase the property. Accordingly, a negotiated sale to the co-venturer at the appropriate market price represented the most expeditious and advantageous way for the Partnership to sell this investment. The original cash investment by the Partnership for its interest in the Braesridge joint venture was approximately $6,879,000 (including an acquisition fee of $725,000 paid to the Adviser of the Partnership). The property was originally subject to an institutional nonrecourse first mortgage of approximately $8,500,000 at the time of acquisition. Subsequent to acquisition, the venture was forced to modify the terms of the mortgage loan because the property did not generate sufficient cash flow to service the debt. The effect of such deferrals was that the total amount of the mortgage loan obligation increased over the several years covered by the modification agreements to a total of approximately $10 million. The inability of the Braesridge joint venture to service its mortgage debt obligations during the late 1980s was the result of overbuilding which precipitated a severe real estate recession. Such conditions, which existed throughout the country, were compounded in Houston by the collapse of the domestic crude oil production industry. These factors put severe downward pressure on occupancy levels and rental rates. The occupancy level of the Braesridge Apartments averaged 68% over the five-year period from fiscal 1985 through fiscal 1989. The estimated market value of the Braesridge Apartments had declined to approximately one-half of the outstanding debt obligation at the height of this real estate slump.
Conditions in the markets for multi-family residential properties across the country have demonstrated gradual improvement over the past few years. The absence of significant new construction activity has allowed the oversupply which existed in many markets as a result of the overbuilding of the late 1980s to be absorbed. The results of this absorption have been stabilized occupancy levels and a gradual improvement in rental rates, which have had a positive impact on cash flow levels and, consequently, property values. The Braesridge Apartments achieved a 96% average occupancy level in fiscal year 1995, improved from a level of 93% attained in the prior year. The high occupancy levels in the Houston market over the last two years, combined with significantly increased rental rates, are now sufficient to justify the construction of new apartment units which could limit Braesridge's long-term performance. Because of the potential apartment development, as well as the attractive, assumable financing obtained in October 1994, management believed that now was the appropriate time to market the Braesridge Apartments for sale and complete a transaction which would enable the Partnership to realize a partial recovery of its initial investment in this property. Despite recovering less than 15% of its original cash investment in Braesridge, the Partnership will recognize a gain for financial reporting purposes in fiscal 1996 in connection with the sale of this venture interest because the losses recorded in prior years under the equity method of accounting have exceeded the Partnership's initial investment amount. The Partnership expects to distribute approximately $500,000 of the net sale proceeds, or approximately $20 per original $1,000 investment, in a special distribution to the Limited Partners to be made by February 15, 1996. The remaining net sale proceeds would be retained by the Partnership as additional working capital reserves.
Due to the fiscal 1996 sale of the interest in the Braesridge joint venture, which represented 31% of the Partnership's original investment portfolio, for an amount which is substantially lower than the Partnership's investment in Braesridge, combined with the fiscal 1991 foreclosure loss of the Yorktown investment, which represented 16% of the Partnership's original investment portfolio, in all likelihood the Partnership will be unable to return the full amount of the original capital contributed by the Limited Partners. The amount of capital which will be returned will depend upon the proceeds received from the final liquidation of the two remaining investments. The amount of such proceeds will ultimately depend upon the value of the underlying investment properties at the time of their final disposition, which cannot presently be determined. The improving market conditions referred to above for multi-family apartment properties, combined with the significant capital improvement programs which are in the process of being implemented at both of the two remaining investment properties, may result in favorable opportunities to sell the Partnership's remaining investments within the next 2-to-3 years. The implementation of capital improvements made possible by the recent refinancings of the Charter Oak and Towne Oaks properties, as discussed further below, are expected to support management's ability to increase rents and add value to these properties. Accordingly, management will likely defer any considerations of engaging in concerted sales efforts with respect to Charter Oak and Towne Oaks for the next 12-to-18 months until the respective capital improvement programs are substantially completed and the effects of the improvements are fully reflected in the rental rate structures for the apartment units.
As part of the refinancing of the mortgage loan secured by the Towne Oaks Apartments in fiscal 1994, the joint venture was required to establish an escrow account for a replacement reserve and other capital repairs. The balance of these restricted reserves totalled approximately $1.5 million at the time of the loan closing. Subsequent to the refinancing, the Partnership has implemented a program to use these funds, along with cash flow from property operations, to repair and upgrade the Towne Oaks Apartments property. To date, over $1.8 million of capital expenditures have been incurred to complete the installation and painting of new exterior siding on all buildings and to begin the process of upgrading the apartment interiors. The exterior portion of the capital improvement program is substantially completed. Apartment interiors are being upgraded on a turnover basis and will continue over the next 3 years until all of the units have been upgraded. The property improvements were necessary in order to improve the average occupancy levels and rental rates at this 20-year old facility, which had declined during fiscal 1993 and 1994 due to competitive conditions existing in the property's Arlington, Texas submarket. The initial impact of the renovation program is reflected in the property's occupancy level which had increased to 94% as of September 30, 1995 from a low of 84% experienced one year earlier. The Partnership hired a new management firm to oversee the implementation of the property rehabilitation program and to manage the day-to-day operations of the apartment complex under the direction of the Managing General Partner. Management is confident that the capital improvement program will allow the property to remain competitive in its marketplace. Further increases in occupancy levels and rental rates are expected in fiscal 1996. As planned rental rate increases are implemented, the property should begin to generate excess cash flow in the fairly near future.
During fiscal 1995, the Partnership received total distributions of $409,000 from Charter Oak Associates, which included an operating cash flow distribution and the release of certain excess reserves. The positive cash flow from the venture is a direct result of the HUD refinancing which took place in August 1993. As part of the HUD insured loan program, the joint venture was required to establish an escrow account for a replacement reserve and other required repairs which totalled approximately $1.7 million at the time of the loan closing. The balance of these restricted escrow deposits totaled approximately $780,000 as of September 30, 1995. These escrows have provided the capital necessary to address certain deferred maintenance and capital improvement items that have significantly upgraded individual units and the property as a whole. The capital improvements during fiscal 1995 were principally comprised of the renovation of individual apartment units which, as with Towne Oaks, is being done on a turnover basis and will continue until all of the apartments have been upgraded. The Charter Oak Apartments property has achieved a 4% increase in its average occupancy level over the past 3 years, improving to 95% for fiscal 1995 from a level of 91% experienced in fiscal 1992. The increase in the occupancy level over the past three consecutive years has been accomplished while simultaneously raising rental rates on the apartment units, which has allowed rental income to increase by an average of 6% per year. The suburban St. Louis submarket has not experienced any substantial new development activity in several years and management is not aware of any significant plans for major development activity in the near future. For fiscal 1996 management plans to continue the unit renovation program and address additional landscaping enhancements.
At September 30, 1995 the Partnership and its consolidated joint venture had available cash and cash equivalents of $129,000. Such cash and cash equivalents, combined with the proceeds to be retained from the sale of the Braesridge joint venture interest, as discussed above, will be utilized for the working capital requirements of the Partnership and, if necessary, to fund property operating deficits and capital improvements of the joint ventures in accordance with the respective joint venture agreements. The source of future liquidity and distributions to the partners is expected to be through cash generated from operations of the Partnership's investment properties and proceeds from the sales or refinancing of such properties.
The Partnership reported a net loss of $253,000 for the year ended September 30, 1995, as compared to a net loss of $484,000 recognized in the prior year. The decrease in net loss resulted from a decrease in the Partnership's operating loss of $91,000 and an increase in the Partnership's share of unconsolidated ventures' income of $140,000. The decrease in the Partnership's operating loss, which includes the results of the consolidated Towne Oaks joint venture, is primarily the result of an increase in rental revenues from the Towne Oak Apartments. Rental revenues increased by $187,000 for fiscal 1995, when compared to fiscal 1994, due to the impact of the capital improvements discussed above on occupancy and rental rates. The increase in revenues at Towne Oaks was partially offset by increases in the consolidated venture's interest expense, depreciation expense and real estate taxes. Interest expense on the Towne Oaks debt increased by $42,000 as a result of the higher principal balance and interest rate on the new mortgage loan subsequent to the fiscal 1994 refinancing transaction. Depreciation expense increased by $25,000 due to the additional depreciation on the capital improvements at the Towne Oaks Apartments. In addition, real estate tax expense on the Towne Oaks property increased by $14,000 in fiscal 1995.
The improvement in the Partnership's share of unconsolidated ventures' income during fiscal 1995 is primarily due to an increase in rental revenues at both the Charter Oak and Braesridge joint ventures. As discussed further above, rental rates have increased at Charter Oak in conjunction with the capital improvement program and Braesridge experienced increases in both average occupancy and rental rates during fiscal 1995. Average occupancy at the Braesridge Apartments was 96% for fiscal 1995, as compared to 93% for fiscal 1994. The resulting increase in combined rental revenues, of $243,000, was partially offset by increases in repairs and maintenance expense at the Braesridge joint venture along with an increase in depreciation and amortization expense at the Charter Oak joint venture as a result of additional depreciation on the capital improvements.
The Partnership reported a net loss of $484,000 for the year ended September 30, 1994, which represented a decrease in net loss of $191,000 when compared to fiscal 1993. This favorable change was primarily the result of an improvement in the net operating results of the Partnership's unconsolidated joint ventures (Braesridge and Charter Oak) during fiscal 1994. The Partnership recognized income of $34,000 from its share of unconsolidated ventures' operations in 1994, as compared to a loss of $353,000 in fiscal 1993. This improvement was primarily the result of increased rental income from the Braesridge Apartments and lower mortgage interest and operating expenses of the Charter Oak joint venture. Rental revenues from Braesridge increased by $263,000 in fiscal 1994, which was partially offset by increases in salaries and repairs and maintenance expenses. As discussed further above, the Charter Oak joint venture refinanced its debt on August 31, 1993. This resulted in a decrease in the venture's interest expense of $242,000 during fiscal 1994. In addition, real estate taxes and maintenance expenses of the Charter Oak joint venture decreased by $39,000.
The favorable change in the Partnership's share of unconsolidated ventures' operations was partially offset by an increase in the Partnership's operating loss. The increase in the Partnership's operating loss, of $196,000, was primarily the result of an increase in interest expense, coupled with a slight decline in rental revenues, from the Towne Oaks Apartments. The decrease in rental revenues can be attributed to the decline in occupancy at the Towne Oaks Apartments during the renovation period of the apartment complex, as discussed further above. Interest expense on the Towne Oaks debt increased by $110,000 as a result of the higher principal balance and interest rate on the new mortgage loan. An increase in Partnership general and administrative expenses of $63,000 also contributed to the increase in operating loss for fiscal 1994. The increase in general and administrative expenses resulted mainly from certain expenditures incurred in connection with an independent valuation of the Partnership's operating properties which was commissioned during fiscal 1994 in conjunction with management's ongoing refinancing efforts and portfolio management responsibilities.
The Partnership reported a net loss of $675,000 for the year ended September 30, 1993 as compared to a net loss of $521,000 for fiscal 1992. This increase in net loss resulted from an increase in the Partnership's operating loss of $100,000, coupled with an increase in the Partnership's share of unconsolidated ventures' losses of $54,000.
The increase in the Partnership's operating loss was primarily a result of a decrease in rental revenues and an increase in property operating expenses reported by the consolidated Towne Oaks joint venture. The decrease in rental revenues can be attributed to a decline in occupancy at the Towne Oaks Apartments while the increase in operating expenses resulted mainly from an increase in repairs and maintenance expense incurred to upgrade the property and address certain deferred maintenance items. This was partially offset by an increase in other income at the Towne Oaks Apartments, along with a slight decrease in interest expense due to principal pay downs on the outstanding mortgage note. A decrease in interest income due to lower average outstanding cash reserve balances also contributed to the increase in operating loss for fiscal 1993.
The Partnership's share of unconsolidated ventures' losses increased by 18% primarily due to an overall increase in property operating expenses at both unconsolidated joint ventures, which was partially offset by an increase in rental revenues due to improved occupancy at both the Charter Oak and Braesridge apartment properties during fiscal 1993. The Partnership's share of losses from the Charter Oak joint venture decreased by $111,000 as a result of higher revenues which were partially offset by an increase in real estate tax expense as a result of a refund received in fiscal 1992. The Partnership's share of losses from the Braesridge joint venture increased by $165,000 mainly due to certain leasing and marketing expenses incurred as part of efforts to further increase occupancy.
The Partnership completed its thirteenth full year of operations in fiscal 1995 and the effects of inflation and changes in prices on revenues and expenses to date have not been significant.
Inflation in future periods may cause an increase in revenues, as well as operating expenses, at the Partnership's operating investment properties. Tenants at the Partnership's apartment properties have short-term leases, generally of six-to-twelve months in duration. Rental rates at these properties can be adjusted to keep pace with inflation, as market conditions allow, as the leases are renewed or turned over. Such increases in rental income would be expected to at least partially offset the corresponding increases in Partnership and property operating expenses.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data are included under Item 14 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Item 10. Directors and Executive Officers of the Partnership
The Managing General Partner of the Partnership is Fourth Income Properties Fund, Inc. a Delaware corporation, which is a wholly-owned subsidiary of PaineWebber. The Associate General Partner of the Partnership is Properties Associates, a Massachusetts general partnership, certain general partners of which are officers of the Adviser and the Managing General Partner. The Managing General Partner has overall authority and responsibility for the Partnership's operations, however, the day-to-day business of the Partnership is managed by the Adviser pursuant to an advisory contract.
(a) and (b) The names and ages of the directors and principal executive officers of the Managing General Partner of the Partnership are as follows: Name Office Age to Office
Lawrence A. Cohen President and Chief Executive Albert Pratt Director 84 6/12/81 * J. Richard Sipes Director 48 6/9/94 Walter V. Arnold Senior Vice President and Chief Financial Officer 48 10/29/85 James A. Snyder Senior Vice President 50 7/6/92 John B. Watts III Senior Vice President 42 6/6/88 David F. Brooks First Vice President and Assistant Treasurer 53 6/12/81 * Timothy J. Medlock Vice President and Treasurer 34 6/1/88 Thomas W. Boland Vice President 33 12/1/91
* The date of incorporation of the Managing General Partner.
(c) There are no other significant employees in addition to the directors and executive officers mentioned above.
(d) There is no family relationship among any of the foregoing directors or executive officers of the Managing General Partner of the Partnership. All of the foregoing directors and executive officers have been elected to serve until the annual meeting of the Managing General Partner.
(e) All of the directors and officers of the Managing General Partner hold similar positions in affiliates of the Managing General Partner, which are the corporate general partners of other real estate limited partnerships sponsored by PWI, and for which PaineWebber Properties Incorporated serves as the Adviser. The business experience of each of the directors and principal executive officers of the Managing General Partner is as follows:
Lawrence A. Cohen is President and Chief Executive Officer of the Managing General Partner and President and Chief Executive Officer of the Adviser which he joined in January 1989. He is also a member of the Board of Directors and the Investment Committee of the Adviser. From 1984 to 1988, Mr. Cohen was First Vice President of VMS Realty Partners where he was responsible for origination and structuring of real estate investment programs and for managing national broker-dealer relationships. He is a member of the New York Bar and is a Certified Public Accountant.
Albert Pratt is Director of the Managing General Partner, a Consultant of PWI and a General Partner of the Associate General Partner. Mr. Pratt joined PWI as Counsel in 1946 and since that time has held a number of positions including Director of both the Investment Banking Division and the International Division, Senior Vice President and Vice Chairman of PWI and Chairman of PaineWebber International, Inc.
J. Richard Sipes is a Director of the Managing General Partner and a Director of the Adviser. Mr. Sipes is an Executive Vice President at PaineWebber. He joined the firm in 1978 and has served in various capacities within the Retail Sales and Marketing Division. Before assuming his current position as Director of Retail Underwriting and Trading in 1990, he was a Branch Manager, Regional Manager, Branch System and Marketing Manager for a PaineWebber subsidiary, Manager of Branch Administration and Director of Retail Products and Trading. Mr. Sipes holds a B.S. in Psychology from Memphis State University.
Walter V. Arnold is a Senior Vice President and Chief Financial Officer of the Managing General Partner and a Senior Vice President and Chief Financial Officer of the Adviser which he joined in October 1985. Mr. Arnold joined PWI in 1983 with the acquisition of Rotan Mosle, Inc. where he had been First Vice President and Controller since 1978, and where he continued until joining the Adviser. Mr. Arnold is a Certified Public Accountant licensed in the State of Texas.
James A. Snyder is a Senior Vice President of the Managing General Partner and a Senior Vice President and Member of the Investment Committee of the Adviser. Mr. Snyder re-joined the Adviser in July 1992 having served previously as an officer of PWPI from July 1980 to August 1987. From January 1991 to July 1992, Mr. Snyder was with the Resolution Trust Corporation where he served as the Vice President of Asset Sales prior to re-joining PWPI. From February 1989 to October 1990, he was President of Kan Am Investors, Inc., a real estate investment company. During the period August 1987 to February 1989, Mr. Snyder was Executive Vice President and Chief Financial Officer of Southeast Regional Management Inc., a real estate development company.
John B. Watts III is a Senior Vice President of the Managing General Partner and a Senior Vice President of the Adviser which he joined in June 1988. Mr. Watts has had over 16 years of experience in acquisitions, dispositions and finance of real estate. He received degrees of Bachelor of Architecture, Bachelor of Arts and Master of Business Administration from the University of Arkansas.
David F. Brooks is a First Vice President and Assistant Treasurer of the Managing General Partner and a First Vice President and an Assistant Treasurer of the Adviser. Mr. Brooks joined the Adviser in March 1980. From 1972 to 1980, Mr. Brooks was an Assistant Treasurer of Property Capital Advisors, Inc. and also, from March 1974 to February 1980, the Assistant Treasurer of Capital for Real Estate, which provided real estate investment, asset management and consulting services.
Timothy J. Medlock is a Vice President and Treasurer of the Managing General Partner and Vice President and Treasurer of the Adviser which he joined in 1986. From June 1988 to August 1989, Mr. Medlock served as the Controller of the Managing General Partner and the Adviser. From 1983 to 1986, Mr. Medlock was associated with Deloitte Haskins & Sells. Mr. Medlock graduated from Colgate University in 1983 and received his Masters in Accounting from New York University in 1985.
Thomas W. Boland is a Vice President of the Managing General Partner and a Vice President and Manager of Financial Reporting of the Adviser which he joined in 1988. From 1984 to 1987, Mr. Boland was associated with Arthur Young & Company. Mr. Boland is a Certified Public Accountant licensed in the state of Massachusetts. He holds a B.S. in Accounting from Merrimack College and an M.B.A. from Boston University.
(f) None of the directors and officers were involved in legal proceedings which are material to an evaluation of his or her ability or integrity as a director or officer.
(g) Compliance With Exchange Act Filing Requirements: The Securities Exchange Act of 1934 requires the officers and directors of the Managing General Partner, and persons who own more than ten percent of the Partnership's limited partnership units, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and ten-percent beneficial holders are required by SEC regulations to furnish the Partnership with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the Partnership believes that, during the year ended September 30, 1995, all filing requirements applicable to the officers and directors of the Managing General Partner and ten-percent beneficial holders were complied with.
The directors and officers of the Partnership's Managing General Partner receive no current or proposed remuneration from the Partnership.
The Partnership is required to pay certain fees to the Adviser, and the General Partners are entitled to receive a share of Partnership cash distributions and a share of profits and losses. These items are described in Item 13.
The Partnership has not paid cash distributions to the Unitholders from operations over the past five years. Furthermore, the Partnership's Units of Limited Partnership Interest are not actively traded on any organized exchange, and no efficient secondary market exists. Accordingly, no accurate price information is available for these Units. Therefore, a presentation of historical Unitholder total returns would not be meaningful.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The Partnership is a limited partnership issuing Units of Limited Partnership Interest, not voting securities. All the outstanding stock of the Managing General Partner, Fourth Income Properties Fund, Inc., is owned by PaineWebber. Properties Associates, the Associate General Partner, is a Massachusetts general partnership, certain general partners of which are officers of the Adviser and the Managing General Partner. No limited partner is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership.
(b) Neither directors and officers of the Managing General Partner nor the general partners of the Associate General Partner, individually, own any Units of limited partnership interest of the Partnership. No director or officer of the Managing General Partner, nor any general partner of the Associate General Partner, possesses a right to acquire beneficial ownership of Units of Limited Partnership Interest of the Partnership.
(c) There exists no arrangement, known to the Partnership, the operation of which may at a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partners of the Partnership are Fourth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber"), and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber.
The General Partners, the Adviser and PWI receive fees and compensation determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management and disposition of Partnership investments. In connection with investing Partnership capital, the Adviser received acquisition fees paid by the joint ventures and sellers.
All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds shall be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income or tax losses of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax losses arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income and tax losses from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's operations between the General Partners and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
Under the advisory contract, the Adviser has specific management responsibilities; to administer day-to-day operations of the Partnership, and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser is paid a basic management fee (4% of adjusted cash flow, as defined) and an incentive management fee (5% of adjusted cash flow subordinated to a noncumulative annual return to the limited partners equal to 6% based upon their adjusted capital contribution) for services rendered. The Adviser did not earn any management fees during the year ended September 30, 1995 due to the lack of distributable cash flow.
An affiliate of the Managing General Partner performs certain accounting, tax preparation, securities law compliance and investor communications and relations services for the Partnership. The total costs incurred by this affiliate in providing such services are allocated among several entities, including the Partnership. Included in general and administrative expenses for the year ended September 30, 1995 is $86,000 representing reimbursements to this affiliate for providing such services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned fees of $1,000 (included in general and administrative expenses) for managing the Partnership's cash assets during the year ended September 30, 1995. Fees charged by Mitchell Hutchins are based on a percentage of invested cash reserves which varies based on the total amount of invested cash which Mitchell Hutchins manages on behalf of PWPI.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) and (2) Financial Statements and Schedules:
The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at Page F-1.
The exhibits listed on the accompanying index to exhibits at Page IV-3 are filed as part of this Report.
(b) No Current Reports on Form 8-K were filed during the last quarter of fiscal 1995.
The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at Page F-1.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PAINE WEBBER INCOME PROPERTIES FOUR
By: Fourth Income Properties Fund, Inc.
By: /s/ Lawrence A. Cohen President and Chief Executive Officer
By: /s/ Walter V. Arnold
By: /s/ Thomas W. Boland
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 Partnership in the capacity and on the dates indicated.
By:/s/ Albert Pratt Date:January 9, 1996
By: /s/ J. Richard Sipes Date January 9, 1996
ANNUAL REPORT ON FORM 10-K
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
Exhibit No. Description of Document Report or Other
(3) and (4) Prospectus of the Registrant dated Filed with the December 22, 1991, as supplemented Commission pursuant with particular reference to the Rule 424(c) and Restated Certificant and Agreement incorporated herein of Limited Partnership. by reference.
(10) Material contracts previously filed as Filed with the exhibits to registration to statements Commission pursuant and amendments thereto of the registrant Section 13 or together with all such contracts filed 15(d) of the as exhibits of previously filed Securities Exchange Forms 10-K and hereby incorporated Act of 1934 and herein by reference. incorporated herein by reference.
(13) Annual Report to Limited Partners No Annual Report the Limited Partners. filing.
(22) List of subsidiaries Included in Item 1 of Part I of this hereby made.
(27) Financial data schedule Filed as the last by Item 14.
ANNUAL REPORT ON FORM 10-K
Item 14(a) (1) and (2) and 14(d)
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Paine Webber Income Properties Four Limited Partnership:
Report of independent auditors F-2
Consolidated balance sheets as of September 30, 1995 and 1994 F-3
Consolidated statements of operations for the years ended September 30, 1995, 1994 and 1993 F-4
Consolidated statements of changes in partners' capital (deficit) for the September 30, 1995, 1994 and 1993 F-5
Consolidated statements of cash flows for the years ended September 30, 1995, 1994 and 1993 F-6
Notes to consolidated financial statements F-7
Schedule III - Real Estate and Accumulated Depreciation F-16
Combined Joint Ventures of Paine Webber Income Properties Four Limited Partnership:
Report of independent auditors F-17
Combined balance sheets as of September 30, 1995 and 1994 F-18
Combined statements of operations and changes in venturers' deficit for the years ended September 30, 1995, 1994 and 1993 F-19
Combined statements of cash flows for the years ended September 30, 1995, 1994 and 1993 F-20
Notes to combined financial statements F-21
Schedule III- Real Estate and Accumulated Depreciation F-27
Other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements, including the notes thereto.
Paine Webber Income Properties Four Limited Partnership:
We have audited the accompanying consolidated balance sheets of PaineWebber Income Properties Four Limited Partnership as of September 30, 1995 and 1994, and the related consolidated statements of operations, changes in partners' capital (deficit) and cash flows for each of the three years in the period ended September 30, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial position of Paine Webber Income Properties Four Limited Partnership at September 30, 1995 and 1994 and the consolidated results of its operations and its 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, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
September 30, 1995 and 1994 (In thousands, except per Unit data)
Land $ 1,400 $ 1,400 Buildings, improvements and equipment 12,468 11,829
Cash and cash equivalents 129 24 Tax escrow deposit 110 156 Prepaid and other assets 57 39 Deferred financing costs, net of accumulated amortization of $13 ($4 in 1994) 175 184
Accounts payable and other liabilities $ 144 $ 484 Accrued real estate taxes 101 93 Mortgage interest payable 37 38 Tenant security deposits 58 56 Equity in losses of unconsolidated joint ventures in excess of investments and advances 974 780
Cumulative net loss (100) (97) Cumulative cash distributions (51) (51)
Limited Partners ($1,000 per unit; 25,698 Units issued): Capital contributions, net of offering costs 23,194 23,194 Cumulative net loss (9,819) (9,569) Cumulative cash distributions (9,492) (9,492) Total partners' capital 3,733 3,986
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
For the years ended September 30, 1995, 1994 and 1993 (In thousands, except per Unit data)
Rental revenue $ 1,613 $ 1,426 $1,454 Interest income 8 8 9 Other income 35 62 68
Property operating expenses 820 811 852 Mortgage interest and other financing costs 458 416 298 Depreciation and amortization 420 395 358 Real estate taxes 134 120 136 General and administrative 251 272 209
Operating loss (427) (518) (322)
ventures' operations 174 34 (353)
Net loss $ (253) $ (484) $ (675)
Net loss per Limited Partnership Unit $ (9.75) $(18.65) $(26.01)
The above net loss per Limited Partnership Unit is based upon the 25,698 Limited Partnership Units outstanding during each year.
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) For the years ended September 30, 1995, 1994 and 1993
Balance at September 30, 1992 $(135) $5,280 $ 5,145
Net loss (7) (668) (675)
Balance at September 30, 1993 (142) 4,612 4,470
Net loss (5) (479) (484)
Balance at September 30, 1994 (147) 4,133 3,986
Net loss (3) (250) (253)
Balance at September 30, 1995 $ (150) $ 3,883 $ 3,733
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 30, 1995, 1994 and 1993 Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities: Net loss $ (253) $ (484) $ (675) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 420 395 358 Amortization of deferred financing costs 9 18 - ventures' operations (174) (34) 353 Changes in assets and liabilities: Tax escrow deposit 46 (18) (37) Accrued interest and other receivables - 1 - Prepaid and other assets (18) 5 (27) Accounts payable and other liabilities (3) 5 21 Accounts payable - affiliate - (25) 9 Accrued real estate taxes 8 (8) - Mortgage interest payable (1) 13 (1) Tenant security deposits 2 (4) 10 Total adjustments 289 348 686 Net cash provided by (used for) operating activities 36 (136) 11
Cash flows from investing activities: joint ventures 409 125 - unconsolidated joint ventures (41) - (82) and equipment (976) (795) (46) Decrease in (deposits to) repair escrow 735 (794) - Net cash provided by (used for) investing activities 127 (1,464) (128)
Cash flows from financing activities: Payment of deferred financing costs - (188) - Proceeds from issuance of long-term debt - 5,000 - Principal repayments on long-term debt (58) (3,364) (149) Net cash provided by (used for) financing activities (58) 1,448 (149)
Net increase (decrease) in cash and cash equivalents 105 (152) (266)
beginning of year 24 176 442
Cash and cash equivalents, end of year $ 129 $ 24 $ 176
Cash paid during the year for interest $ 450 $ 370 $ 299
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP Notes To Consolidated Financial Statements
Paine Webber Income Properties Four Limited Partnership (the "Partnership") is a limited partnership organized pursuant to the laws of the State of Delaware in July 1981 for the purpose of investing in a diversified portfolio of income-producing properties. The Partnership authorized the sale of units (the "Units") of partnership interest (at $1,000 per Unit) of which 25,698 were subscribed and issued between December 1981 and December 1982.
2. Summary of Significant Accounting Policies
The accompanying financial statements include the Partnership's investments in three joint venture partnerships which own operating properties. As further discussed in Note 5, subsequent to year-end, the Partnership sold its interest in the Braesridge joint venture for $1,000,000. Except as described below, the Partnership accounts for its investments in joint venture partnerships using the equity method because the Partnership does not have a voting control interest in the ventures. Under the equity method the investment in a joint venture is carried at cost adjusted for the Partnership's share of the venture's earnings or losses and distributions. See Note 5 for a description of the unconsolidated joint venture partnerships.
As further discussed in Note 4, effective December 31, 1990, the co-venture partner of Arlington Towne Oaks Associates assigned its general partnership interest to Fourth Income Properties Fund, Inc., the Managing General Partner of the Partnership (see Note 3). The assignment gave the Partnership control over the affairs of the joint venture. Accordingly, the accompanying financial statements present the financial position, results of operations and cash flows of this joint venture on a consolidated basis. All transactions between the Partnership and the joint venture have been eliminated in consolidation.
The operating investment property owned by the consolidated joint venture is carried at the lower of cost, reduced by accumulated depreciation, or net realizable value. The net realizable value of a property held for long-term investment purposes is measured by the recoverability of the Partnership's investment through expected future cash flows on an undiscounted basis, which may exceed the property's market value. The Partnership's operating investment property is considered to be held for long-term investment purposes as of September 30, 1995 and 1994. Depreciation on the operating investment property is computed using the straight-line method over an estimated useful life of forty years for the buildings and improvements and five years for the equipment. Acquisition fees paid to an affiliate in connection with the investment in the Towne Oaks joint venture have been capitalized and are included in the cost of the operating investment property.
The Partnership has reviewed FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," which is effective for financial statements for years beginning after December 15, 1995, and believes this new pronouncement will not have a material effect on the Partnership's financial statements.
Deferred financing costs represent loan financing fees and other long-term debt acquisition costs which have been capitalized and are being amortized, on a straight-line basis, over the term of the consolidated joint venture's mortgage loan. Amortization of deferred financing costs is included in mortgage interest expense and related financing costs on the accompanying statements of operations.
The consolidated joint venture leases apartment units under leases with terms usually of one year or less. Rental income is recorded on the accrual basis as earned. Security deposits typically are required of all tenants.
For purposes of reporting cash flows, the Partnerships considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.
No provision for income taxes has been made as the liability for such taxes is that of the partners rather than the Partnership. Upon sale or disposition of the Partnership's investments, the taxable gain or the taxable loss incurred will be allocated among the partners. In cases where the disposition of the investment involves the lender foreclosing on the investment, taxable income could occur without distribution of cash. This income would represent passive income to the partners which could be offset by each partners' existing passive losses, including any passive loss carryovers from prior years.
3. The Partnership Agreement and Related Party Transactions
The General Partners of the Partnership are Fourth Income Properties Fund, Inc. (the "Managing General Partner"), a wholly-owned subsidiary of PaineWebber Group Inc. ("PaineWebber"), and Properties Associates (the "Associate General Partner"), a Massachusetts general partnership, certain general partners of which are also officers of the Managing General Partner and PaineWebber Properties Incorporated. Subject to the Managing General Partner's overall authority, the business of the Partnership is managed by PaineWebber Properties Incorporated (the "Adviser") pursuant to an advisory contract. The Adviser is a wholly-owned subsidiary of PaineWebber Incorporated ("PWI"), a wholly-owned subsidiary of PaineWebber. The General Partners, the Adviser and PWI receive fees and compensation, determined on an agreed-upon basis, in consideration of various services performed in connection with the sale of the Units, the management of the Partnership and the acquisition, management, financing and disposition of Partnership investments.
All distributable cash, as defined, for each fiscal year shall be distributed quarterly in the ratio of 99% to the Limited Partners and 1% to the General Partners. All sale or refinancing proceeds shall be distributed in varying proportions to the Limited and General Partners, as specified in the Partnership Agreement.
Pursuant to the terms of the Partnership Agreement, taxable income or tax losses of the Partnership will be allocated 99% to the Limited Partners and 1% to the General Partners. Taxable income or tax losses arising from a sale or refinancing of investment properties will be allocated to the Limited Partners and the General Partners in proportion to the amounts of sale or refinancing proceeds to which they are entitled; provided that the General Partners shall be allocated at least 1% of taxable income arising from a sale or refinancing. If there are no sale or refinancing proceeds, taxable income and tax losses from a sale or refinancing will be allocated 99% to the Limited Partners and 1% to the General Partners. Allocations of the Partnership's operations between the General Partners and the Limited Partners for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
Under the advisory contract, the Adviser has specific management responsibilities; to administer day-to-day operations of the Partnership, and to report periodically the performance of the Partnership to the Managing General Partner. The Adviser is paid a basic management fee (4% of adjusted cash flow, as defined) and an incentive management fee (5% of adjusted cash flow subordinated to a noncumulative annual return to the limited partners equal to 6% based upon their adjusted capital contribution) for services rendered. The Adviser did not earn any basic management fees during the three-year period ended September 30, 1995 due to the lack of distributable cash flow. No incentive management fees have been paid to date.
In connection with the sale of each property, the Adviser may receive a disposition fee in an amount equal to 3/4% based on the selling price of the property, subordinated to the payment of certain amounts to the Limited Partners. No such fees have been earned to date.
The Managing General Partner and its affiliates are reimbursed for their direct expenses relating to the offering of Units, the administration of the Partnership and the acquisition and operation of the Partnership's real estate investments.
Included in general and administrative expenses for the years ended September 30, 1995, 1994 and 1993 is $86,000, $98,000 and $110,000, respectively, representing reimbursements to an affiliate of the Managing General Partner for providing certain financial, accounting and investor communication services to the Partnership.
The Partnership uses the services of Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins") for the managing of cash assets. Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc., an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned $1,000 (included in general and administrative expenses) for each of the years ended September 30, 1995, 1994 and 1993 for managing the Partnership's cash assets.
Operating investment property at September 30, 1995 and 1994 represents the land, buildings and equipment of Arlington Towne Oaks Associates, a joint venture in which the Partnership has a controlling interest, as described below.
On August 23, 1982 the Partnership acquired an interest in Arlington Towne Oaks Associates, a Texas general partnership organized to purchase and operate Towne Oaks Apartments, a 320-unit apartment complex in Arlington, Texas. The Partnership's original co-venture partner was an affiliate of the Trammell Crow organization. Effective December 31, 1990, the co-venture partner of Arlington Towne Oaks Associates withdrew from the venture and assigned its interest to the Managing General Partner of the Partnership in return for a release of any further obligations. As a result of the assignment, the Partnership assumed control over the affairs of the joint venture.
The aggregate cash investment by the Partnership for its interest was approximately $5,258,000 (including an acquisition fee of $550,000 paid to the Adviser). The apartment complex was acquired subject to two mortgages: an institutional nonrecourse first mortgage with a balance of $4,435,000 at the time of closing and a second mortgage from the seller of the property with a balance of $1,650,000 at the time of closing. The second mortgage was extinguished in fiscal 1991. The venture refinanced its first mortgage loan during fiscal 1994. The new nonrecourse first mortgage loan had an outstanding principal balance of approximately $4,915,000 as of September 30, 1995.
The joint venture agreement provides that the Partnership will receive from cash flow, to the extent available, a non-cumulative preferred return, payable monthly, of $483,000 for each year. After the Partnership's preferred return requirements are met, the co-venturer is then entitled to receive quarterly, non-cumulative subordinated returns of $14,000 for each quarter thereafter. The next $300,000 of available annual cash flow in any year is to be distributed 90% to the Partnership and 10% to the co-venturer. The next $200,000 of cash flow in any year is to be distributed 80% to the Partnership and 20% to the co-venturer. Any remaining cash flow is to be used to liquidate any unpaid principal and accrued interest on any notes made by the joint venture to any partners, and any remaining cash flow is to be distributed 70% to the Partnership and 30% to the co-venturer.
Distributions of sale and/or refinancing proceeds will be as follows, after the payment of mortgage debts and to the extent not previously returned to each partner: 1) payment of notes and accrued interest payable to partners, 2) to the Partnership in an amount equal to the Partnership's gross investment, 3) to the manager for any unpaid subordinated management fees, 4) the next $3,000,000 to the Partnership and co-venturer allocated 90% and 10%, respectively, 5) the next $2,000,000 to the Partnership and co-venturer allocated 80% and 20%, respectively, 6) the next $2,000,000 to the Partnership and co-venturer allocated 70% and 30%, respectively (increased by $200,000 for each year or partial year succeeding the fifth year of ownership by the Partnership), 7) remaining balance to the Partnership and co-venturer allocated 60% and 40%, respectively.
Tax profits, as defined, will be allocated to the Partnership and the co-venturer in amounts equal to cash distributions, with the balance of the taxable income allocated 70% to the Partnership and 30% to the co-venturer. Tax losses, as defined, are allocated 80% to the Partnership and 20% to the co-venturer. Profits resulting from the sale or refinancing of the Operating Investment Property will be allocated as follows: 1) to the Partnership and the co-venturer on a proportionate basis to restore any negative capital accounts to zero, 2) any remaining gain equal to the excess of the capital proceeds, as defined, over the aggregate capital balances of all partners, to the Partnership and the co-venturer on a proportionate basis, and 3) to the Partnership and the co-venturer in a manner similar to cash distributions described in the preceding paragraph. Losses from the sale or refinancing of the Operating Investment Property will be allocated as follows: 1) losses equal to the excess of the aggregate positive capital accounts of all partners who have positive capital balances over the capital proceeds, as defined, to the Partnership and the co-venturer on a proportionate basis and 2) remaining losses 70% to the Partnership and 30% to the co-venturer. Internal Revenue Service regulations require partnership allocations of income and loss to the respective partners to have "substantial economic effect". This requirement resulted in the joint venture's net loss for the years ended September 30, 1995, 1994 and 1993 being allocated in a manner different from that provided in the joint venture agreement, as set forth above, such that no loss was allocable to the co-venturer. Allocations of the venture's operations between the Partnership and the co-venturer for financial accounting purposes have been made in conformity with the actual allocations of taxable income or tax loss.
If additional cash is required for any reason in connection with the venture, the Partnership and the co-venturer shall loan the required funds to the venture in the proportions of 70% and 30%, respectively. In the event a partner defaults in its obligations to make a loan, the other partner may make all or any part of the loan required by the defaulting partner. Cumulative loans advanced to the joint venture by the Partnership totalled $1,551,000 as of September 30, 1995. Such loans bear interest at the lesser of 12% per annum or the prime rate and are repayable only from the venture's net cash flow or sale or refinancing proceeds.
The following is a summary of property operating expenses for the years ended September 30, 1995, 1994 and 1993 (In thousands). Property operating expenses: Salaries $ 263 $ 241 $ 230 Repairs and maintenance 241 175 274 Management fees 78 69 62 Administrative and other 123 150 111 $ 820 $ 811 $ 852
5. Investments in Unconsolidated Joint Ventures
At September 30, 1995 and 1994, the Partnership had investments in two unconsolidated joint ventures, Charter Oak Associates and Braesridge 305 Associates, which own operating investment properties. The unconsolidated joint ventures are accounted for on the equity method in the Partnership's financial statements. Under the equity method, the assets, liabilities, revenues and expenses of the joint ventures do not appear in the Partnership's financial statements. Instead, the investments are carried at cost adjusted for the Partnership's share of the ventures' earnings, losses and distributions. Condensed combined financial statements of the unconsolidated joint ventures follow.
September 30, 1995 and 1994
Current assets $ 1,221 $ 1,903 Operating investment property, net 18,216 17,943 Other assets, net 292 276
Current liabilities (including current portion of mortgage notes payable) $ 2,052 $ 2,070 Long-term mortgage debt, less current portion 19,854 20,054
Partnership's share of combined deficit (1,575) (1,406) Co-venturers' share of combined deficit (602) (596)
September 30, 1995 and 1994
Partnership's share of combined deficit, as shown above $ (1,575) $(1,406) Partnership's share of current liabilities and long-term debt 511 531 Excess basis due to investment in joint ventures, net (1) 90 95 Equity in losses of unconsolidated joint ventures in excess of investments and advances $ (974) $ (780)
(1) At September 30, 1995 and 1994, the Partnership's investment exceeds its share of the combined joint venture capital and liabilities by approximately $90,000 and $95,000, respectively. This amount, which relates to certain expenses incurred by the Partnership in connection with acquiring its joint venture investments, is being amortized on a straight-line basis over the estimated useful life of the properties.
Condensed Combined Summary of Operations For the years ended September 30, 1995, 1994 and 1993
Rental income $ 5,168 $ 4,925 $ 4,546 Interest and other income 129 132 100
financing fees 1,779 1,790 1,910 Property operating expenses 2,663 2,646 2,583 Depreciation and amortization 640 565 544 Net income (loss) $ 215 $ 56 $ (391)
operations $ 179 $ 39 $ (348) $ 215 $ 56 $ (391)
Reconciliation of Partnership's Share of Operations
operations, as shown above $ 179 $ 39 $ (348) Amortization of excess basis (5) (5) (5) ventures' income (losses) $ 174 $ 34 $ (353)
Equity in losses of unconsolidated joint ventures in excess of investments and advances on the balance sheet is comprised of the following equity method carrying values:
Charter Oak Associates $ 32 $ 200 Braesridge 305 Associates (1,006) (980)
These joint ventures are subject to partnership agreements which determine the distribution of available funds, the disposition of the venture's assets and the rights of the partners, regardless of the Partnership's percentage ownership interest in the venture. Substantially all of the Partnership's investments in these joint ventures are restricted as to distributions.
A description of the unconsolidated ventures' properties and the terms of the joint venture agreements are summarized below:
On June 8, 1982, the Partnership acquired an interest in Charter Oak Associates, a Missouri general partnership organized to purchase and operate Charter Oak Apartments, a 284-unit apartment complex in Creve Coeur, Missouri. The Partnership is a general partner in the joint venture. The Partnership's co-venture partner is an affiliate of the Paragon Group.
The aggregate cash investment by the Partnership for its interest was approximately $5,289,000 (including an acquisition fee of $530,000 paid to the Adviser). The apartment complex was acquired subject to an institutional nonrecourse first mortgage with a balance of $5,036,000 at the time of closing. At September 30, 1985, Charter Oak Associates refinanced the first mortgage loan on the Charter Oak apartment complex. A new non-recourse first mortgage in the amount of $8,600,000 was obtained at that time. The mortgage loan had a term of seven years and bore interest at the rate of 11.3% per year. The proceeds from the refinancing were used to repay the remaining balance on the existing first mortgage loan of $4,670,000, to pay expenses of closing the new loan and for distributions to the joint venture partners. Refinancing proceeds of $3,000,000 and $600,000 were distributed to the Partnership and the co-venturer, respectively, on September 30, 1985. During fiscal 1993, the property's existing debt was refinanced again through the receipt of a loan issued in conjunction with an insured loan program of the U.S. Department of Housing and Urban Development (HUD). The new loan, which had an initial principal balance of $10,262,000, is a nonrecourse obligation secured by the operating investment property and an assignment of rents and leases. The loan, which is fully assumable, has a 35-year maturity and bears interest at a fixed rate of 7.35% . As part of the HUD insured loan program, the operating investment property was required to establish an escrow account for a replacement reserve and other required repairs. The excess loan proceeds, after repayment of the outstanding indebtedness, were used to pay transaction costs and to fund certain of the aforementioned capital reserve requirements.
The joint venture agreement and an amendment thereto (the "Agreement") dated September 30, 1985 provides that the first distribution of cash flow for any year shall be used collectively to reduce the other partner's deficit. The other partner's deficit is defined to be an amount equal to 10% of the excess aggregate amount required to be loaned to Charter Oak over the aggregate amount actually so loaned to Charter Oak by such partner. During fiscal 1993, the Partnership advanced 100% of the funds required to close the refinancing transaction referred to above, which totalled approximately $25,000. The joint venture agreement provides that the next $220,000 of net cash flow be distributed to the Partnership, on a noncumulative annual basis, payable monthly (preference return of the Partnership) and that the next $19,000 of cash flow be distributed to the co-venturer on a noncumulative annual basis, payable quarterly (preference return of the co-venturer); the next $213,000 of annual cash flow will be distributed 85% to the Partnership and 15% to the co-venturer, and any remaining annual cash flow will be distributed 70% to the Partnership and 30% to the co-venturer. The amount and timing of actual cash distributions are restricted by the Computation of Surplus Cash, Distributions and Residual Receipts as defined under the HUD financing agreement. During fiscal year 1995, the joint venture distributed $409,000 to the Partnership.
Depreciation and an amount of gross taxable income equal to the amount paid to amortize the indebtedness of Charter Oak Associates shall be allocated 94% to the Partnership and 6% to the co-venturer. Any remaining taxable income or tax loss shall be allocated in the same proportions as cash is distributed. Allocations of the venture's operations between the Partnership and co-venturer for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
Any proceeds arising from a refinancing, sale, exchange or other disposition of property will be distributed first to the payment of unpaid principal and accrued interest on any outstanding mortgage loans. Any remaining proceeds will be distributed according to the September 30, 1985 Amendment to the Agreement in the following order: repayment of unpaid principal and accrued interest on all outstanding operating notes; $2,230,000 to the Partnership; $200,000 to the co-venturer; $4,000,000 to the Partnership and the co-venturer in the proportions of 85% and 15%, respectively; with the remaining balance to the Partnership and the co-venturer in the proportions of 70% and 30%, respectively, unless distributions of net cash flow and certain proceeds have reached specified levels, in which case the remaining balance is distributed equally.
If additional cash is required in connection with Charter Oak Associates, it may be provided by the Partnership and the co-venturer as loans to Charter Oak Associates. The agreement calls for such loans to be provided 70% by the Partnership and 30% by the co-venturer.
The joint venture entered into a property management contract with an affiliate of the co-venturer, cancelable at the option of the Partnership upon the occurrence of certain events. The management fee is 5% of gross rental revenues.
On September 30, 1982 the Partnership acquired an interest in Braesridge 305 Associates (Braesridge), a Texas general partnership organized to purchase and operate Braesridge Apartments, a 545-unit apartment complex. The apartment complex is located in Houston, Texas. The Partnership is a general partner in the joint venture. The Partnership's co-venture partners are Stanford Capital Corporation and certain individuals.
Subsequent to year end, on December 29, 1995, the Partnership sold its interest in Braesridge to an affiliate of the co-venture partners for net cash proceeds of $1 million. Management had been actively marketing the Braesridge Apartments for sale during fiscal 1995 and received several offers from prospective purchasers. The purchase contract signed with the co-venture partners was at a price which exceeded all third party offers. The net sale price for the Partnership's equity interest is based on an agreed upon fair value of the property of approximately $11.7 million. The agreed upon fair market value is supported by management's most recent independent appraisal of the Braesridge Apartments and by the marketing efforts to third-parties which were conducted during fiscal 1995. Under the terms of the Braesridge joint venture agreement, the co-venture partner had the right to match any third-party offer to purchase the property. Accordingly, a negotiated sale to the co-venturer at the appropriate market price represented the most expeditious and advantageous way for the Partnership to sell this investment. The Partnership's investment in the Braesridge Apartments represented 31% of the original investment portfolio. Despite recovering less than 15% of its original cash investment in Braesridge, the Partnership will recognize a gain in fiscal 1996 in connection with the sale of this venture interest because the losses recorded in prior years under the equity method have exceeded the Partnership's initial investment amount. The Partnership expects to distribute approximately $500,000 of the net sale proceeds, or approximately $20 per original $1,000 investment, in a Special Distribution to be made by February 15, 1996. The remaining net sale proceeds would be retained by the Partnership as additional working capital reserves. The sale of the Partnership's interest in Braesridge, as discussed further above, terminates the Partnership's rights to any share of future cash flow or sale or refinancing proceeds.
The aggregate cash investment by the Partnership for its interest was approximately $6,879,000 (including an acquisition fee of $725,000 paid to the Adviser of the Partnership). The property was originally subject to an institutional nonrecourse first mortgage of approximately $8,500,000 at the time of closing. Subsequent to acquisition, the venture was forced to modify the terms of the mortgage loan because the property did not generate sufficient cash flow to service the debt. The initial debt modification provided for the deferral of a portion of the debt service payments through August 1, 1994. Effective August 1, 1994, the Braesridge joint venture completed a further modification of its mortgage obligation. The modified note, in the initial principal amount of $10,058,000, is secured by the operating investment property and requires principal and interest payments of $84,000 on the first day of each month beginning September 1994. The interest rate on the modified obligation is 9% with provisions to adjust the rate after the first 7 years of the note. The term of the mortgage obligation is not to exceed 25 years. Additionally, under the loan agreement the venture is required to make property maintenance escrow payments of $16,667 each month that the escrow does not maintain a balance of $300,000. Amounts in the property maintenance escrow are to be used, subject to approval by the lender, for major repairs, replacements, and renovations to the property or to offset operating deficits incurred in connection with the property. The venture is also required to make real estate tax escrow payments.
If additional cash was required in connection with the operating investment property, it was to be provided by the venture partners equally as loans to the joint venture after an initial $100,000 special operating loan from the co-venturers. During 1995, the venture partners loaned an additional $82,000 to the joint venture in accordance with these terms. As of September 30, 1995, total operating loans of $290,750 and $178,250 were payable to the co-venturers and the Partnership, respectively. Total accrued interest on such loans aggregated $357,000 as of September 30, 1995.
Taxable income or tax loss of the joint venture through the date of the sale of the Partnership's interest shall be allocated in the same proportion as cash is distributed and if no cash is distributed, 100% to the Partnership. Allocations of the venture's operations among the Partnership and co-venturers for financial accounting purposes have been made in conformity with the allocations of taxable income or tax loss.
The joint venture entered into a property management contract with an affiliate of the co-venturers for fees equal to 4% of the gross receipts from operations of the complex.
Long-term debt at September 30, 1995 and 1994 relates to the consolidated joint venture, Arlington Towne Oaks Associates, and is summarized as follows (in thousands):
9.08% mortgage note due March 1, 2019, payable in monthly operating investment property. $ 4,915 $4,973
Scheduled maturities of long-term debt are summarized as follows (in thousands):
The Partnership is involved in certain legal actions. The Managing General Partner believes these actions will be resolved without material adverse effect on the Partnership's financial statements, taken as a whole.
Paine Webber Income Properties Four Limited Partnership:
We have audited the accompanying combined balance sheets of the Combined Joint Ventures of PaineWebber Income Properties Four Limited Partnership as of September 30, 1995 and 1994, and the related combined statements of operations and changes in venturers' deficit and cash flows for each of the three years in the period ended September 30, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
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 the Partnership's 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 the Combined Joint Ventures of Paine Webber Income Properties Four Limited Partnership at September 30, 1995 and 1994 and the combined 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, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
September 30, 1995 and 1994
Cash and cash equivalents $ 262 $ 265 Property maintenance escrow 19 - Total current assets 1,221 1,903
Operating investment properties, at cost: Buildings, improvements and equipment 22,706 21,793 Less accumulated depreciation (7,609) (6,969) Deferred expenses, net of accumulated amortization of $25 ($131 in 1994) 292 276
Accounts payable and other liabilities $ 114 $ 134 Accrued real estate taxes 293 298 Tenant security deposits 119 116 Distributions payable to venturers 305 336 Operating loans from venturers 516 459 Other current liabilities 11 13 Current portion of long-term debt 200 202 Total current liabilities 2,052 2,070
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN VENTURERS' DEFICIT
For the years ended September 30, 1995, 1994 and 1993
Rental income $ 5,168 $ 4,925 $ 4,546 Interest and other income 129 132 100
financing fees 1,779 1,790 1,910 Salaries and related costs 719 738 648 Depreciation and amortization 640 565 544 Repairs and maintenance 629 558 507 Real estate taxes 385 390 447 Management fees 235 223 228 General and administrative 254 271 310 Net income (loss) 215 56 (391)
Distributions to venturers (390) (448) -
Venturers' deficit, beginning of year (2,002) (1,610) (1,219)
Venturers' deficit, end of year $ (2,177) $(2,002) $(1,610)
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS For the years ended September 30, 1995, 1994 and 1993 Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities: Net income (loss) $ 215 $ 56 $ (391) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 640 565 544 Amortization of deferred financing costs 20 40 41 Original issue discount interest - (144) (181) Changes in assets and liabilities: Escrow deposits 718 430 15 Accounts receivable - - 2 Prepaid expenses (39) 135 (72) Accounts payable and other liabilities (20) (146) 163 Accrued real estate taxes (5) (7) (3) Accrued interest (18) 116 114 Tenant security deposits 3 7 4 Other current liabilities (2) (9) (24) Total adjustments 1,297 987 603 operating activities 1,512 1,043 212
Cash flows from investment activities: Capital expenditures (913) (699) (79)
Cash flows from financing activities: Distributions to venturers (421) (125) - Issuance of operating loans from venturers 82 - 131 Repayment of operating loans from venturers (25) - - Restricted escrows funded by debt proceeds - - (1,678) Increase in deferred expenses (36) (59) (247) Proceeds from long-term debt - - 10,262 Principal payments on long-term debt (202) (65) (8,526) Net cash used for financing
Net increase (decrease) in cash and cash equivalents (3) 95 75
Cash and cash equivalents, beginning of year 265 170 95
Cash and cash equivalents, end of year $ 262 $ 265 $ 170
Cash paid during the year for interest $ 1,726 $ 1,675 $ 2,003
PAINE WEBBER INCOME PROPERTIES FOUR LIMITED PARTNERSHIP Notes to Combined Financial Statements
1. Summary of significant accounting policies
The accompanying financial statements of the Combined Joint Ventures of Paine Webber Income Properties Four Limited Partnership (PWIP4) include the accounts of PWIP4's two unconsolidated joint ventures investees as of September 30, 1995. Charter Oak Associates was organized on June 8, 1982 in accordance with a partnership agreement between PWIP4 and Paragon/Charter Oak Associates, Ltd. The Charter Oak Associates joint venture was organized to purchase and operate an apartment complex in St. Louis County, Missouri. Braesridge 305 Associates was formed as a general partnership on September 30, 1982, for the purpose of acquiring and operating an apartment complex, including two phases, Braesridge I and Braesridge II. On the same date, Braesridge 305 Associates acquired from a partner the assets, subject to certain liabilities, of Braesridge I and the adjacent site for Braesridge II, which was completed in August 1983. The apartment complex is located in Houston, Texas. PWIP4 has two co-venturer partners in the Braesridge joint venture, Stanford Capital Corporation ("Stanford") and Braesridge Apartments. The financial statements of the Combined Joint Ventures are presented in combined form due to the nature of the relationship between the co-venturers and PWIP4, which owns a majority financial interest in both joint ventures.
The records of the two Combined Joint Ventures are maintained on the income tax basis of accounting and adjusted to generally accepted accounting principles (GAAP) for financial reporting purposes, principally for depreciation.
The operating investment properties are carried at the lower of cost, reduced by accumulated depreciation, or net realizable value. The net realizable value of a property held for long-term investment purposes is measured by the recoverability of the venture's investment through expected future cash flows on an undiscounted basis, which may exceed the property's market value. The net realizable value of a property held for sale approximates its current market value. Both of the operating properties owned by the Combined Joint Ventures were considered to be held for long-term investment purposes as of September 30, 1995 and 1994.
The Combined Joint Ventures have reviewed FAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," which is effective for financial statements for years beginning after December 15, 1995, and believe this new pronouncement will not have a material effect on the financial statements of the Combined Joint Ventures.
The Combined Joint Ventures capitalized property taxes and interest incurred during the construction period of the projects along with the costs of identifiable improvements. Professional fees and other costs relating to the formation of the joint ventures have also been capitalized and are included in the cost of the properties. Depreciation expense is computed on a straight-line basis over the estimated useful life of the buildings, improvements and equipment, generally, 5 to 40 years.
Deferred expenses consist of capitalized loan costs which are being amortized over the terms of the related loan agreements. Amortization of deferred loan costs is included in interest expense on the accompanying statements of operations.
The Combined Joint Ventures lease space at the apartment properties under short-term operating leases. Rental revenues are recognized on an accrual basis as earned pursuant to the terms of the leases. Security deposits are generally required of all tenants.
Certain prior year balances have been reclassified to conform to the current year presentation.
The Combined Joint Ventures consists of entities which are not taxable and accordingly, the results of their operations are included on the tax returns of the various partners. Accordingly no income tax provision is reflected in the accompanying combined financial statements.
For purposes of the statement of cash flows, the Combined Joint Ventures consider all highly liquid investments with original maturity dates of 90 days or less to be cash equivalents.
Escrow deposits consist primarily of amounts to be used for the payment of property taxes, insurance premiums and reserves for replacements to the operating investment properties. Amounts in the property replacement reserves are to be used, subject to the approval by the lender, for major repairs, replacements and renovations to the properties. As of September 30, 1995, approximately $718,000 of these reserves relates to escrow accounts for property taxes, insurance premiums and a reserve for replacements as required by the U.S. Department of Housing and Urban Development (HUD) which insures the long-term debt of Charter Oak Associates Joint Venture. Use of these funds must be approved by HUD.
Affiliates of Stanford provided property repair and maintenance services for the Braesridge Apartments totalling $65,000, $154,000 and $128,000 during the years ended September 30, 1995, 1994 and 1993, respectively. Additionally, management fees and fees for accounting services rendered totalling $136,000, $138,000 and $133,000 were paid by Braesridge 305 Associates to Stanford and affiliates of Stanford for the years ended September 30, 1995, 1994 and 1993, respectively. Both joint ventures have property management contracts with affiliates of the co-venture partners. The management fees paid to the property managers range from 4% to 5% of certain gross revenues.
As provided for in the Braesridge joint venture agreement, the first $100,000 of deficit funding from the venture partners is to be treated as a special operating loan. The special operating loans from partners accrue interest on principal only at 16%. Any deficit funding thereafter is to be treated as an operating loan which shall accrue interest on principal only at the greater of Bank of Boston prime plus 1% or 12%. Operating loans totaling $107,000 and $17,625 were made by the partners to the Braesridge 305 Associates joint venture in accordance with the joint venture agreement during fiscal 1993 and 1992, respectively. During 1995 the partners loaned an additional $82,000 to the Partnership under the same terms, as stated above. Of the total special and operating loans at September 30, 1995, $224,000, $178,000 and $67,000 is payable to Braesridge Apartments, PWIP4 and Stanford, respectively. Interest incurred on these operating loans totaled $57,000, $51,000 and $48,000 for the years ended September 30, 1995, 1994 and 1993, respectively.
As part of the refinancing of the long-term debt of Charter Oak Associates in fiscal 1993, PWIP4 provided an unsecured operating note in the amount of $25,000 which bore interest at the lower of 12% or the prime rate (8.75% at September 30, 1995) per year. The operating note and related accrued interest are payable only from refinancing or sales proceeds as defined by the agreement, including funds set aside in an escrow account to be released at some later date. During fiscal 1995, Charter Oaks repaid the operating loan plus accrued interest from certain funds released from escrow by the mortgage lender.
Included in the balance of other current liabilities at September 30, 1995 and 1994 is $11,000 and $13,000, respectively, which represents the balance in an intercompany account maintained between Charter Oak Associates and the related property manager.
The joint venture owns and operates the Charter Oak Apartments, a 284-unit apartment complex in Creve Coeur, Missouri. As discussed further in Note 4, the mortgage debt of Charter Oak Associates matured on October 1, 1992, and was refinanced during fiscal 1993 through the receipt of a loan issued in conjunction with an insured loan program of the U.S. Department of Housing and Urban Development (HUD).
The joint venture agreement and an amendment thereto dated September 30, 1985 (collectively, the Agreement) provides that the cash flow for any year shall first be distributed to a partner in the amount of the other partner's deficit. The other partner's deficit is defined to be an amount equal to 10% of the excess aggregate amount required to be loaned to the joint venture over the aggregate amount actually so loaned to the joint venture by such partner. Cash flow for any year shall next be distributed to PWIP4 in the amount of $220,000 on a non-cumulative annual basis, payable monthly. The next $19,000 will be distributed to the co-venturer on a non-cumulative annual basis, payable quarterly. The next $213,000 of annual cash flow will be distributed 85% to PWIP4 and 15% to the co-venturer, and any remaining annual cash flow will be distributed 70% to PWIP4 and 30% to the co-venturer. The timing and amount of actual distributions to the venture partners is restricted by the Computation of Surplus Cash, Distributions and Residual Receipts as defined under the HUD financing agreement. During fiscal year 1995, the joint venture distributed $385,000 to the Partnership.
Depreciation and an amount of gross income equal to the amount paid to amortize the indebtedness of the joint venture shall be allocated 94% to PWIP4 and 6% to the co-venturer. Any remaining taxable income or tax losses shall be allocated in the same proportions as cash is distributed. Allocations of income or loss for financial reporting purposes have been made in accordance with the allocations of taxable income and tax loss.
Any proceeds arising from a refinancing, sale, exchange or other disposition of property will be distributed first to the payment on unpaid principal and accrued interest on any outstanding mortgage notes. Any remaining proceeds will be distributed in the following order: repayment of unpaid principal and accrued interest on all outstanding operating notes; $2,230,000 to PWIP4; $200,000 to the co-venturer; $4,000,000 to PWIP4 and the co-venturer in the proportions of 85% and 15%, respectively; with any remaining balance to PWIP4 and the co-venturer in the proportions of 70% and 30%, respectively, unless distributions of net cash flow and certain proceeds have reached specified levels, in which cash the remaining balance is distributed equally.
If additional cash is required in connection with the joint venture, it may be provided by PWIP4 and the co-venturer as loans (evidenced by operating notes) to the joint venture. The agreement calls for such loans to be provided 70% by PWIP4 and 30% by the co-venturer. PWIP4 funded 100% of the operating note required by the venture in fiscal 1993. Charter Oak Associates repaid the 1993 operating note plus accrued interest during fiscal 1995.
The joint venture owns and operates the 545-unit Braesridge apartment complex located in Houston, Texas. The joint venture agreement provides that the Net Cash Flow (as defined), after certain adjustments, shall be distributed monthly as a preferred return to PWIP4 from the date of the agreement as follows: September 30, 1983 - $510,000, September 30, 1984 - $555,000; September 30, 1985 and thereafter - $600,000. Any such amounts not distributed prior to the sale of the property will be distributed as a preference item to PWIP4 upon dissolution of the joint venture. Unpaid amounts at September 30, 1995 total $6,300,000. If any net cash flow remains after the payment to PWIP4 and payment of interest on the special operating loans for years subsequent to September 30, 1991, a noncumulative annual preferred return of up to $200,000 will be paid to Stanford Capital Corporation and Braesridge Apartments (the "remaining partners") on a quarterly basis. Any net cash flow remaining after payment of the preferred returns subsequent to September 30, 1991 will be distributed annually as follows: the first $100,000 distributed 75% to PWIP4 and 25% to the remaining partners, and any remaining distributed 50% to PWIP4 and 50% to the remaining partners.
If there is a sale, exchange, or refinancing of the encumbered operating investment property, the first payment (after repayment of any operating loans, including accrued interest, payable to the venture partners) will be to PWIP4 to the extent of its gross investment (presently $6,775,000); the next will be to pay any accrued interest on and principal of any outstanding special operating loans; the next $2,250,000 will be to the remaining partners; the next $1,000,000 will be to PWIP4; and the next $500,000 will be to the remaining partners. Any excess will be distributed 50% to PWIP4 and 50% to the remaining partners.
Taxable income or tax loss in each year shall be allocated in accordance with the partners' tax basis interests in the joint venture. Allocations of the venture's income or loss for financial reporting purposes have been made in accordance with the allocations of taxable income and tax loss.
Additional working capital required in connection with operations of the property prior to September 30, 1986 was to be provided by the remaining partners. Working capital required subsequent to September 30, 1986 is to be provided by the partners equally as loans to the joint venture (see Note 2).
On October 27, 1995 PWIP 4 entered into a partnership interest purchase agreement with Braesridge 1995 Equity (Braesridge), an affiliate of the co-venturers, calling for the sale of PWIP4's entire partnership interest to Braesridge for $1,000,000. On this date, Braesridge paid PWIP a $200,000 nonrefundable deposit which is to be credited against the purchase price at closing. Under the terms of the assignment, PWIP4 will relinquish all rights and obligations associated with its interest in the joint venture, including any loans outstanding and interest related thereto.
Long-term debt at September 30, 1995 and 1994 consists of the following (in thousands):
secured by the Charter Oak payable from October 1, 1993 installments of $68 per month and the last installment to be due and payable on September 1, 2028. See discussion below. $ 10,127 $10,197
Mortgage note secured by the and interest payments of $84 are due on the first day of each month loan bears interest at a rate of 9% with provisions to adjust the rate after the first 7 years of the note. The term of the mortgage obligation is not to exceed 25 years. See discussion regarding Less current portion (200) (202)
Annual debt service payments on the Braesridge mortgage loan were scheduled to increase by approximately $130,000 effective August 1, 1992. Commencing August 1, 1992 monthly principal and interest payments of $95,000 were to have been payable until August 1, 1994 at which time a balloon payment of $9,800,000 was to have been due. The venture's cash flow was not expected to be sufficient to cover these increased payments in fiscal 1993. As a result, management initiated discussions with the lender during fiscal 1992, which resulted in an agreement for a further modification of the loan terms. Under the terms of the modification agreement, dated December 2, 1992, the lender agreed to defer the scheduled principal payments through the remaining term of the loan, which matured on August 1, 1994, until which the loan required interest-only payments on a monthly basis at a rate of 10% per annum. The mortgage note was modified again on August 1, 1994 under the terms set forth above. The agreement contains a call option that, with six months advance written notice on either the 7th, 14th, or 21st anniversary date of the note, would require the payment of the unpaid principal and accrued interest. Given 30 days advance written notice, the Partnership is allowed to make prepayments of up to 10% of the original principal on any interest paying date during the first 7 years of the note without prepayment consideration. The entire balance may be prepaid during the six full calendar months immediately preceding the 7th, 14th, and 21st anniversary date of the note or immediately preceding the maturity date of August 1, 2019 given 30 days advance written notice. In addition, the venture is required to make property maintenance escrow payments of $16,667 each month that the escrow does not maintain of balance of $300,000. Amounts in the property maintenance escrow are to be used, subject to approval by the lender, for major repairs, replacements and renovations to the property or to offset operating deficits incurred in connection with the property. The venture is also required to make real estate tax escrow payments.
Interest expense on the Braesridge loan through August 1, 1994 was adjusted to reflect the original issue discount on the basis of a constant annual interest rate of 8%. This additional liability was recorded as accrued original issue discount interest and totalled $144,000 at September 30, 1993. Such amount was fully amortized during fiscal 1994.
The loan secured by the Charter Oak Apartments is insured by the U.S. Department of Housing and Urban Development (HUD). In addition to the monthly principal and interest payment, the Charter Oak joint venture submits monthly escrow deposits of $19,000 for tax and insurance escrows and replacement reserves. Under the HUD loan program, the venture is required to obtain mortgage insurance to cover the outstanding principal balance of the loan. Mortgage insurance premiums paid during fiscal 1995 and 1994 totalled $84,000 and $103,000, respectively, and are included in interest expense and related financing fees on the accompanying statement of operations.
Maturities of the long-term debt for each of the next five years and thereafter are as follows (in thousands): | 10-K405 | 10-K | 1996-01-16T00:00:00 | 1996-01-16T11:23:19 |
0000921895-96-000010 | 0000921895-96-000010_0001.txt | (As amended through December 12, 1995.)
Article 1 Corporation Office.................................. 1
Article 2 Shareholder Meetings................................ 1
Article 3 Quorum of Shareholders.............................. 3
Article 4 Voting Rights....................................... 5
Article 6 Record Date......................................... 8
Article 7 Shareholder List.................................... 9
Article 8 Judges of Election..................................10
Article 9 Consent of Shareholders in Lieu
Article 11 Removal of Directors................................13
Article 12 Vacancies on Board of Directors.....................14
Article 13 Powers of Board.....................................14
Article 14 Meetings of the Board of Directors..................16
Article 15 Action by Written Consent...........................17
Article 16 Compensation of Directors...........................17
Article 17 Liability of Directors..............................18
Article 19 The Chairman of the Board...........................21
Article 21 The Vice President..................................22
Article 25 Indemnification of Officers, Directors,
Article 26 Shares; Share Certificates..........................30
Article 27 Transfer of Shares..................................31
Article 30 Manner of giving Written Notice; Waivers
Article 32 Non-Applicability of Subchapter E of Chapter 25 of the BCL.............................34
Article 33 Non-Applicability of Subchapter G of Chapter 25 of the BCL.............................35
Article 34 Non-Applicability of Subchapter H of Chapter 25 of the BCL.............................35
Section 1.1 The Corporation shall have and continuously maintain in the Commonwealth of Pennsylvania a registered office at an address to be designated from time to time by the Board of Directors, which may, but need not, be the same as its place of business. Section 1.2 The Corporation may also have offices at such other places as the Board of Directors may from time to time designate or the business of the Corporation may require. Section 2.1 All meetings of the shareholders shall be held at such time and place, within or without the Commonwealth of Pennsylvania, as may be determined from time to time by the Board of Directors and need not be held at the registered office of the Corporation. Section 2.2 An annual meeting of the shareholders for the election of directors and the transaction of such other business as may properly be brought before the meeting shall be held in each calendar year at such time and place as may be determined by the Board of Directors. Section 2.3 Special meetings of the shareholders may be called at any time by the resolution of the Board of
Directors, which may fix the date, time and place of the meeting. If the Board of Directors does not fix the date, time or place of the meeting, it shall be the duty of the Secretary to do so. A date fixed by the Secretary shall not be more than 60 days after the date of the adoption of the resolution of the Board of Directors calling the special meeting. Section 2.4 Written notice of each meeting other than an adjourned meeting of shareholders, stating the place and time, and, in the case of a special meeting of shareholders, the general nature of the business to be transacted, shall be provided to each shareholder of record entitled to vote at the meeting at such address as appears on the books of the Corporation. Such notice shall be given, in accordance with the provisions of Article 30 of these Bylaws, at least (a) ten days prior to the day named for a meeting to consider a fundamental change under Chapter 19 of the Pennsylvania Business Corporation Law of 1988 (the "BCL") or (b) five days prior to the day named for the meeting in any other case. (a) Whenever the Corporation has been unable to communicate with a shareholder for more than 24 consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the Corporation with a current address, the giving of notice to such shareholder pursuant to Section 2.4 of these Bylaws shall not be required. Any action or meeting that is taken or held without notice or communication to that shareholder shall have the same validity as if the notice or communication had been duly given. Whenever a shareholder provides the Corporation with a current address this Section 2.5(a) shall cease to be applicable to such shareholder until such later time, if any, as the terms of this Section 2.5(a) shall again become applicable. (b) The Corporation shall not be required to give notice to any shareholder pursuant to Section 2.4 hereof if and for as long as communication with such shareholder is unlawful. Section 2.6 The Board of Directors may provide by resolution with respect to a specific meeting or with respect to a class of meetings that one or more shareholders may participate in such meeting or meetings of shareholders by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear one another. Participation in the meeting by such means shall constitute presence in person at the meeting. Any notice otherwise required to be given in connection with any meeting at which participation by conference telephone or other communications equipment is permitted shall so specify. Section 3.1 A meeting of shareholders duly called shall not be organized for the transaction of business unless a quorum is present.
Section 3.2 The presence, in person or by proxy, of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for purposes of consideration and action on such matter. Section 3.3 The shareholders present at a duly organized meeting may continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum . Section 3.4 If a meeting of shareholders cannot be organized because a quorum is not present, those present in person or by proxy, may, except as otherwise provided by statute, adjourn the meeting to such time and place as they may determine, without notice other than an announcement at the meeting, until the requisite number of shareholders for a quorum shall be present in person or by proxy. Section 3.5 Notwithstanding the provisions of Sections 3.1, 3.2, 3.3 and 3.4 of these Bylaws: (a) Any meeting of shareholders, including one at which directors are to be elected, may be adjourned for such period as the shareholders present and entitled to vote shall direct. (b) Those shareholders entitled to vote who attend a meeting called for election of directors that has been previously adjourned for lack of a quorum, although less than a quorum as fixed in these Bylaws, shall nevertheless constitute a quorum for the purpose of electing directors. (c) Those shareholders entitled to vote who attend a meeting that has been previously adjourned for one or more periods aggregating at least 15 days because of an absence of a quorum, although less than a quorum as fixed in these Bylaws, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the notice of the meeting if the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter. Section 4.1 Except as may be otherwise provided by the Corporation's Articles of Incorporation, at every meeting of shareholders, every shareholder entitled to vote thereat shall be entitled to one vote for every share having voting power standing in his name on the books of the Corporation on the record date fixed for the meeting. Except as otherwise provided in the Corporation's Articles of Incorporation, in each election of directors every shareholder entitled to vote shall have the right to multiply the number of votes to which he may be entitled by the total number of directors to be elected in the same election and he may cast the whole number of his votes for one candidate or he may distribute them among any two or more candidates.
Section 4.2 Except as otherwise provided by statute, at any duly organized meeting of shareholders the vote of the holders of a majority of the votes cast shall decide any question brought before such meeting. Section 4.3 Unless demand is made before the voting begins by a shareholder entitled to vote at any election for directors, the election of such directors need not be by ballot. Section 4.4 No shareholder shall be permitted to nominate a candidate for election as a director unless such shareholder shall provide to the Secretary of the Corporation (a) information about such candidate that is equivalent to the information concerning the candidates nominated by the Board of Directors that was contained in the Corporation's proxy statement for the immediately preceding annual meeting of shareholders at which directors were elected if the Corporation distributed a proxy statement to its shareholders in connection with such election of directors or (b) if the Corporation did not distribute such a proxy statement, the following information about such candidate: name, age, any position or office held with the Corporation, a description of any arrangement between the candidate and any other person(s) (naming such person(s)) pursuant to which he was nominated as a director, principal occupation for the five years prior to the election, the number of shares of the Corporation's stock beneficially owned by the candidate and a description of any material transaction or series of transactions to which the Corporation or any of its affiliates is a party and in which the candidate or any of his affiliates has a direct or indirect material interest, which description shall specify the candidate's interest in the transaction, the amount of the transaction and, where practicable, the amount of the candidate's interest in the transaction. Such information shall be provided in writing not later than 120 days before the first anniversary of the preceding annual meeting of shareholders. Section 5.1 Every shareholder entitled to vote at a meeting of shareholders, or to express consent or dissent to corporate action in writing without a meeting, may authorize another person or persons to act for him by proxy. Every proxy shall be executed in writing by the shareholder or his duly authorized attorney-in-fact and filed with the Secretary of the Corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the Secretary of the Corporation. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker, unless before the vote is counted or the exercised, written notice of such death or incapacity is given to the Secretary of the Corporation. Section 5.2 Where two or more proxies of a shareholder are present, the Corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them, and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. Section 6.1 The Board of Directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall not be more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date so fixed shall be entitled to notice of, or to vote at, such meeting, notwithstanding any transfer of shares on the books of the Corporation after any record date fixed as aforesaid. The Board of Directors may similarly fix a record date for the determination of shareholders of record for any other purpose, such as the payment of a distribution or a conversion or exchange of shares.
Section 6.2 The Board of Directors may by resolution adopt a procedure whereby a shareholder of the Corporation may certify in writing to the Corporation that all or a portion of the shares registered in such shareholder's name are held for the account of a specified person or persons. Such resolution may set forth: (a) the classification of shareholder who may certify; (b the purpose or purposes for which the certification may be made; (c) the form of certification and information to be contained therein; (d) if the certification is with respect to a record date, the time after the record date within which the certification must be received by the Corporation; and (e) such other provisions with respect to the procedure as are deemed necessary or desirable. Upon receipt by the Corporation of a certification complying with the procedure, the persons specified in the certification shall be deemed, for the purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification. Section 7.1 The officer or agent having charge of the share transfer books of the Corporation shall make a complete alphabetical list of the shareholders entitled to vote at any meeting, showing their addresses and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting for inspection by any shareholder during the entire meeting except that if the Corporation has 5,000 or more shareholders, in lieu of the making of the list, the Corporation may make the information available at the meeting by other means. Section 7.2 Failure to comply with the provisions of Section 7.1 of these Bylaws shall not affect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. Section 7.3 The original transfer books for shares of the Corporation, or a duplicate thereof kept in the Commonwealth of Pennsylvania, shall be prima facie evidence as to who are the shareholders entitled to examine the list or transfer books for shares or to vote at any meeting. Section 8.1 Prior to any meeting of shareholders, the Board of Directors may appoint judges of election, who may but need not be shareholders, to act at such meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of judges shall be one or three. No person who is a candidate for an office to be filled at the meeting shall act as a judge of election. Section 8.2 In case any person appointed as a judge of election fails to appear or fails or refuses to act, the vacancy so created may be filled by appointment made by the Board of
Directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof. Section 8.3 The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies. The judges of election shall also receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such other acts as may be proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as practicable. If there are three judges of election, the decision, act or certificate of a majority shall be the decision, act or certificate of all. Section 8.4 On request of the presiding officer of the meeting or of any shareholder, the judges of election shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts found by them. CONSENT OF SHAREHOLDERS IN LIEU OF MEETING Section 9.1 Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if, prior or subsequent to the action, a written consent or consents thereto signed by all of the shareholders who would be entitled to vote at a meeting for such purpose shall be filed with the Secretary of the Corporation. Section 10.1 The number of directors shall be determined by the Board of Directors from time to time. Each director shall be a natural person of full age and need not be a resident of the Commonwealth of Pennsylvania or a shareholder of the Corporation. Section 10.2 The Board of Directors may elect a Chairman of the Board. The Chairman of the Board shall preside at all meetings of shareholders and directors. Section 10.3 Except as otherwise provided in Article 12 of these Bylaws, directors shall be elected by the shareholders. The candidates receiving the highest number of votes from the shareholders, or each class or group of classes, if any, entitled to elect directors separately up to the number of directors to be elected by the shareholders, or class or group of classes, if any, shall be elected. The term of each director shall continue until the Annual Meeting of Shareholders next following the director's election and until such director's successor shall be duly elected and qualify, or until his earlier death, resignation or removal. A decrease in the number of directors shall not have the effect of shortening an incumbent director's term. Section 11.1 The entire Board of Directors, or a class of the Board of Directors where the Board of Directors is classified with respect to the power of shareholders to elect directors, or any individual director may be removed from office without assigning any cause by the vote of the shareholders or of the holders of a class or series of shares, entitled to elect directors or the class of directors. Notwithstanding the foregoing, an individual director shall not be removed (unless the entire Board of Directors or class of directors is removed) from the Board of Directors if sufficient votes are cast against the resolution for such director's removal which, if cumulatively voted at an annual or other regular election of directors, would be sufficient to elect one or more directors to the Board of Directors or a class thereof. If any directors are so removed, new directors may be elected at the same meeting. Section 11.2 The Board of Directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year. Section 11.3 The Board of Directors may be removed at any time with or without cause by the unanimous vote or consent of shareholders entitled to vote thereon.
VACANCIES ON BOARD OF DIRECTORS Section 12.1 Vacancies on the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled by a majority vote of the remaining members of the Board of Directors, though less than a quorum, or by a sole remaining director, and each person so elected shall be a director to serve for the balance of the unexpired term. Section 12.2 When one or more directors resign from the Board of Directors effective at a future date, the directors then in office, including those who have so resigned, shall have the power by a majority vote to fill the vacancies, the vote thereon to take effect when the resignations become effective. Section 13.1 The business and affairs of the Corporation shall be managed under the direction of the Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are directed or required to be exercised and done by statute, the Articles of Incorporation or these Bylaws. Section 13.2 The Board of Directors may, by resolution adopted by a majority of the directors in office, establish one or more committees consisting of one or more directors as may be deemed appropriate or desirable by the Board of Directors to serve at the pleasure of the Board. Any committee, to provided in the resolution of the Board of Directors pursuant to which it was created, shall have and may exercise all of the powers and authority of the Board of Directors, except that no committee shall have any power or authority as to the following: (a) The submission to shareholders of any action (b) The creation or filling of vacancies in the Board (c) The adoption, amendment or repeal of these Bylaws; (d) The amendment or repeal of any resolution of the Board of Directors that by its terms is amendable or repealable only by the Board of Directors; and (e) Action on matters committed by these Bylaws or resolution of the Board of Directors to another committee of the Board of Directors. MEETINGS OF THE BOARD OF DIRECTORS Section 14.1 A meeting of the Board of Directors may be held immediately following the annual meeting of shareholders at which directors have been elected without the necessity of notice to the directors. Section 14.2 Meetings of the Board of Directors shall be held at such times and places within or without the Commonwealth of Pennsylvania as the Board of Directors may from time to time appoint or as may be designated in the notice of the meeting. One or more directors may participate in any meeting the Board of Directors, or of 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 one another. Participation in a meeting by such means shall constitute presence in person at the meeting. Section 14.3 Special meetings of the Board of Directors may be called by the Chairman of the Board, if there shall be one, or the President of the Corporation on one day's notice to each director, either by telephone, or if in writing, in accordance with the provisions of Article 30 of these Bylaws. Special meetings shall be called by the Chairman of the Board, the President or Secretary in like manner and on like notice upon the written request of a majority of the directors in office. Section 14.4 At all meetings of the Board of Directors a majority of the directors in office shall constitute a quorum for the transaction of business, and the acts of a majority of the directors present and voting at a meeting at which a quorum is present shall be the acts of the Board of Directors, except as may be otherwise specifically provided by statute or by the Articles of Incorporation or by these Bylaws. Section 15.1 Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto signed by all of the directors is filed with the Secretary of the Corporation. Section 16.1 Directors, as such, may receive a stated salary for their services or a fixed sum and expenses for attendance at regular and special meetings or any combination of the foregoing as may be determined from time to time by resolution of the Board of Directors, and nothing contained herein shall be construed to preclude any director from receiving compensation for services rendered to the Corporation in any other capacity. Section 17.1 A director of the Corporation shall stand in a fiduciary relation to the Corporation and shall perform his duties as a director, including his duties as a member of any committee of the Board of Directors upon which he may serve, in good faith, in a manner he reasonably believes to be in the best interests of the Corporation, and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following: (a) one or more officers or employees of the Corporation whom the director reasonably believes to be reliable and competent in the matters presented; (b) legal counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such persons; or (c) a committee of the Board of Directors upon which he does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. A director shall not be considered to be acting in good faith if he has knowledge concerning the matter in question that would cause his reliance to be unwarranted. Section 17.2 In discharging the duties of their respective positions, the Board of Directors, committees of the Board of Directors and individual directors may, in considering the best interests of the Corporation, consider the effects of any action upon employees, suppliers and customers of the Corporation and communities in which offices or other establishments of the Corporation are located, and all other pertinent factors. The consideration of these factors shall not constitute a violation of Section 17.1 hereof. Section 17.3 Absent breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or any failure to take any action shall be presumed to be in the best interests of the Corporation. Section 17.4 A director of the Corporation shall not be personally liable, as such, for monetary damages for any action taken, or any failure to take any action, unless: (a) the director has breached or failed to perform the duties of his office under Sections 17.1 through 17.3 hereof; and (b) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Section 17.5 The provisions of Section 17.4 hereof shall not apply to: (a) the responsibility or liability of a director pursuant to any criminal statute; or (b) the liability of a director for the payment of taxes pursuant to local, state or federal law. Section 17.6 Notwithstanding any other provisions of these Bylaws, the approval of shareholders shall be required to amend, repeal or adopt any provision as part of these Bylaws that is inconsistent with the purpose or intent of Sections 17.1, 17.2, 17.3, 17.4, 17.5 or 17.6 of this Article 17, and, if any such action shall be taken, it shall become effective only on a prospective basis from and after the date of such shareholder approval. The provisions of this Article 17 were adopted by the shareholders of the Corporation on May 29, 1987. Section 18.1 The Corporation shall have a Chairman of the Board, a President, a Secretary and a Treasurer, or persons who shall act as such, regardless of the name or title by which they may be designated, elected or appointed and may have such other officers and assistant officers as the may authorize from time to time. The Chairman of the Board, President and Secretary shall be natural persons of full age. The Treasurer may be a corporation, but if a natural person shall be of full age. It shall not be necessary for the officers to be directors. Any number of offices may be held by the same person. Each officer shall hold office at the pleasure of the Board of Directors and until his successor has been elected or until his earlier death, resignation or removal. Any officer may resign at any time upon written notice to the Corporation. The resignation shall be effective upon receipt thereof by the Corporation or at such subsequent time as may be specified in the notice of resignation. The Corporation may secure the fidelity of any or all of the officers by bond or otherwise. Section 18.2 Except as otherwise provided in the Articles of Incorporation, an officer shall perform his duties as an officer in good faith, in a manner he reasonably believes to be in the best interests of the Corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. A person who so performs his duties shall not be liable by reason of having been an officer of the Corporation. Section 18.3 Any officer or agent of the Corporation may be removed by the Board of Directors with or without cause. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. THE CHAIRMAN OF THE BOARD Section 19.1 The Chairman of the Board shall be the chief executive officer of the Corporation. He shall preside at all meetings of the shareholders and directors. Section 20.1 In the absence of the Chairman of the Board of Directors, the President shall preside at all meetings of shareholders and directors. He shall be responsible for the general and active management of the business of the Corporation; shall see that all orders and resolutions of the Board of Directors and the Chairman of the Board are put into effect, subject, however, to the right of the Board of Directors to delegate any specific powers, except such as may be by statute exclusively conferred on the President, to any other officer or officers of the Corporation; and shall have the authority to execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation.
Section 21.1 The Vice President or, if more than one, the Vice Presidents in the order, if any, established by the Board of Directors shall, in the absence or incapacity of the President, have the authority to exercise all the powers and perform the duties of the President. The Vice Presidents, respectively, shall also have such other authority and perform such other duties as may be provided in these Bylaws or as shall be determined by the Board of Directors or the President. Any Vice President may, in the discretion of the Board of Directors, be designated as executive, senior' or by departmental or functional classification. Section 22.1 The Secretary shall attend all meetings of the Board of Directors and of the shareholders and keep accurate records thereof in one or more minute books kept for that purpose and shall perform the duties customarily performed by the secretary of a corporation and such other duties as may be assigned to him by the Board of Directors or the President. Section 23.1 The Treasurer shall be responsible for the custody of the corporate funds and securities; shall be responsible for full and accurate accounts of receipts and disbursements in books belonging to the Corporation; and shall perform such other duties as may be assigned to him by the Board of Directors or the President. He shall give bond in such sum and with such surety as the Board of Directors may from time to time direct. Section 24.1 Each assistant officer shall assist in the performance of the duties of the officer to whom he is assistant and shall perform such duties in the absence of the officer. He shall perform such additional duties as the Board of Directors, the President or the officer to whom he is assistant may from time to time assign him. Such officers may be given such functional titles as the Board of Directors shall from time to time determine. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS Section 25.1 The Corporation shall indemnify any director or officer, and may indemnify any other employee or agent, who was or is a party to, or is threatened to be made a party to, or who is called as a witness in connection with, any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or request of the Corporation as a director, officer, employee or agent of another domestic or foreign corporation, for profit or not-for-profit, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by him in connection with such action, suit or proceeding unless the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness. Section 25.2 The indemnification and advancement of expenses provided by, or granted pursuant to, this Article 25 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any Bylaw, agreement, contract, vote of shareholders or directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. It is the policy of the Corporation that indemnification of, and advancement of expenses to, directors and officers of the Corporation shall be made to the fullest extent permitted by law. To this end, the provisions of this Article 25 shall be deemed to have been amended for the benefit of directors and officers of the Corporation effective immediately upon any modification of the BCL or any modification, or adoption of any other law that expands or enlarges the power or obligation of corporations organized under the BCL to indemnify, or advance expenses to, directors and officers of corporations.
Section 25.3 The Corporation shall pay expenses incurred by an officer or director, and may pay expenses incurred by any other employee or agent, in defending an action, or proceeding referred to in this Article 25 in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation. Section 25.4 The indemnification and advancement of expenses provided by, or granted pursuant to, this Article 25 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. Section 25.5 The Corporation shall have the authority to create a fund of any nature, which may, but need not, be under the control of a trustee, or otherwise secure or insure in any manner, its indemnification obligations, whether arising under these Bylaws or otherwise. This authority shall include, without limitation, the authority to: (a) deposit funds in trust or in escrow; (b) establish any form of self-insurance; (c) secure its indemnity obligation by grant of a security interest, mortgage or other lien on the assets of the Corporation; or (d) establish a letter of credit, guaranty or surety arrangement for the benefit of such persons in connection with the anticipated indemnification or advancement of expenses contemplated by this
Article 25. The provisions of this Article 25 shall not be deemed to preclude the indemnification of, or advancement of expenses to, any person who is not specified in Section 25.1 of this Article 25 but whom the Corporation has the power or obligation to indemnify, or to advance expenses for, under the provisions of the BCL or otherwise. The authority granted by this Section 25.5 shall be exercised by the Board of Directors of the Corporation. Section 25.6 The Corporation shall have the authority to enter into a separate indemnification agreement with any officer, director, employee or agent of the Corporation or any subsidiary providing for such indemnification of such person as the Board of Directors shall determine up to the fullest extent permitted by law. Section 25.7 As soon as practicable after receipt by any person specified in Section 25.1 of this Article 25 of notice of the commencement of any action, suit or proceeding specified in Section 25.1 of this Article 25, such person shall, if a claim with respect thereto may be made against the Corporation under Article 25 of these Bylaws, notify the Corporation in writing of the commencement or threat thereof; however, the omission so to notify the Corporation shall not relieve the Corporation from any liability under Article 25 of these Bylaws unless the Corporation shall have been prejudiced thereby or from any other liability which it may have to such person other than under Article 25 of these Bylaws. With respect to any such action as person notifies the Corporation of the commencement or threat thereof, the Corporation may participate therein at its own expense and, except as otherwise provided herein, to the extent that it desires, the Corporation, jointly with any other indemnifying party similarly notified, shall be entitled to assume the defense thereof, with counsel selected by the Corporation to the reasonable satisfaction of such person. After notice from the Corporation to such person of its election to assume the defense thereof, the Corporation shall not be liable to such person under Article 25 of these Bylaws for any legal or other expenses subsequently incurred by such person in connection with the defense thereof other than as otherwise provided herein. Such person shall have the right to employ his own counsel in such action, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of such person unless: (a) the employment of counsel by such person shall have been authorized by the Corporation; (b) such person shall have reasonably concluded that there may be a conflict of interest between the Corporation and such person in the conduct of the defense of such proceeding; or (c) the Corporation shall not in fact have employed counsel to assume the defense of such action. The Corporation shall not be entitled to assume the defense of any proceeding brought by or on behalf of the Corporation or as to which such person shall have reasonably concluded that there may be a conflict of interest. If indemnification under Article
25 of these Bylaws or advancement of expenses are not paid or made by the Corporation, or on its behalf, within 90 days after a written claim for indemnification or a request for an advancement of expenses has been received by the Corporation, such person may, at any time thereafter, bring suit against the Corporation to recover the unpaid amount of the claim or the advancement of expenses. The right to indemnification and advancements of expenses provided hereunder shall be enforceable by such person in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on the Corporation. Expenses reasonably incurred by such person in connection with successfully establishing the right to indemnification or advancement of expenses, in whole or in part, shall also be indemnified by the Corporation. Section 25.8 The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another domestic or foreign corporation for profit or not-for-profit, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article 25.
Section 25.9 Notwithstanding any other provisions of these Bylaws, the approval of shareholders shall be required to amend, repeal or adopt any provision as part of these Bylaws that is inconsistent with the purpose or intent of this Article 25, and, if any such action shall be taken, it shall become effective only on a prospective basis from and after the date of such shareholder approval. The provisions of this Article 25 were adopted by the shareholders of the Corporation on May 29, 1987. Section 26.1 All shares issued by the Corporation shall be represented by certificates. The share certificates of the Corporation shall be numbered and registered in a share register as they are issued; shall state that the Corporation is incorporated under the laws of the Commonwealth of Pennsylvania; shall bear the name of the registered holder, the number and class of shares and the designation of the series, if any, represented thereby, the par value, if any, of each share or a statement that the shares are without par value, as the case may be; shall be signed by the Chairman of the Board, the President or a Vice President, and the Secretary or the Treasurer or any other person properly authorized by the Board of Directors, and shall bear the corporate seal, which seal may be a facsimile engraved or printed. Where the certificate is signed by a transfer agent or a registrar, the signature of any corporate officer on such certificate may be a facsimile engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise before the certificate is issued, such share certificate may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issue. Section 27.1 Upon surrender to the Corporation of a share certificate duly endorsed by the person named in the certificate or by attorney duly appointed in writing and accompanied where necessary by proper evidence of succession, assignment or authority to transfer, a new certificate shall be issued to the person entitled thereto and the old certificate cancelled and the transfer recorded on the share register of the Corporation. Except as otherwise provided pursuant to Section 6.2 hereof, a transferee of shares of the Corporation shall not be a record holder of such shares entitled to the rights and benefits associated therewith unless and until the share transfer has been recorded on the share transfer books of the Corporation. No transfer shall be made if it would be inconsistent with the provisions of Article 8 of the Pennsylvania Uniform Commercial Code.
Section 28.1 Where a shareholder of the Corporation alleges the loss, theft or destruction of one or more certificates for shares of the Corporation and requests the issuance of a substitute certificate therefor, the Board of Directors may direct a new certificate of the same tenor and for the same number of shares to be issued to such person upon such person's making of an affidavit in form satisfactory to the Board of Directors setting forth the facts in connection therewith, provided that prior to the receipt of such request the Corporation shall not have either registered a transfer of such certificate or received notice that such certificate has been acquired by a bona fide purchaser. When authorizing such issue of a new certificate the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his heirs or legal representatives, as the case may be, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such form and sum and with surety or sureties, with fixed or open penalty, as shall be satisfactory to the Board of Directors, as indemnity for any liability or expense which it may incur by reason of the original certificate remaining outstanding.
Section 29.1 The fiscal year of the Corporation shall be as determined by the Board of Directors. MANNER OF GIVING WRITTEN NOTICE; WAIVERS OF NOTICE Section 30.1 Whenever written notice is required to be given to any person under the provisions of these Bylaws, it may be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answerback received) or courier service, charges prepaid, or by telecopier, to his address (or to his telex, TWX, telecopier or telephone number) appearing on the books of the Corporation or, in the case of written notice to directors, supplied by each director to the Corporation for the purpose of the notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched. Section 30.2 Any written notice required to be given to any person under the provisions of statute, the Corporation's Articles of Incorporation or these Bylaws may be waived in a writing signed by the person entitled to such notice whether before or after the time stated therein. Except required by statute, and except in the case of a special meeting, neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice. In the case of a special meeting of shareholders, the waiver of notice shall specify the general nature of the business to be transacted. attendance of any person, whether in person or by proxy, at any meeting shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Section 31.1 Subject to the provisions of Sections 17.6 and 25.9 hereof, these Bylaws may be amended or repealed, and new Bylaws adopted, by the affirmative vote of a majority of the votes cast by the shareholders at any regular or special meeting duly convened after written notice to the shareholders that the purpose, or one of the purposes, of the meeting is to consider the amendment or repeal of these Bylaws and the adoption of new Bylaws. There shall be included in, or enclosed with, the notice, a copy of the proposed amendment or a summary of the changes to be effected thereby. Section 31.2 Except as provided in Sections 17.6 and 25.9 hereof, and except as provided in Section 1504(b) of the BCL, these Bylaws may be amended or repealed, and new Bylaws adopted, by the affirmative vote of a majority of the members of the Board of Directors at any regular or special meeting duly convened, subject to the power of the shareholders to change such action of the Board of Directors. NON-APPLICABILITY OF SUBCHAPTER E OF CHAPTER 25 OF THE BCL
Section 32.1 Pursuant to Section 1541(a)(2)(ii) of the BCL, Subchapter E of Chapter 25 of the BCL relating to control transactions shall not be applicable to the Corporation by virtue of the adoption by the Board of Directors on March 21, 1984 of the following provision of the Bylaws of the Corporation as then in effect: "Section 9.1. By reason of this Article IX, which was duly adopted by the Board of Directors of the Corporation on March 21, 1984 pursuant to Section 910(A)(1) of the [Business Corporation Law of 1933], Section 910 of the [Business Corporation Law of 1933] shall not be applicable to the Corporation. NON-APPLICABILITY OF SUBCHAPTER G OF CHAPTER 25 OF THE BCL
Section 33.1 By reason of this Article 33, which was duly adopted by the Board of Directors of the Corporation on July 26, 1990 pursuant to Section 2561(b)(2)(i) of the BCL, Subchapter G of Chapter 25 of the BCL shall not be applicable to the Corporation.
NON-APPLICABILITY OF SUBCHAPTER H OF CHAPTER 25 OF THE BCL
Section 34.1 By reason of this Article 34, which was duly adopted by the Board of Directors of the Corporation on July 26, 1990 pursuant to Section 2571(b)(2)(i) of the BCL, Subchapter H of Chapter 25 of the BCL shall not be applicable to the Corporation. | 10QSB | EX-3.(I) | 1996-01-16T00:00:00 | 1996-01-16T16:11:28 |
0000800055-96-000004 | 0000800055-96-000004_0002.txt | THIS MASTER PURCHASE AGREEMENT ("Agreement") is made effective as of December 28, 1995 by and between THERMO JARRELL ASH CORPORATION, a Massachusetts corporation whose address is 27 Forge Parkway, Franklin, Massachusetts 02038-3148 ("TJA"), and THERMO INSTRUMENT SYSTEMS INC., a Delaware corporation whose address is 504 Airport Road, Santa Fe, New Mexico 87504 and which is the parent corporation of TJA ("Thermo Instrument") (TJA and Thermo Instrument being sometimes collectively referred to herein as "Thermo"), and ON-SITE ANALYSIS, INC., a Georgia corporation whose address is 3125 Presidential Drive, Suite 130, Atlanta, Georgia 30340-3907 ("OSA, Inc."), and TOP SOURCE TECHNOLOGIES, INC., a Delaware corporation whose address is 2000 PGA Boulevard, Suite 3200, Palm Beach Gardens, Florida 33408-2713 and which is the parent corporation of OSA, Inc. ("Top Source") (OSA, Inc. and Top Source being sometimes collectively referred to herein as "TSI").
W I T N E S S E T H:
WHEREAS, TSI and United Testing Group, Inc., a Georgia corporation which is the successor (by way of merger) to Spectro/Metrics, Inc., a Georgia corporation, and whose parent corporation is Top Source ("UTG"), and TJA and Nicolet Instrument Corporation, a Wisconsin corporation whose parent corporation is Thermo Instrument ("Nicolet"), have each contributed certain Technical Contributions (as hereinafter defined) in the joint development of the On-Site Analyzer (as hereinafter defined); and
WHEREAS, Top Source and UTG have transferred or licensed their Technical Contributions to OSA, Inc., and Thermo Instrument and Nicolet have transferred or licensed their Technical Contributions to, or otherwise authorized the use thereof by, TJA; and
WHEREAS, the parties intend from time to time jointly to modify the specifications for the On-Site Analyzer in order to create specialized instrumentation (individually, a "Specialized Unit" and, collectively, the "Specialized Units") for use in different commercial applications relating to Oil Analysis (as hereinafter defined); and
WHEREAS, OSA, Inc., in addition to its Technical Contributions, will be contributing to the commercial exploitation of the Specialized Units the marketing expertise of OSA, Inc., and the knowledge of the business of Oil Analysis required in order to determine which commercial applications are technologically feasible and otherwise appropriate for each Specialized Unit which may be developed; and
WHEREAS, TJA, in addition to its Technical Contributions, will be contributing to the commercial exploitation of the Specialized Units the manufacturing expertise of TJA required in order to ensure that each Specialized Unit functions in substantial conformance with the Specialized Unit Specification (as hereinafter defined) applicable thereto, upon the terms and subject to the conditions more particularly set forth in this
WHEREAS, the parties wish to memorialize their agreement regarding their rights and obligations with respect to the Specialized Units and the commercial exploitation thereof as hereinafter provided;
NOW, THEREFORE, for and in consideration of the premises and mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and accepted, the parties hereto do agree as follows:
In addition to such other terms as may be defined elsewhere in this Agreement, the following terms as used herein shall have the meanings ascribed in this Article:
1.1 Customer means a person or entity who purchases, leases or licenses a Specialized Unit from OSA, Inc. as contemplated by the terms of this Agreement.
1.2 Customer Site means a location at which a Specialized Unit will be installed as herein provided for Customer use.
1.3 Instrument Software means, with respect to any Specialized Unit developed hereunder, that portion of the computer software operating system and any application software used to operate the Specialized Unit, in object code form only, developed by or for (and owned or licensed by) TJA and all future modifications and enhancements thereto developed by or for (and owned or licensed by) TJA, all as incorporated in the Specialized Unit. Instrument Software shall not include the OSA, Inc. Software or any other proprietary software of OSA, Inc.
1.4 Integrated Instrument means any integrated apparatus used for analysis of mineral oils, synthetic oils and hydraulic fluids, which combines an optical emission spectrometer ("OES") with spark excitation and a Fourier transform infrared spectrometer ("FTIR") in one cabinet with a single computer control.
1.5 Intellectual Property means all intellectual property rights existing from time to time, including without limitation any patents, design rights or registered designs, trademarks or service marks (and any application throughout the world or the right to apply therefor), copyrights (whether registered or unregistered, and including moral rights), know-how (including without limitation engineering and technical know-how), trade secrets, information, any business name, trade name or style or brand name and any merchandising rights.
1.6 Oil Analysis means the testing and analysis of any and all petrochemical-based lubricants, synthetic oils and hydraulic fluids in any and all stages of processing, production or use, including (without limitation) extraction, refinement, product-in- use and waste, regardless of the industry or purpose for which such testing and analysis is performed. Petrochemical-based fluids other than those identified in the preceding sentence are not within the scope of "Oil Analysis" and are excluded from the definition thereof.
1.7 Operator's Manual means the written materials produced by OSA, Inc. and supplied to a Customer in conjunction with any given Specialized Unit instructing the Customer in the use of such Specialized Unit.
1.8 On-Site Analyzer or OSA means the Integrated Instrument (and software incorporated therein, including without limitation the Instrument Software and OSA, Inc. Software) described in the specifications attached hereto as Exhibit A entitled "'U' Specification" and incorporated herein by this reference, as the same may be amended from time to time.
1.9 OSA, Inc. Software means, with respect to any Specialized Unit developed hereunder, that portion of the computer software operating system and any application software used to operate the Specialized Unit, in object code form only, developed by or for (and owned or licensed by) OSA, Inc. and all future modifications and enhancements thereto developed by or for (and owned or licensed by) OSA, Inc., all as incorporated in the Specialized Unit. OSA, Inc. Software shall not include Instrument Software or any other proprietary software of TJA.
1.10 Party or "party" means Thermo considered as one party (or any one or both of TJA or Thermo Instrument, as the context may require) and TSI considered as one party (or any one or both of OSA, Inc. or Top Source, as the context may require).
1.11 Technical Contributions means, with respect to any Specialized Unit developed hereunder, Intellectual Property contributed respectively by OSA, Inc. (itself or as transferee or licensee of Top Source and UTG) and TJA (itself or as transferee, licensee, or authorized designee of Thermo Instrument and Nicolet) in the development of the Specialized Unit. Technology, engineering and other technical know-how constituting prior art existing within the public domain as of the effective date of this Agreement shall be expressly excluded from the definition of Technical Contributions hereunder.
Upon the development of specifications mutually acceptable to the parties for a Specialized Unit which OSA, Inc. desires to purchase from TJA and TJA desires to sell to OSA, Inc. (as to each such Specialized Unit, the "Specialized Unit Specification"), the parties shall execute an Addendum to this Agreement, in form mutually acceptable to the parties (a "Specialized Unit Addendum"), setting forth the Specialized Unit Specification and the purchase price applicable to such Specialized Unit (the "Purchase Price"). Each Specialized Unit Addendum shall be a separate and enforceable agreement, shall incorporate therein all of the terms and conditions of this Agreement, and shall contain such additional terms and conditions as the parties mutually agree upon.
3. OWNERSHIP OF SPECIALIZED UNITS AND RELATED INTELLECTUAL PROPERTY.
3.1 Technical Contributions, Etc. Except to the extent expressly otherwise provided in this Agreement, TJA and OSA, Inc. shall each remain fully vested with all right, title and interest (as owner, licensee or designee, as the case may be) in and to its respective Technical Contributions.
3.2 Marks. Specialized Units (and related services) shall be sold, leased, licensed, sublicensed, distributed and marketed as permitted herein only under the trademarks, trade names, service marks and trade dress of OSA, Inc. (collectively, the "OSA, Inc. Marks"). Specialized Units (and related services) shall not be sold, leased, licensed, sublicensed, distributed or marketed under the trademarks, trade names, service marks or trade dress of TJA, Thermo Instrument or Nicolet (collectively, the "TJA Marks"). Notwithstanding the foregoing provisions of this Section 3.2, OSA, Inc. shall not remove or obscure any notice of copyright, patent, trademark, trade secret or restricted or limited rights which may be contained on the Instrument Software and/or any of TJA's Technical Contributions. For purposes of this Agreement, the OSA, Inc. Marks and the TJA Marks are referred to collectively as the "Marks." No party shall use any of the Marks of another party hereto without the prior written consent of the other party. No party shall register, agree to register or assist any other person in registering any Marks of another party hereto in any jurisdiction in the world. Each party acknowledges that the other has the exclusive right, title and interest in and to such other party's respective Marks. Each party agrees that it will not use, without the other's prior written consent, any Marks which are likely to be similar to or confused with the Marks of the other party. Notwithstanding the foregoing, OSA, Inc. shall have the right to identify TJA as the manufacturer of any Specialized Unit developed hereunder, and to identify any TJA Marks affixed by TJA to components of the Specialized Unit, in presentations marketing the Specialized Unit, and in sales, advertising and marketing materials for the Specialized Unit; provided, however, that (i) TJA shall have the right to pre-approve in writing all such written sales, advertising and marketing materials referencing TJA and/or any TJA Marks prior to the dissemination of such materials by OSA, Inc., (ii) except where such identification is required by law (and in such cases, TJA shall be notified prior to the making of such identification), TSI shall obtain TJA's prior written consent to identify TJA or any TJA Marks in relation to the Specialized Unit in any press release or public statement, including without limitation those to the financial community, and (iii) if TJA determines, in good faith, that the TJA Marks are being used by OSA, Inc. in a manner which is detrimental to the reputation of TJA (including without limitation in connection with the sale, leasing, licensing or sublicensing of one or more Specialized Units to any Customer for an application as to which the applicable Specialized Unit Specification is, in TJA's sole discretion, inadequate or otherwise inappropriate), then, in such event, TJA shall so notify OSA, Inc., and OSA, Inc. shall immediately remove all TJA Marks from Specialized Units then in OSA, Inc.'s possession and thereafter shall not identify TJA as the manufacturer of the Specialized Units nor otherwise use the TJA Marks in any manner, including without limitation in connection with the sale, leasing, licensing, sublicensing, distribution or marketing of the Specialized Units (or related services). The consents required of TJA pursuant to the provisions of the immediately preceding sentence shall not unreasonably be withheld or delayed, provided TJA expressly reserves the right to make determinations in TJA's sole discretion to the extent set forth in clause (iii) of said sentence.
4. USE OF TECHNICAL CONTRIBUTIONS, ETC.
4.1 General. Except to the extent permitted by the terms of this Agreement, neither party may use the Technical Contributions of the other party in any manner whatsoever without the express written consent of such other party.
4.2 Instrument Software. TJA hereby grants to OSA, Inc. a nontransferable (except to the extent expressly otherwise provided herein), nonexclusive right and license to use the Instrument Software, subject to the following:
4.2.1 Use of the Instrument Software by OSA, Inc. shall be solely in connection with the ordinary operation of a Specialized Unit, as specified in the applicable Operator's Manual .
4.2.2 OSA, Inc. shall have the right to grant to any Customer (and shall in any event not grant rights greater than) a nonexclusive, nontransferable sublicense (expressly excluding the right by the Customer to further sublicense) for the sole purpose of allowing the Customer to use the Instrument Software in connection with the ordinary operation of the Specialized Unit, as specified in the Operator's Manual.
4.2.3 The license to OSA, Inc., and any Customer's sublicense, shall encompass only object code.
4.2.4 OSA, Inc. is prohibited from, and any Customer's sublicense shall prohibit the Customer from, (a) copying, accessing or downloading the Instrument Software, other than in connection with the ordinary operation of the Specialized Unit in accordance with the Operator's Manual; (b) decompiling, disassembling or reverse engineering the Instrument Software; (c) removing or obscuring any notice of copyright, patent, trademark, trade secret or restricted or limited rights; or (d) removing or obscuring any export restriction or similar notice contained on the Instrument Software.
4.3 OSA, Inc. Software. OSA, Inc., hereby grants to TJA a nontransferable, nonexclusive right and license to use the OSA, Inc. Software, subject to the following restrictions:
4.3.1 TJA shall have the right only to copy and use the OSA, Inc. Software solely in connection with (a) developing the Instrument Software for purposes of this Agreement for the mutual benefit of the parties hereto and (b) installation of the OSA, Inc. Software into Specialized Units prior to shipment by TJA to OSA, Inc. or Customers.
4.3.2 Without limiting the foregoing, TJA agrees not to (a) copy, access or download the OSA, Inc. Software; (b) decompile, disassemble or reverse engineer the OSA, Inc. Software; (c) remove or obscure any notice of copyright, patent, trademark, trade secret, restricted or limited rights; or (d) remove or obscure any export restriction or similar notice contained on the OSA, Inc. Software.
5.1 Manufacture by TJA. TJA shall manufacture Specialized Units developed hereunder (including, without limitation, installing the Instrument Software thereon) and supply such Specialized Units to OSA, Inc. in accordance with the terms and conditions of this Agreement.
5.2 Specifications. IT IS EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES HERETO THAT ANY MODIFICATION OF THE SPECIALIZED UNIT SPECIFICATION MUST BE APPROVED IN WRITING BY BOTH THE PRESIDENT OF TJA AND THE PRESIDENT OF OSA, INC., WHICH APPROVAL MAY BE WITHHELD BY EITHER TJA OR OSA, INC. IN SUCH PARTY'S SOLE AND ABSOLUTE DISCRETION, IT BEING EXPRESSLY UNDERSTOOD AND AGREED THAT, EXCEPT AS MAY BE EXPRESSLY AGREED TO BY THE PARTIES AS PROVIDED ABOVE IN THIS SECTION 5.2, NEITHER TJA NOR THERMO INSTRUMENT HAS ANY OBLIGATION UNDER THIS AGREEMENT, EXPRESS OR IMPLIED, TO MANUFACTURE, DELIVER OR OTHERWISE PROVIDE TO OSA, INC. OR TOP SOURCE ANY SPECIALIZED UNIT WHICH DIFFERS IN ANY MANNER FROM THE SPECIALIZED UNIT SPECIFICATION ORIGINALLY DEVELOPED AND AGREED UPON BY THE PARTIES WITH RESPECT THERETO.
Notwithstanding any provision herein to the contrary, it is understood and agreed by the parties hereto that OSA, Inc. shall have the right, alone or in conjunction with any third party, to modify (including without limitation to add or substitute component parts) in any manner any Specialized Unit purchased by OSA, Inc. hereunder (so long as OSA, Inc. does not infringe upon the Instrument Software or any of TJA's Technical Contributions); provided, however, that any such modification shall immediately void and cancel, with respect to the Specialized Unit so modified, (i) all Installation obligations under Section 9.1, (ii) all maintenance obligations under Section 9.2 and (iii) all warranties under Section 10.1.1. . Upon the modification of any Specialized Unit pursuant to the provisions of this Article 6, OSA, Inc.
immediately shall remove all TJA Marks therefrom and thereafter shall not identify TJA as the manufacturer of the same nor otherwise use the TJA Marks in any manner with respect to such modified Specialized Unit, including without limitation in connection with the sale, leasing, licensing, sublicensing, distribution or marketing thereof.
7.1 Site Survey Report. OSA, Inc. agrees to deliver to TJA, prior to the week in which an order for Specialized Units hereunder is to be shipped by TJA, a completed Site Survey Report with respect to each Customer to which such order relates in substantially the form of Exhibit B attached hereto and incorporated herein by this reference (the "Site Survey Report"). It is understood and agreed that one purpose of such Site Survey Report is to enable TJA to contact any Customer directly, whether by mail, telephone, facsimile, computer modem or otherwise, in order to relay to such Customer information regarding the use, operation and/or maintenance of the Specialized Unit(s) in such Customer's possession.
7.2 Terms and Conditions. No terms or conditions of any order for Specialized Units other than the terms and conditions set forth in this Agreement shall apply to purchases of Specialized Units by OSA, Inc.
7.3 Shipment. Specialized Units shall be shipped to the destination specified by OSA, Inc., on an F.O.B. destination basis.. Unless otherwise requested by OSA, Inc., TJA shall select the carrier. Partial shipments shall be permitted and TJA may invoice each shipment separately. All shipping costs shall be borne by OSA, Inc., and all Specialized Units shall be insured in transit by TJA (unless otherwise requested by OSA, Inc.), at the expense of OSA, Inc. OSA, Inc. shall reimburse TJA for such shipping and insurance costs promptly upon demand. The delivery date for any given shipment of Specialized Units will be mutually agreed upon by the parties at the time of TJA's acceptance of the order therefor.
7.4 Return Authorization. No Specialized Unit shipped by TJA may be returned without TJA's written permission. All shipping expenses on returned Specialized Units will be paid by the party who necessitated the return (the "Responsible Party"). In the event such expenses are not paid by the Responsible Party, the other party may invoice the Responsible Party therefor.
7.5 Shortages; Damages in Transit. If the quantity of Specialized Units received by OSA, Inc. shall be less than the quantity shown in the applicable invoice, or if the Specialized Units received by OSA, Inc. shall have been damaged in transit, OSA, Inc. shall, within twenty (20) days after receipt of such goods, give written notice of such shortage or damage to the agent of the delivery carrier in order to permit written verification of the shortage or damage by the delivery carrier and substantiate a formal claim when and if presented. OSA, Inc. shall promptly send a copy of such notice to TJA.
7.6 Title and Risk of Loss. Subject to any claims pursuant to Section 7.5, title to and post-delivery risk of loss for Specialized Units shall pass to OSA, Inc. upon delivery of the Specialized Units to the designated destination; provided, however, that title to the Instrument Software shall at all times remain with TJA (or its licensor). OSA, Inc. shall reasonably cooperate with TJA in any documentation and proof of loss claims promptly presented by TJA to the appropriate carrier and/or insurer.
7.7 Title Matters. OSA, Inc. shall have flexibility in its discretion to arrange for title to any Specialized Unit to be transferred at any time to any third party, including, without limitation, finance corporations, subject to compliance with the provisions of Section 14.2 below. Written notice of any such transfer, together with the identity of the transferee, shall be promptly presented to TJA by OSA, Inc.
8.1 Payments Net. An amount equal to forty percent (40%) of the total Purchase Price allocable to a given order for Specialized Units hereunder shall be paid by OSA, Inc. at the time of the order. The balance of the Purchase Price will be paid within thirty (30) days after the date of shipment. All amounts payable by OSA, Inc. to TJA under this Agreement shall be paid net of all freight charges, insurance premiums, taxes (including without limitation sales, value-added and use taxes, but excluding taxes based on TJA's net income), tariffs and other governmental charges, payment of which shall be the responsibility of OSA, Inc. If TJA is required to pay any such charge, premium, tax, tariff or other charge based on goods sold or any services performed under this Agreement, then the same (together with any penalties and/or interest thereon) shall be billed to and paid by OSA, Inc. All payments hereunder shall be made in U.S. dollars.
8.2 Late Payment Charges. In addition to any other remedies available to TJA hereunder, if OSA, Inc. fails to pay any amounts when due, OSA, Inc. shall pay TJA interest on such overdue amounts at the rate of 2.0% per month (or the highest rate permitted by law, if lower) from the date due until paid (calculated on the basis of a thirty (30)-day month and pro-rated on a per diem basis with respect to any partial month), together with all costs and expenses, including without limitation reasonable attorneys' fees, incurred by TJA in collecting such overdue amounts.
8.3 OSA, Inc. Pricing. OSA, Inc. shall be free to establish its own pricing for Specialized Units sold, leased or licensed to Customers and shall have no obligation whatsoever to TJA to account for any differential relative to the applicable Purchase Price paid to TJA therefor.
9. INSTALLATION, TRAINING AND MAINTENANCE.
9.1.1 Installation Obligation. TJA shall install each Specialized Unit at the applicable Customer Site ("Installation") located within the United States within twenty (20) business days after delivery of the Specialized Unit to the Customer Site. TJA may, in its discretion and for an additional fee as specified in Section 9.1.3, arrange for Installation at Customer Sites outside of the United States. TJA may subcontract its Installation obligations hereunder to a qualified subcontractor.
9.1.2 Customer Site. Notwithstanding the provisions of Section 9.1.1 above, TJA's Installation obligation need not be completed until the latest to occur of (a) the expiration of the twenty (20) business day period referenced in Section 9.1.1 above; (b) the second (2nd) business day after receipt by TJA of the Site Survey Report referenced in Section 7.1 above or (c) the fourteenth (14th) day after receipt by TJA of written notice from OSA, Inc. that the following conditions have been satisfied: (i) the Customer Site is in compliance with the site specifications listed on Exhibit C attached hereto and incorporated herein by this reference and is otherwise safe and appropriate for Installation; and (ii) any third-party equipment to be used in conjunction with the Specialized Unit has been reasonably approved by TJA and is operating according to the manufacturer's specifications. TJA or its designated subcontractor shall perform the unpacking of the Specialized Unit at the Customer Site. On the date scheduled for Installation, OSA, Inc. shall cause appropriate personnel of the Customer or OSA, Inc. or both to be available to cooperate with TJA, allowing TJA to use without charge any of the Customer's equipment and facilities which TJA reasonably deems necessary for Installation. TJA shall give OSA, Inc. and/or the Customer sufficient advance notification of personnel required for completion of the Installation. The Customer Site shall remain accessible to TJA throughout the period of Installation. Upon Installation of a Specialized Unit, TJA or its designated subcontractor or agent, as the case may be, shall perform TJA's standard acceptance test procedures to confirm that the Specialized Unit operates in substantial conformance with the Specialized Unit Specification applicable thereto. Upon successful completion of the aforesaid acceptance test procedures, Installation of the Specialized Unit shall be deemed complete.
9.1.3 Installation Fee. Specialized Units shall be installed by TJA free of charge in the United States. If TJA in its discretion agrees to install a Specialized Unit outside of the United States, TJA will charge an installation fee in accordance with TJA's then current rates (the "Installation Fee"). The terms and conditions of Section 9.1.2 shall be applicable to any Installation to be performed by TJA outside of the United States.
9.1.4 Reinstallation. In the event a Customer desires to relocate a Specialized Unit previously installed by TJA, TJA shall install the Specialized Unit at the new Customer Site within the United States ("Reinstallation"), provided that the terms and conditions of Section 9.1.2 above are satisfied with respect to the Reinstallation at the new Customer Site. TJA shall charge a fee, payment of which shall be the responsibility of the Customer, for Reinstallation in accordance with TJA's then current rates (the "Reinstallation Fee").
9.1.5 Unauthorized Installation or Reinstallation. OSA, Inc. shall have the right to elect to have the Installation or Reinstallation of any Specialized Unit performed by OSA, Inc. or any third party, including without limitation a Customer; provided, however, that any Installation or Reinstallation of a Specialized Unit at a Customer Site or any other location by any person or entity other than TJA or TJA's designated subcontractor or agent without the express written consent of TJA, signed by the President of TJA and specifically referencing this Section 9.1.5. (an "Unauthorized Installation"), shall automatically invalidate and void any TJA warranty with respect to such Specialized Unit. TJA HEREBY DISCLAIMS ALL LIABILITY FOR ANY AND ALL CLAIMS, LOSSES, COSTS AND DAMAGES TO THE EXTENT ARISING FROM OR ATTRIBUTABLE TO ANY UNAUTHORIZED INSTALLATION OR REINSTALLATION OF A SPECIALIZED UNIT.
9.2 Maintenance. OSA, Inc. agrees to retain TJA to provide all maintenance with respect to Specialized Units manufactured or supplied by TJA hereunder, provided TJA's maintenance services are competitive. The determination as to whether or not the maintenance services of TJA are competitive for purposes of this Section 9.2 shall be based upon such factors as, without limitation, timeliness of performance, price and professional competence. If OSA, Inc. requests that TJA provide all maintenance with respect to Specialized Units manufactured or supplied by TJA hereunder, TJA agrees to provide the same in accordance with the terms of TJA's standard form of maintenance agreement (whether or not TJA's maintenance services are competitive). Payment for maintenance services provided by TJA hereunder shall be made by OSA, Inc. to TJA on a time and materials basis at TJA's then current rates. TJA may subcontract any such maintenance services to qualified subcontractors. In the event that TJA's services are not competitive, OSA, Inc. shall have the right to elect to obtain said maintenance directly from third party vendors. In the event that OSA, Inc. contracts with any party other than TJA to provide such maintenance services, OSA, Inc. agrees to defend, indemnify and hold harmless TJA, its parent, subsidiaries and affiliates (including without limitation Thermo Instrument) from and against any and all losses, damages, liabilities and expenses (including without limitation reasonable attorneys' fees and disbursements and court costs) incurred in connection with third party claims or suits, whether based in statute, contract, tort, strict liability, breach of warranty or otherwise, to the extent arising, or alleged by such third party claimant to arise, by reason of the acts or omissions of any such third party service provider. It is understood and agreed that in no event shall OSA, Inc., or any third party service provider retained by OSA, Inc., have any right to the use of any diagnostic software owned by, or otherwise developed on behalf of, TJA or Thermo Instrument. TJA shall have no obligation to provide service manuals to OSA, Inc. or to any third party service provider. If it is determined that TJA's maintenance services are competitive with respect to certain geographic areas and not others, and OSA, Inc. elects to contract with one or more third party service providers with respect to any such geographic area or areas as to which TJA's services are not competitive, TJA shall in such event have the right to elect not to provide maintenance services with respect located in any remaining areas.
10. WARRANTY AND LIMITATION OF LIABILITY.
10.1 Warranties to OSA, Inc.
10.1.1 TJA warrants to OSA, Inc. that the Specialized Units (including, without limitation, the Instrument Software) purchased from TJA shall (a) upon initial delivery be free from material defects in workmanship or materials and (b) upon initial delivery and for a period of six (6) months after initial shipment (the "Warranty Period") operate substantially in accordance with the Specialized Unit Specification applicable thereto when subjected to normal, proper and intended usage. TJA agrees during the Warranty Period, provided it is promptly notified in writing upon the discovery of any defect, to repair or replace, at its option, free of charge, defective Specialized Units so as to cause the same to conform to the warranties set forth in clauses (a) or (b) above, as the case may be, and such repair or replacement shall constitute the sole and exclusive remedy for breach of any such warranty. Replacement parts may be new or refurbished, at the election of TJA. All costs for returning defective Specialized Units to TJA shall be paid by OSA, Inc., with reimbursement of such costs to be made by TJA to OSA, Inc. within thirty (30) days following TJA's receipt of an invoice and reasonable back-up documentation therefor. Notwithstanding anything to the contrary contained herein, TJA makes no warranties (INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE) with respect to equipment, materials or software (including without limitation the OSA, Inc. Software) not manufactured by TJA, Thermo Instrument, or any parent, subsidiary or affiliate of either. Lamps, mercury bulbs and other minor expendable items are further expressly excluded from this warranty. TJA agrees to assign to OSA, Inc. any manufacturer's warranty relating to any such excluded equipment, materials and software, to the extent the same is assignable. If TJA determines that any Specialized Unit for which OSA, Inc. or any Customer has requested warranty service is not covered by the terms of the warranty under clause (a) or (b) above, OSA, Inc. shall pay or reimburse to TJA all costs of investigating and responding to such request at TJA's then prevailing time and materials rates. ANY INSTALLATION, MAINTENANCE, REPAIR, SERVICE, ALTERATION, MODIFICATION (PURSUANT TO THE TERMS OF ARTICLE 6 ABOVE OR OTHERWISE), RELOCATION OR OTHER TAMPERING TO OR WITH A SPECIALIZED UNIT PERFORMED BY ANY PERSON OR ENTITY OTHER THAN TJA OR TJA's DESIGNATED SUBCONTRACTOR OR AGENT WITHOUT TJA'S WRITTEN APPROVAL SIGNED BY THE PRESIDENT OF TJA AND
SPECIFICALLY REFERENCING THIS SECTION 10.1.1, OR ANY USE OF REPLACEMENT PARTS SUPPLIED BY ANY PARTY OTHER THAN TJA WITHOUT TJA'S WRITTEN APPROVAL SIGNED BY THE PRESIDENT OF TJA AND SPECIFICALLY REFERENCING THIS SECTION 10.1.1 (IT BEING UNDERSTOOD AND AGREED THAT REPLACEMENT PARTS DELIVERED DIRECTLY TO OSA, INC. OR TO ANY CUSTOMER BY TJA, TJA's DESIGNATED SUBCONTRACTOR OR AGENT OR A THIRD PARTY VENDOR AT THE DIRECTION OF TJA WILL BE DEEMED TO HAVE BEEN SUPPLIED BY TJA FOR PURPOSES OF THIS SECTION 10.1.1), SHALL IMMEDIATELY VOID AND CANCEL ALL WARRANTIES WITH RESPECT TO SUCH SPECIALIZED UNITS (BUT SHALL NOT IMPAIR ANY VALID WARRANTY CLAIMS THERETOFORE ACCRUED WITH RESPECT TO SUCH SPECIALIZED UNITS).
10.1.2 TJA warrants that the Instrument Software and Technical Contributions of TJA do not violate or infringe the United States Intellectual Property rights of any third party.
10.1.3 EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, TJA DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THE SPECIALIZED UNITS, INCLUDING, WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE.
10.2.1 (a) TJA's LIABILITY FOR DAMAGES TO OSA, INC. OR ANY CUSTOMER FOR ANY BREACH OF WARRANTY CLAIM HEREUNDER SHALL NOT EXCEED THE PRICE PAID FOR THE SPECIALIZED UNIT TO WHICH SUCH BREACH RELATES; AND (b) TJA SHALL IN NO EVENT BE LIABLE FOR ANY SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOSS OF DATA, PROFITS OR USE, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION IN CONNECTION WITH THE USE OR PERFORMANCE OF THE SPECIALIZED UNITS. 10.2.2 IN NO EVENT SHALL TJA BE LIABLE TO CUSTOMERS OR OTHER THIRD PARTIES FOR, AND, SUBJECT TO THE LIMITATIONS IN SECTION 10.2.3, OSA, INC. SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS TJA, ITS PARENT, SUBSIDIARIES AND AFFILIATES (INCLUDING WITHOUT LIMITATION THERMO INSTRUMENT AND NICOLET) FROM AND AGAINST, ANY DAMAGES TO THE EXTENT (a) CAUSED BY ANY INSTALLATION, MAINTENANCE, REPAIR, SERVICE, ALTERATION, MODIFICATION (PURSUANT TO THE TERMS OF ARTICLE 6 ABOVE OR OTHERWISE), RELOCATION OR OTHER TAMPERING TO OR WITH ANY SPECIALIZED UNIT PERFORMED BY ANY PARTY OTHER THAN TJA OR TJA's DESIGNATED SUBCONTRACTOR OR AGENT WITHOUT TJA'S WRITTEN APPROVAL SIGNED BY THE PRESIDENT OF TJA AND
REFERENCING THIS SECTION 10.2.2; (b) DUE TO A CUSTOMER'S FAILURE TO OBSERVE THE SAFETY INSTRUCTIONS ACCOMPANYING ANY SPECIALIZED UNIT, INCLUDING WITHOUT LIMITATION THOSE CONTAINED IN THE OPERATOR'S MANUAL OR DUE TO THE CUSTOMER HAVING ALTERED, OBSCURED OR REMOVED WARNING OR OTHER LABELS OR MATERIALS PROVIDED BY TJA; (c) DUE TO THE NATURE OR CONTENT OF THE DIAGNOSTIC DATA OR OTHER RESULTS GENERATED OR PRODUCED BY THE OSA, INC. SOFTWARE; (d) DUE TO USE OR STORAGE OF AN UNPACKED SPECIALIZED UNIT IN A PHYSICAL ENVIRONMENT WHICH IS NOT IN CONFORMANCE WITH THE OPERATING ENVIRONMENT DESCRIBED IN THE SPECIALIZED UNIT SPECIFICATION APPLICABLE THERETO; OR (e) DUE TO ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOSS OF DATA, PROFITS OR USE, IN CONNECTION WITH THE USE OR PERFORMANCE OF ANY SPECIALIZED UNIT; PROVIDED, HOWEVER, THAT OSA, INC. SHALL HAVE NO LIABILITY UNDER THIS SECTION 10.2.2 TO THE EXTENT ANY DAMAGES ARE ATTRIBUTABLE TO THE NEGLIGENCE OR WILLFUL MISCONDUCT OF TJA, OR ITS PARENT, AFFILIATES, EMPLOYEES, AGENTS, REPRESENTATIVES OR CONTRACTORS. The foregoing provisions of this Section 10.2.2 are not intended to limit the express terms of any warranty set forth herein, including without limitation in clause (b) of Section 10.1.1 above regarding substantial conformance of a Specialized Unit with the Specialized Unit Specification applicable thereto during the Warranty Period; provided, however, that to the extent any warranty claim made against TJA is attributable to the occurrence of any one or more of the events enumerated in clauses (a) through (e) above, OSA, Inc. shall indemnify TJA for all costs incurred by TJA in connection with such claim.
10.2.3 OSA, INC. SHALL IN NO EVENT BE LIABLE FOR ANY SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOSS OF PROFITS, ARISING OUT OF THIS AGREEMENT.
10.3 Warranty to TJA. OSA, Inc. warrants that the OSA, Inc. Software and Technical Contributions of OSA, Inc. do not violate or infringe the United States Intellectual Property rights of any third party.
11. MARKETING BY OSA, INC.
11.1 Marketing. OSA, Inc. shall use its best efforts to market and promote the Specialized Units and to maximize its sales, leases or licenses of Specialized Units.
11.3 Information Regarding Specialized Units. OSA, Inc. shall: (a) provide pertinent information concerning the Specialized Units to prospective Customers; (b) promptly present to TJA complaints concerning any Specialized Unit which OSA, Inc. receives from Customers; (c) remain reasonably informed and knowledgeable concerning the function, specifications and advantages of the Specialized Units; (d) avoid deceptive, misleading or unethical practices that are detrimental to TJA, Thermo Instrument and/or any one or more of the Specialized Units; (e) make no false or misleading representations with regard to TJA, Thermo Instrument and/or any one or more of the Specialized Units; (f) not publish or employ, or cooperate in the publication or employment of, any misleading or deceptive advertising material with regard to TJA, Thermo Instrument and/or any one or more of the Specialized Units; and (g) make no representations, warranties or guarantees to Customers or to the trade with respect to the specifications, features or capabilities of any one or more of the Specialized Units that are inconsistent with this Agreement and the various Exhibits attached hereto or the warranties provided herein.
11.4 Specialized Unit Applications. It is understood and agreed by the parties hereto that the identification of Customers to whom the Specialized Units are to be sold, leased or licensed, and the selection of the commercial applications for and environments in which any given Specialized Unit is to be utilized, shall be determined exclusively by OSA, Inc. in the exercise of its sole discretion. TJA MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE THAT THE FUNCTIONALITY OF ANY SPECIALIZED UNIT IS ADEQUATE, SUITABLE OR OTHERWISE APPROPRIATE, FROM A TECHNOLOGICAL STANDPOINT OR OTHERWISE, IN THE CONTEXT OF ANY CURRENTLY CONTEMPLATED AND/OR FUTURE APPLICATIONS THEREFOR AND HEREBY DISCLAIMS ALL LIABILITY ARISING FROM OR IN CONNECTION WITH THE ADEQUACY, SUITABILITY OR APPROPRIATENESS OF SUCH FUNCTIONALITY FOR ANY SUCH APPLICATIONS. The foregoing provisions of this Section 11.4 are not intended to limit the express terms of the warranty set forth in clause (b) of Section 10.1.1 above regarding substantial conformance of each Specialized Unit developed hereunder with the applicable Specialized Unit Specification during the Warranty Period.
No Specialized Unit shall be sold, leased, licensed or sublicensed by OSA, Inc. to any Customer until such time as a form of customer agreement mutually acceptable to OSA, Inc. and TJA, in the exercise of each party's created (the "Customer Agreement"). OSA, Inc. agrees to cause each Customer to execute a Customer Agreement prior to the delivery to such Customer of any Specialized Unit hereunder. Upon execution of this Agreement, OSA, Inc. and TJA shall commence and thereafter diligently continue to negotiate in good faith the form of such Customer Agreement.
13.1 By OSA, Inc. Subject to the limitations in Section 10.2.3, OSA, Inc. shall indemnify, defend and hold harmless TJA, its parent, subsidiaries and affiliates (including without limitation Thermo Instrument and Nicolet), from and against any and all losses, damages, liabilities and expenses (including, without limitation, reasonable attorneys' fees and disbursements and court costs) incurred by them in connection with third party claims or suits, whether based in statute, contract, tort, strict liability or breach of warranty or otherwise, to the extent arising, or alleged by said third party claimant to arise, by reason of (a) the negligence or willful misconduct of OSA, Inc., its parent, affiliates, employees, agents, representatives or contractors, (b) false or misleading statements made by OSA, Inc., its parent, affiliates, employees, agents, representatives or contractors, to any persons including, but not limited to, Customers, (c) infringement by the OSA, Inc. Software of any patent, copyright, trademark, trade secret or any other proprietary right of any third party, (d) use of any Specialized Unit in combination with equipment or software external to the Specialized Unit and not manufactured by TJA or Thermo Instrument, or any parent, subsidiary or affiliate of either, which use is not approved in writing by TJA in an instrument expressly referencing this Section 13.1(d) and signed by the President of TJA , (e) TJA's compliance with designs, specifications or instructions of OSA, Inc., or of any Customer made with OSA, Inc.'s approval, (f) use of any Specialized Unit in an application or environment for which the Specialized Unit design and/or the Specialized Unit Specification applicable thereto is or are inadequate, unsuitable or otherwise inappropriate, (g) use of any Specialized Unit which has been modified pursuant to the provisions of Article 6 above or otherwise, (h) repair, maintenance or installation of, or other tampering with, any Specialized Unit by anyone other than TJA or its affiliates, employees, contractors or agents unless approved by TJA, which approval must be evidenced by an instrument expressly referencing this Section 13.1(h) and signed by the President of TJA, (i) infringement of any Intellectual Property rights of any person or entity by OSA, Inc.'s Technical Contributions or Marks or (j) TSI's breach of any representation or warranty under Section 17.16.1 below; provided, however, that OSA, Inc. shall have no liability under this Section 13.1 to the extent any third party claims or suits are attributable to the negligence or willful misconduct of TJA or its parent, affiliates, employees, agents, representatives or contractors.
13.2 By TJA. Subject to the limitations in Section 10.2.1(b), TJA shall indemnify, defend and hold harmless OSA, Inc., its parent, subsidiaries and affiliates (including without limitation Top Source and UTG), from and against any and all losses, damages, liabilities and expenses (including, without limitation, reasonable attorneys' fees and disbursements and court costs) incurred by them in connection with third party claims or suits, whether based in statute, contract, tort, strict liability or breach of warranty or otherwise, to the extent arising, or alleged by said third party claimant to arise, by reason of (a) the negligence or willful misconduct of TJA, its parent, affiliates, employees, agents, representatives or contractors, (b) false or misleading statements made by TJA, its parent, affiliates, employees, agents, representatives or contractors, to any persons including, but not limited to, Customers, (c) infringement by the Instrument Software of any patent, copyright, trademark, trade secret or any other proprietary right of any third party, (d) use of any Specialized Unit in combination with equipment or software external to the Specialized Unit and manufactured by TJA or Thermo Instrument, or any parent, subsidiary or affiliate of either, or otherwise used with TJA's written approval, which approval must be evidenced by an instrument expressly referencing this Section 13.2(d) and signed by the President of TJA, (e) OSA, Inc.'s compliance with designs, specifications or instructions of TJA, (f) repair, maintenance, installation or reinstallation of any Specialized Unit by TJA or its parent, affiliates, employees, agents, representatives or contractors, (g) infringement of any Intellectual Property rights of any person or entity by TJA's Technical Contributions or Marks, (h) OSA, Inc.'s or any Customer's compliance with written safety or training materials provided by TJA or (i) Thermo's breach of any representation or warranty under Section 17.16.2 below; provided, however, that TJA shall have no liability under this Section 13.2 to the extent any third party claims or suits are attributable to the negligence or willful misconduct of OSA, Inc. or its parent, affiliates, employees, agents, representatives or contractors.
13.3 Procedures. The party seeking indemnification under this Article 13 ("Indemnified Party") shall provide prompt written notice of any claim to the party from whom indemnification is sought hereunder ("Indemnifying Party"). The Indemnifying Party shall have the right, at its option, to assume the defense of any claim for which indemnification is sought. In the event that the defense of any claim has been assumed by the Indemnifying Party, the Indemnified Party shall have the right to participate in any such proceeding with counsel of its own choice and at its own expense.
13.4 Terminology. It is understood and agreed that any time the term "contractor(s)" is used in this Agreement, the same shall be deemed to refer to and include subcontractor(s) as well.
14.1 Proprietary Information. All of the parties to this Agreement (i.e., TJA, Thermo Instrument, OSA, Inc. and Top Source) agree and acknowledge that in order to further the performance of this Agreement, they have disclosed and will continue to disclose to each other certain information concerning their respective Technical Contributions, proprietary inventions, confidential know-how and trade secrets (including without limitation methods or concepts utilized therein), marketing and sales, pricing (including without limitation the pricing information contained in any Specialized Unit Addendum hereto), software (including without limitation the Instrument Software and OSA, Inc. Software), distributors, customers, business and other confidential information (collectively, the "Proprietary Information"). The Proprietary Information shall remain the sole property of the disclosing party (the "Owner"), and the receiving party (the "Recipient") shall have no interest in, or rights with respect to, such Proprietary Information except as set forth in this Agreement. In addition, the terms of this Agreement shall constitute Proprietary Information of all parties.
14.2 Protection. The Recipient agrees to use the same degree of care to protect the confidentiality of all Proprietary Information, designated as such in writing by the Owner thereof, as a reasonable man would utilize in protecting his own similar proprietary information, including without limitation agreeing:
14.2.1 Except as specifically authorized by this Agreement, not to permit the disclosure, use, copying, display, loan, publication, transfer of possession (whether by sale, exchange, gift, operation of law or otherwise) or other dissemination of or access to the Proprietary Information, in whole or in part, to any third party without the prior written consent of the Owner, except that such disclosure or access shall be permitted
(a) to an employee, agent, representative, contractor or director of the Recipient requiring access to the Proprietary Information in the course of his or her duties in connection with the performance by the Recipient of its obligations under this Agreement and who has agreed to maintain the confidentiality of the Proprietary Information, (b) with respect to disclosure only of Proprietary Information other than the contents of this Agreement, to a Customer or other third party who has executed a Customer Agreement or (c) with respect to disclosure of the contents of this Agreement only, to any party providing, or considering providing, financing or capital to TSI in connection with any Specialized Unit developed hereunder who has agreed, in writing, to maintain the confidentiality of the contents of this Agreement;
14.2.2 To notify the Owner promptly, and in writing, of the circumstances surrounding any suspected possession, use or knowledge of the Proprietary Information or any part thereof at any location or by any person or entity other than those whose access thereto is authorized by this Agreement and take further steps as may reasonably be requested by the Owner to prevent or remedy any such violation. The Owner shall be permitted to make reasonable inquiries from time to time concerning the Recipient's compliance with the provisions of this Article 14.
14.3 Exception. Nothing in this Article 14 shall restrict the Recipient with respect to information or data, whether or not identical or similar to that contained in the Proprietary Information, if such information or data (a) was rightfully possessed by the Recipient before it was received from the Owner; (b) is independently developed by or for the Recipient without derivation from or reference to the Owner's information or data; (c) is or becomes public or available to the general public otherwise than through any act or default of the Recipient; (d) becomes available to the Recipient from a source (other than the Owner) who is not, to the Recipient's knowledge, bound by a confidentiality obligation; or (e) is required by law or stock exchange rule to be disclosed. In addition, nothing in this Article 14 shall restrict the Recipient from disclosing this Agreement (a) in connection with any legal action to enforce the terms hereof or (b) in compliance with any valid subpoena, provided the Recipient notifies the Owner prior to making any such disclosure and uses reasonable efforts to obtain a protective stipulation of confidentiality with respect to the subpoenaed information prior to disclosure of the same.
14.4 Efforts to Maintain Confidentiality. The parties agree to take any and all reasonable and appropriate measures to maintain confidentiality of all Proprietary Information in conformance with the standards set forth in Section 14.2 above, such measures to include, without limitation, written agreements with Customers and other users, purchasers, lessees, licensees and sublicensees acknowledging the parties' proprietary rights, imposing confidentiality obligations, and prohibiting internal inspection or reverse engineering of any Specialized Unit, the Instrument Software or the OSA, Inc. Software. No Specialized Unit may be transferred to any person without such an agreement. Said agreements shall be in form acceptable to counsel for all parties, and shall provide that the provisions thereof will survive the expiration or earlier termination of this Agreement.
14.5 Obligation to Defend Proprietary Information. Each Owner agrees to protect and defend its Proprietary Information against infringement to the extent such Owner, in its sole discretion, considers appropriate. An Owner which otherwise would elect not to protect and defend its Proprietary Information against infringement shall be obligated to do so if the other party pays or reimburses the Owner for all costs incurred therefor.
14.6 Injunctive Relief. Because the unauthorized use, transfer or dissemination of the Instrument Software or OSA, Inc. Software or any Proprietary Information provided by one party to the other may diminish substantially the value thereof and of the Specialized Units and may irreparably harm the offended party, if either party breaches the provisions of this Article 14 or the software licensing provisions of this Agreement, the other party shall be entitled, without limiting its other rights or remedies, to seek equitable relief, including, but not limited to, injunctive relief.
15.1 Term and Non-Compete. This Agreement shall be for an initial term (the "Term") commencing as of the effective date hereof and continuing through and including December 31, 1997 (the "Term Expiration Date"), unless earlier terminated in accordance with the provisions of this Article 15. This Agreement shall automatically terminate as of the Term Expiration Date without the requirement of notice or any other action on the part of either party hereto.
15.2 Termination. This Agreement may be terminated as to all parties prior to the Term Expiration Date:
15.2.1 By either party in the event of a material breach by the other party of any of such other party's obligations under this Agreement, which breach has not been cured within sixty (60) days following the date on which the non-breaching party has given written notice to the breaching party specifying the nature of the breach (or, if such breach is of a nature that it cannot reasonably be cured within said sixty (60)-day period, if the breaching party fails to commence to cure the same within said sixty (60)-day period or thereafter fails to diligently prosecute such cure to completion);
15.2.2 By either party, effective immediately and without the requirement of any notice, if the other party (a) files for or consents to a general assignment for the benefit of creditors, (b) files a petition in bankruptcy or liquidation, or is adjudicated bankrupt or insolvent or takes similar actions under the laws of any jurisdiction for the general benefit of creditors of an insolvent or financially troubled debtor or (c) is the subject of an involuntary bankruptcy or insolvency proceeding which is not finally dismissed within forty-five (45) days;
15.2.3 (i) Notwithstanding the provisions of Section 17.9 below, by TJA, upon not less than thirty (30) days' prior written notice, in the event of a change in control, direct or indirect, of OSA, Inc. or Top Source which has, or in the reasonable opinion of TJA could have, a material adverse effect on the ability of TSI to perform its obligations hereunder or otherwise on the consummation of the transactions contemplated herein; or
(ii) Notwithstanding the provisions of Section 17.9 below, by OSA, Inc., upon not less than thirty (30) days' prior written notice, in the event of a change in control, direct or indirect, of TJA or Thermo Instrument which has, or in the reasonable opinion of OSA, Inc. could have, a material adverse effect on the ability of Thermo to perform its obligations hereunder or otherwise on the consummation of the transactions contemplated
(iii) For purposes of this Section 15.2.3, "control" shall mean ownership of greater than fifty percent (50%) of the capital stock or the power to vote or direct the voting of sufficient securities to elect a majority of the directors;
15.3 Effect of Expiration or Termination. Upon expiration or the effective date of termination of this Agreement for any reason, all rights and obligations of the parties under this Agreement shall cease, except as follows:
15.3.1 In the event of the expiration of the Term of this Agreement pursuant to Section 15.1 above, TJA shall complete the manufacture and shipment of all orders in effect at the time of such expiration, and OSA, Inc. shall be obligated to make payment for the same in accordance with the applicable provisions of Article 8 above.
15.3.2 At the election of the party initiating termination in the case of a termination pursuant to the provisions of Sections 15.2.1, 15.2.2 or 15.2.3 above TJA shall be obligated to complete the manufacture and shipment of all (or such portion thereof as is indicated by the electing party under this Section 15.3.2) orders in effect on the effective date of such termination, and OSA, Inc. shall be obligated to make payment for the same in accordance with the applicable provisions of Article 8 above.
15.3.3 OSA, Inc. shall, within ten (10) days after the expiration or the effective date of any termination of this Agreement, provide TJA with a list of all Customers for whom the Installation or Reinstallation of a Specialized Unit has been performed by any person or entity other than TJA or its designated subcontractor or agent. Such list shall specify the date of Installation or Reinstallation, as the case may be, and the appropriate contact with, and address of, each such Customer. TJA may, at its option, thereafter communicate directly with such Customers. 15.3.4 Solely with respect to Specialized Units purchased from TJA and paid for by OSA, Inc. hereunder, TJA shall continue, for a period of five (5) years following the expiration or the effective date of any termination of this Agreement, to provide maintenance services for such Specialized Units to the extent required by, and in accordance with, the provisions of Section 9.2 above. TJA shall honor warranty coverage extended to Customers by OSA, Inc., provided that such coverage does not exceed the warranty coverage provided by TJA pursuant to the terms of this Agreement. Solely with respect to Specialized Units purchased from TJA and paid for by OSA, Inc. hereunder, and solely in connection with the normal operation thereof, OSA, Inc. and Customers shall have, without payment of additional consideration, the continuing perpetual and worldwide non-exclusive right and license to use, license and, with respect to OSA, Inc. only, sublicense, "AS IS, WHERE IS", the Instrument Software and other Technical Contributions of TJA and to install and reinstall such Specialized Units with existing or new Customers, all without restriction except (i) with respect to OSA, Inc., as provided in those Sections of this Agreement which shall survive, in accordance with the provisions of Section 15.4 below, the expiration or earlier termination of this Agreement, and (ii) with respect to any Customer, as provided for the benefit of TJA in the Customer Agreement.
15.3.5 The termination of this Agreement shall not affect OSA, Inc.'s obligation to make payments to TJA which have become due and payable hereunder on or before the effective date of such termination, nor release either party from any liability to the other party which shall have accrued or matured at the time such termination becomes effective.
15.3.6 On or before the expiration or effective date of termination of this Agreement, OSA, Inc. shall remove all TJA Marks from Specialized Units then in OSA, Inc.'s possession and thereafter shall cease all use of the TJA Marks, including without limitation the use thereof in connection with the sale, leasing, licensing, sublicensing, distribution or marketing of Specialized Units (or related services); provided, however, that OSA, Inc. agrees not to remove or obscure any notice of copyright, patent, trademark, trade secret or restricted or limited rights which may be contained on the Instrument Software and/or any of TJA's Technical Contributions.
15.4 Survival. Notwithstanding anything to the contrary contained herein, the provisions of Section 3.1, Section 3.2 (as it relates to the OSA, Inc. Marks), Section 4.1, Section 4.2.4, Section 4.3.2, Section 6, Section 7.7 (first sentence only), Sections 9.1.1 and 9.1.2 (solely with respect to OSAs purchased from TJA and paid for by OSA, Inc. hereunder), Section 9.2 (solely to the extent related to the obligations of TJA under Section 15.3.4), Article 10, Article 13, Article 14, Article 15, and, to the extent related to the foregoing, Articles 1, 16 and 17 (including without limitation Section 17.12 and 17.18), shall survive any termination or expiration of this Agreement according to their respective terms. Subject to the limitations of Article 10, an aggrieved party's right to pursue all legal remedies for breach of contract or otherwise, including without limitation damages related thereto, shall survive any expiration or earlier termination of this Agreement unimpaired.
16.1 Compliance with Laws. OSA, Inc. and TJA shall comply with all laws, legislation, rules, regulations, governmental requirements and industry standards existing from time to time with respect to the Specialized Units (including without limitation with respect to the sale, leasing, licensing and sublicensing thereof) and performance of their respective obligations hereunder; provided, however, that OSA, Inc. shall be solely responsible for ensuring that the Specialized Units comply with all applicable governmental requirements and industry standards imposed by any foreign country prior to any shipment of Specialized Units to any such country. In the event that this Agreement is required to be registered with any foreign governmental authority with respect to Specialized Units purchased or sublicensed by OSA, Inc., OSA, Inc. shall cause such registration to be made and shall bear any expense or tax payable in respect thereof.
16.2 Customs and Local Taxes. TJA shall be responsible for clearing Specialized Units purchased or sublicensed by OSA, Inc. through customs in the country of destination, provided that OSA, Inc. shall pay all applicable customs or import duties and all applicable local taxes.
16.3 Export. TJA shall not export any Specialized Unit to any jurisdiction without first obtaining all necessary export permits and clearances, and in no event shall TJA export any Specialized Unit in violation of any applicable law or regulation; provided that OSA, Inc. shall pay all applicable permit and clearance fees. Any shipment of Specialized Units by OSA, Inc. or any Customer subsequent to the initial shipment thereof by TJA (other than returns to TJA of defective Specialized Units in accordance with the terms of this Agreement) shall be the sole responsibility of OSA, Inc., and OSA, Inc. shall comply with all import, export and other laws, rules, orders and regulations, foreign or domestic, applicable to such re-shipment.
17.1 Governing Laws. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts (without reference to the conflict of laws provisions thereof and excluding the United Nations Convention on Contracts for the International Sale of Goods).
17.2 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and shall not be released, discharged, supplemented, interpreted, amended, varied, or modified in any manner except by an instrument in writing signed by an authorized officer or representative of each of the parties hereto. The exhibits following the operative part of this Agreement shall be deemed to be incorporated in this Agreement by this reference and the various other references contained herein. The parties acknowledge that they are not entering into this Agreement on the basis of any representations not expressly contained herein.
17.3 Waivers. No delay or omission on the part of any party to this Agreement in requiring performance by any other party or in exercising any right hereunder shall operate as a waiver of any provision hereof or of any right or rights hereunder; and the waiver, omission or delay in requiring performance or exercising any right hereunder on any one occasion shall not be construed as a bar to or waiver of such performance or right on any future occasion.
17.4 Severability. If any provision of this Agreement shall for any reason be held illegal or unenforceable, such provision shall be deemed severable from the remaining provisions of this Agreement and shall in no way affect or impair the validity or enforceability of the remaining provisions of this Agreement.
17.5 Force Majeure. Notwithstanding anything to the contrary contained herein, Thermo shall not be liable in any respect for any delay in the performance of any of its obligations under this Agreement to the extent such delay shall have been due to acts of God, acts of terrorism, acts of OSA, Inc. or Top Source, acts of civil or military authority, legal or regulatory changes, fires, floods, epidemics, quarantine restrictions, war, armed hostilities, riots, strikes, lockouts, accidents to machinery, delays in deliveries by TJA's suppliers, delays in transportation not the fault of TJA or any other cause beyond the reasonable control of Thermo. Notwithstanding anything to the contrary contained herein, TSI shall not be liable in any respect for any delay in the performance of any of its obligations under this Agreement (other than obligations for the payment of money) to the extent such delay shall have been due to acts of God, acts of terrorism, acts of TJA or Thermo Instrument, acts of civil or military authority, legal or regulatory changes, fires, floods, epidemics, quarantine restrictions, war, armed hostilities, riots, strikes, lockouts or any other cause beyond the reasonable control of TSI.
17.6 Captions. Article and Section headings are for descriptive purposes only and shall not control or alter the meaning of this Agreement.
17.7 Relationship of the Parties. The parties acknowledge that the parties hereto are independent contractors and that OSA, Inc. will, on its own behalf, solicit orders for Specialized Units only as an independent contractor. The parties shall not represent themselves as partners, joint-venturers, agents, employees or general representatives of each other for any reason. The parties acknowledge that they shall have no right, power or authority to in any way obligate each other to any contract or obligation other than the obligations contained herein.
17.8 Notices. For the purposes of this Agreement, and for all notices and correspondence hereunder, the addresses of the respective parties are as follows:
If to TJA: Thermo Jarrell Ash Corporation
with a copy to: Thermo Electron Corporation
If to Thermo Instrument: Thermo Instrument Systems Inc.
with a copy to: Thermo Electron Corporation
If to TSI (or one On-Site Analysis, Inc. or more of OSA, 3125 Presidential Drive, Suite 130 Inc., and Atlanta, Georgia 30340-3907
with a copy to: Top Source Technologies, Inc. 2000 PGA Boulevard, Suite 3200
and: Cushing, Morris, Armbruster & Jones 2110 Peachtree Center Cain Tower 229 Peachtree Street, N.E. Attn.: Kevin R. Armbruster, Esq.
No change of address shall be binding upon the other party hereto until written notice thereof is received by such party at the address shown herein. All notices shall be in English and shall be effective upon receipt if delivered personally or by courier or sent by facsimile, and three (3) business days after mailing if sent by United States Mail.
17.9 Assignment and Corporate Reorganization. None of the parties shall assign any rights or obligations under this Agreement without the prior written consent of the other parties hereto. Notwithstanding the foregoing provisions of this Section 17.9, but subject to the provisions of Section 15.2.3, any party hereto ("Assignor") shall have the right to assign its rights and obligations under this Agreement, without the prior written consent of any other party hereto, (i) to a parent, subsidiary or affiliate of Assignor, (ii) in connection with a merger, consolidation or combination or (iii) in connection with a sale of substantially all of the assets of Assignor; provided that any such assignee shall agree in writing to be bound by all obligations of Assignor hereunder, and further provided that, unless released in writing by the other parties hereto, Assignor shall continue to be bound by all of the terms and conditions of this Agreement. Subject to the foregoing, this Agreement shall inure to the benefit of and be binding upon any successor or permitted assign of such party.
17.10 Official Language. If this Agreement is translated into another language besides English, the English language version shall be the official version.
17.11 Currency. All prices are in currency of the United States of America.
17.12.1 By Top Source. Top Source, as a material inducement to Thermo to enter into this Agreement, hereby unconditionally guarantees, as and for its own obligation, the full and prompt performance by OSA, Inc. of all of its obligations under this Agreement. If any such obligations are not performed when due, Top Source will immediately perform them, without resort by the obligee to any other person or party. TJA and Thermo Instrument (or either of them) may grant one or more extensions to fulfill such obligations or may release or reach a compromise with any person liable for such obligations without giving Top Source notice and without obtaining Top Source's consent. This guaranty shall not be released, in whole or in part, by any action or thing which might, but for this provision, be deemed a legal or equitable discharge of a surety or guarantor, or by reason of any waiver, omission, action or failure to act by TJA or Thermo Instrument (whether or not Top Source's risk is varied or increased or its rights or remedies are affected thereby), or by reason of any further dealings between TSI and TJA or Thermo Instrument.
17.12.2 By Thermo Instrument. Thermo Instrument, as a material inducement to TSI to enter into this Agreement, hereby unconditionally guarantees the full and prompt performance by TJA of all of its obligations under this Agreement. If any such obligations are not performed when due, Thermo Instrument will immediately perform them, without resort by the obligee to any other person or party. TSI may grant one or more extensions to fulfill such obligations or may release or reach a compromise with any person liable for such obligations without giving Thermo Instrument notice and without obtaining Thermo Instrument's consent. This guaranty shall not be released, in whole or in part, by any action or thing which might, but for this provision, be deemed a legal or equitable discharge of a surety or guarantor, or by reason of any waiver, omission, action or failure to act by TSI (whether or not Thermo Instrument's risk is varied or increased or its rights or remedies are affected thereby), or by reason of any further dealings between TJA or Thermo Instrument and TSI.
17.13 Remedies Cumulative. Any and all rights and remedies which any party may have under this Agreement, at law or in equity, shall be cumulative and shall not be deemed inconsistent with each other, and any two or more of all such rights and remedies may be exercised at the same time insofar as permitted by law.
17.14 Authority. The individuals executing this Agreement hereby represent and warrant that they are empowered and duly authorized to so execute this Agreement on behalf of the parties they represent.
17.15 Nicolet. Notwithstanding anything contained in this Agreement, it is expressly understood and agreed by all parties hereto that in no event shall Nicolet be deemed to be a party to this Agreement or otherwise be subject to or bound in any way by any of the terms or provisions contained herein, including without limitation the confidentiality obligations set forth in Article 14. It is further expressly understood and agreed by all parties hereto that, notwithstanding any provision in this Agreement to the contrary, TJA and Thermo Instrument shall each have the right, in connection with the performance of their respective obligations under this Agreement or the consummation of the transactions contemplated hereby, to convey, disclose or disseminate to any officer, employee, representative or agent of Nicolet (acting in his or her capacity as such) any Proprietary Information of OSA, Inc. or Top Source (including without limitation any Intellectual Property of either such party), regardless of whether Nicolet, or any such officer, employee, representative or agent of Nicolet , shall have theretofore agreed to maintain the confidentiality of such Proprietary Information, and such conveyance, disclosure or dissemination shall in no event be deemed to constitute a breach by TJA or Thermo Instrument of any of the provisions of this Agreement, including without limitation those contained in or Article 14 above.
17.16.1 By OSA, Inc. and Top Source. OSA, Inc. and Top Source each warrant and represent that (i) it has full right, power, capacity and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby; (ii) the execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, will not (A) conflict with or result in a violation, breach, termination or acceleration of, or default under (or would result in a violation, breach, termination, acceleration or default with the giving of notice or passage of time, or both), any of the terms, conditions or provisions of the Articles of Incorporation or Bylaws of OSA, Inc. or Top Source, as amended, or of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which OSA, Inc. or Top Source is a party or by which either of them, or any of their respective properties or assets, may be bound or affected, or (B) result in the violation of any order, writ, injunction, decree, statute, rule or regulation applicable to OSA, Inc. or Top Source, or their respective properties or assets; (iii) this Agreement is enforceable in accordance with its terms; and (iv) no consent or approval by, or notification to or filing with, any court, governmental authority or third party is required in connection with the execution, delivery and performance of this Agreement by OSA, Inc. and Top Source, or the consummation of the transactions contemplated hereby. Without in any way limiting the foregoing, OSA, Inc. warrants and represents that it owns or otherwise has the right to use all Technical Contributions contributed by OSA, Inc. (as referenced in Section 1.11 above) in the development of the OSA and any Specialized Unit hereunder and has obtained all consents, approvals and authorizations required for the use of such Technical Contributions by TSI and Thermo in connection with the performance of this Agreement and the consummation of the transactions contemplated hereby. Each of the foregoing representations and warranties shall also be true and correct as though made on and as of the date of execution of each Specialized Unit Addendum hereunder.
17.16.2 By TJA and Thermo Instrument. TJA and Thermo Instrument each warrant and represent that (i) it has full right, power, capacity and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby; (ii) the execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby, will not (A) conflict with or result in a violation, breach, termination or acceleration of, or default under (or would result in a violation, breach, termination, acceleration or default with the giving of notice or passage of time, or both), any of the terms, conditions or provisions of the Articles of Incorporation or Bylaws of TJA or Thermo Instrument, as amended, or of any note, bond, mortgage, indenture, license, agreement or other instrument or obligation to which TJA or Thermo Instrument is a party or by which either of them, or any of their respective properties or assets, may be bound or affected, or (B) result in the violation of any order, writ, injunction, decree, statute, rule or regulation applicable to TJA or Thermo Instrument, or their respective properties or assets; (iii) this Agreement is enforceable in accordance with its terms; and (iv) no consent or approval by, or notification to or filing with, any court, governmental authority or third party is required in connection with the execution, delivery and performance of this Agreement by TJA and Thermo Instrument, or the consummation of the transactions contemplated hereby. Without in any way limiting the foregoing, TJA warrants and represents that it owns or otherwise has the right to use all Technical Contributions contributed by TJA (as referenced in Section 1.11 above) in the development of the OSA and any Specialized Unit hereunder and has obtained all consents, approvals and authorizations required for the use of such Technical Contributions by Thermo and TSI in connection with the performance of this Agreement and the consummation of the transactions contemplated hereby. Each of the foregoing representations and warranties shall also be true and correct as though made on and as of the date of execution of each Specialized Unit Addendum hereunder.
17.17 Prevailing Party. If any action at law or in equity is brought to enforce or interpret the provisions of this Agreement, the prevailing party in such action shall be entitled to reimbursement of the reasonable attorneys' fees and disbursements and court costs incurred by said prevailing party in connection with such action.
17.18 General Provisions Regarding Warranties. Subject to the provisions of Sections 15.2.3 and 17.9 above, the warranties provided to OSA, Inc. hereunder shall continue to be enforceable by OSA, Inc., in accordance with the terms of this Agreement, regardless of the transfer by OSA, Inc. of title to the products to which such warranties relate in the ordinary course of marketing the same as contemplated by this Agreement. Subject to the provisions of Sections 15.2.3 and 17.9 above, the warranties provided to TJA hereunder shall continue to be enforceable by TJA, in accordance with the terms of this Agreement, regardless of the transfer by TJA of title to the products to which such warranties relate in the ordinary course of marketing the same as contemplated by this Agreement.
Reference is hereby made to that certain Agreement dated as of March 3, 1995 by and between TJA and Thermo Instrument and OSA, Inc. and Top Source (the "'U' Unit Agreement"). It is understood and agreed that each purchase by OSA, Inc. of a Specialized Unit hereunder shall also be deemed to constitute a purchase by OSA, Inc. of an OSA for purposes of Sections 15.1 and 15.2.6 of the "U" Unit Agreement. Notwithstanding anything to the contrary contained in the "U" Unit Agreement, including without limitation the provisions of Sections 5.2 and 15.1 thereof, it is further understood and agreed that the performance by either party of its obligations under this Agreement will not constitute a such party under the "U" Unit Agreement. The "U" Unit Agreement is hereby ratified and confirmed in its entirety, and, except to the extent expressly provided in this Article 18, nothing contained herein shall be deemed to constitute an amendment to or modification of the "U" Unit Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement under seal as of the day and year first above written.
[Signatures Continued on Next Page]
By: /s/ Stuart Landow 12/28/95
Attest: /s/ Jane M. Ott
By: /s/ Stuart Landow 12/28/95
Attest: /s/ Jane M. Ott
Exhibit B Site Survey Report
Exhibit C Customer Site Specifications for | 10-K | EX-10.20 | 1996-01-16T00:00:00 | 1996-01-12T20:21:19 |
0000725614-96-000001 | 0000725614-96-000001_0000.txt | (As last amended in Rel. No. 34-36968, eff. 8/13/92.)
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: December 29, 1995
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (Commission (I.R.S. Employer incorporation or organization) File Number) Identification
(Address of Principal Executive Office)
Registrant's telephone number, including area code (864) 239-1000
Item 2. Acquisition or Disposition of Assets
On December 29, 1995, Consolidated Capital Properties V, a California limited partnership (the "Partnership"), sold Fourth and Race Tower, located in Cincinnati, Ohio to an unaffiliated party, West Fourth Associates, Ltd., an Ohio limited liability company. The property was sold in an effort to maximize the Partnership's return on its investment. Total cash paid for Fourth and Race Tower was $1,050,000.
Item 7. Financial Statements and Exhibits
The Partnership has requested copies of the closing documents from the purchaser for the sale of Fourth and Race Tower but has not received these documents as of the date of this filing. The Partnership will file an amended 8-K to include these Exhibits when they are received.
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/ Carroll D. Vinson | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-16T15:52:03 |
0000912057-96-000532 | 0000912057-96-000532_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)
70 Blanchard Road, Burlington, Massachusetts 01803 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Common Stock -- par value $.01 per share (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) /X/ 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 or notice
Pursuant to the requirements of the Securities Exchange Act of 1934 (NAME OF REGISTRANT AS SPECIFIED IN CHARTER) has caused this certification/notice to be signed on its behalf by the undersigned duly authorized person.
Date: January 16, 1996 By: /s/ JONATHAN C. ODELL
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 | 1996-01-16T00:00:00 | 1996-01-16T16:35:45 |
0000899140-96-000021 | 0000899140-96-000021_0001.txt | COUNSELLORS GLOBAL FIXED INCOME FUND, INC.
The undersigned, Abby L. Ingber, whose post office address is c/o Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022, being at least 18 years of age, does hereby act as an incorporator and forms a corporation, under and by virtue of the Maryland General Corporation Law.
The name of the Corporation is Counsellors Global Fixed Income Fund, Inc.
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of an investment company.
(2) To hold, invest and reinvest its assets in securities and other investments or to hold part or all of its assets in cash.
(3) To issue and sell shares of its capital stock in such amounts and on such terms and conditions and for such purposes and for such amount or kind of consideration as may now or hereafter be permitted by law.
(4) To redeem, purchase or acquire in any other manner, 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 law and by these Articles of Incorporation.
(5) To do any and all additional acts and to exercise any and all additional powers or rights as may be necessary, incidental, appropriate or desirable for the accomplishment of all or any of the foregoing purposes.
The Corporation shall be authorized to exercise and enjoy all of the powers, rights and privileges granted to, or conferred upon, corporations by the Maryland General Corporation Law now or hereafter in force, and the enumeration of the foregoing shall not be deemed to exclude any powers, rights or privileges so granted or conferred.
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Company Incorporated, 32 South Street, Baltimore, Maryland, 21201. The name and address of the resident agent of the Corporation in the State of Maryland is The Corporation Trust Company Incorporated, a Maryland Corporation, 32 South Street, Baltimore, Maryland 21202.
(1) The total number of shares of capital stock that the Corporation shall have authority to issue is three billion (3,000,000,000) shares, of the par value of one tenth of one cent ($.001) per share and of the aggregate par value of three million dollars ($3,000,000), all of which three billion (3,000,000,000) shares are designated Common Stock.
(2) Any fractional share shall carry proportionately the rights of a whole share including, without limitation, the right to vote and the right to receive dividends. A fractional share shall not, however, have the right to receive a certificate evidencing it.
(3) All persons who shall acquire stock in the Corporation shall acquire the same subject to the provisions of this Charter and the By-Laws of the Corporation.
(4) No holder of stock of the Corporation by virtue of being such a holder shall have any right to purchase or subscribe for any shares of the Corporation's capital stock or any other security that the Corporation may issue or sell (whether out of the number of shares authorized by this Charter or out of any shares of the Corporation's capital stock that the Corporation may acquire) other than a right that the Board of Directors in its discretion may determine to grant.
(5) The Board of Directors shall have authority by resolution to classify and reclassify any authorized but unissued shares of capital stock from time to time by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of the capital stock.
(6) Notwithstanding any provision of law requiring any action to be taken or authorized by the affirmative vote of a greater proportion of the votes of all classes or of any class of stock of the Corporation, such action shall be effective and valid if taken or authorized by the affirmative vote of a majority of the total number of votes entitled to be cast thereon, except as otherwise provided in this Charter.
Each holder of shares of the Corporation's capital stock shall be entitled to require the Corporation to redeem all or any part of the shares of capital stock of the Corporation standing in the name of the holder on the books of the Corporation, and all shares of capital stock issued by the Corporation shall be subject to redemption by the Corporation, at the redemption price of the shares as in effect from time to time as may be determined by or pursuant to the direction of the Board of Directors of the Corporation in accordance with the provisions of Article VI, subject to the right of the Board of Directors of the Corporation to suspend the right of redemption or postpone the date of payment of the redemption price in accordance with provisions of applicable law. Without limiting the generality of the foregoing, the Corporation shall, to the extent permitted by applicable law, have the right at any time to redeem the shares owned by any holder of capital stock of the Corporation (i) if the redemption is, in the opinion of the Board of Directors of the Corporation, desirable in order to prevent the Corporation from being deemed a "personal holding company" within the meaning of the Internal Revenue Code of 1986 or (ii) if the value of the shares in the account maintained by the Corporation or its transfer agent for any class of stock for the stockholder is $10,000 (ten thousand dollars) or less and the stockholder has been given at least 60 (sixty) days' written notice of the redemption and has failed to make additional purchases of shares in an amount sufficient to bring the value in his account to $10,000 (ten thousand dollars) or more before the redemption is effected by the Corporation. Payment of the redemption price shall be made in cash by the Corporation at the time and in the manner as may be determined from time to time by the Board of
Directors of the Corporation unless, in the opinion of the Board of Directors, which shall be conclusive, conditions exist that make payment wholly in cash unwise or undesirable; in such event the Corporation may make payment wholly or partly by securities or other property included in the assets belonging or allocable to the class of the shares redemption of which is being sought, the value of which shall be determined as provided herein. The Board of Directors may establish procedures for redemption of shares.
(1) The number of directors constituting the Board of Directors shall be one (1) or such other number as may be set forth in the By-laws or determined by the Board of Directors pursuant to the By-laws. The number of Directors shall at no time be less than the minimum number required under the Maryland General Corporation Law. Dale C. Christensen has been appointed director of the Corporation to hold office until the first annual meeting of stockholders or until his successor is elected and qualified.
(2) In furtherance, and not in limitation, of the powers conferred by the laws of the State of Maryland, the Board of Directors is expressly authorized:
(i) To make, alter or repeal the By-Laws of the Corporation, except where such power is reserved by the By-Laws to the stockholders, and except as otherwise required by the Investment Company Act of 1940, as amended.
(ii) From time to time to determine whether and to what extent and at what times and places and under what conditions and regulations the books and accounts of the Corporation, or any of them other than the stock ledger, shall be open to the inspection of the stockholders. No stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by law or authorized by resolution of the Board of Directors or of the stockholders.
(iii) Without the assent or vote of the stockholders, to authorize the issuance from time to time of shares of the stock of any class of the Corporation, whether now or hereafter authorized, and securities convertible into shares of stock of the Corporation of any class or classes, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable.
(iv) Without the assent or vote of the stockholders, to authorize and issue obligations of the Corporation, secured and unsecured, as the Board of Directors may determine, and to authorize and cause to be executed mortgages and liens upon the real or personal property of the Corporation.
(v) Notwithstanding anything in this Charter to the contrary, to establish in its absolute discretion the basis or method for determining the value of the assets belonging to any class, the value of the liabilities belonging to any class and the net asset value of each share of any class of the Corporation's stock.
(vi) To determine in accordance with generally accepted accounting principles and practices what constitutes net profits, earnings, surplus or net assets in excess of capital, and to determine what accounting periods shall be used by the Corporation for any purpose; to set apart out of any funds of the Corporation reserves for such purposes as it shall determine and to abolish the same; to declare and pay any dividends and distributions in cash, securities or other property from surplus or any funds legally available therefor, at such intervals as it shall determine; to declare dividends or distributions by means of a formula or other method of determination, at meetings held less frequently than the frequency of the effectiveness of such declarations; and to establish payment dates for dividends or any other distributions on any basis, including dates occurring less frequently than the effectiveness of declarations thereof.
(vii) In addition to the powers and authorities granted herein and by statute expressly conferred upon it, the Board of Directors is authorized to exercise all powers and do all acts that may be exercised or done by the Corporation pursuant to the provisions of the laws of the State of Maryland, this Charter and the By-Laws of the Corporation.
(3) Any determination made in good faith, and in accordance with accepted accounting practices, if applicable, by or pursuant to the direction of the Board of Directors, with respect to the amount of assets, obligations or liabilities of the Corporation, as to the amount of net income of the Corporation 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 reserves or as to the use, alteration or cancellation of any reserves or charges (whether or not any obligation or liability for which the reserves or charges have been created has been paid or discharged or is then or thereafter required to be paid or discharged), as to the value of any security owned by the Corporation, the determination of the net asset value of shares of any class of the Corporation's capital stock, or as to any other matters relating to the issuance, sale or other acquisition or disposition of securities or shares of capital stock of the Corporation, and any reasonable determination made in good faith by the Board of Directors whether any transaction constitutes a purchase of securities on "margin," a sale of securities "short," or an underwriting of the sale of, or a participation in any underwriting or selling group in connection with the public distribution of, any securities, shall be final and conclusive, and shall be binding upon the Corporation and all holders of its capital stock, past, present and future, and shares of the capital stock of the Corporation are issued and sold on the condition and understanding, evidenced by the purchase of shares of capital stock or acceptance of share certificates, that any and all such determinations shall be binding as aforesaid. No provision of this Charter of the Corporation shall be effective to (i) require a waiver of compliance with any provision of the Securities Act of 1933, as amended, or the Investment Company Act of 1940, as amended, or of any valid rule, regulation or order of the Securities and Exchange Commission under those Acts or (ii) protect or purport to protect any director or officer of the Corporation against any liability to the Corporation or its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
The Corporation reserves the right from time to time to make any amendment to its Charter, now or hereafter authorized by law, including any amendment that alters the contract rights, as expressly set forth in this Charter, of any outstanding stock.
IN WITNESS WHEREOF, I have adopted and signed these Articles of Incorporation and do hereby acknowledge that the adoption and signing are my act.
Dated the 6th day of July, 1990 | 485A24E | EX-99.B1(A) | 1996-01-16T00:00:00 | 1996-01-16T15:37:30 |
0000930661-96-000018 | 0000930661-96-000018_0002.txt | J. C. PENNEY COMPANY, INC.
JCP MASTER CREDIT CARD TRUST
Under Section 5.2 of the Master Pooling and Servicing Agreement dated as of September 5, 1988, as supplemented by the Series C Supplement dated as of April 9, 1990, (together with the "Pooling and Servicing Agreement") by and between JCP Receivables, Inc., J. C. Penney Company, Inc. ("JCPenney"), as Servicer and The Fuji Bank and Trust Company (the "Trustee"), JCPenney is required to prepare certain information for each Series each month regarding current distributions to Certificateholders of such Series and the performance of the JCP Master Credit Card Trust (the "Trust") during the previous month. The information which is required to be prepared with respect to the Funding Date of January 16, 1996, and with respect to the performance of the Trust during the month of December, 1995, is set forth below. Certain of the information is presented on the basis of an original principal amount of $1,000 per Investor Certificate of this Series (a "Certificate"). Certain other information is presented based on the aggregate amounts for the Trust as a whole. Capitalized terms used in this Certificate have their respective meanings set forth in the Pooling and Servicing Agreement.
A. Information Regarding the Current Monthly Distribution (Stated on the Basis of $1,000 Original Certificate Principal Amount) for this Series.
J. C. PENNEY COMPANY, INC., | 8-K | EX-99.2 | 1996-01-16T00:00:00 | 1996-01-16T12:17:05 |
0000891554-96-000013 | 0000891554-96-000013_0000.txt | <DESCRIPTION>SCHEDULE 13D/A AMENDMENT NO. 2
Under the Securities Exchange Act of 1934
The Village Green Bookstore, Inc.
Common Stock, par value $.001 per share (Title of Class of Securities)
New York, New York 10022 (212)759-5000 (Name, Address and Telephone Number of Person Authorized to
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement of Schedule 13G to report the acquisition which is the subject of the 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 five percent or less of such class.) (See Rule 13d-7.)
Note: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent.
*The remainder of this cover page shall be filed 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 on 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. 927077206 Page 2 of 6 Pages
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*
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(a) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
NUMBER OF 7 SOLE VOTING POWER OWNED BY 8 SHARED VOTING POWER PERSON 9 SOLE DISPOSITIVE POWER
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
14 TYPE OF REPORTING PERSON*
*SEE INSTRUCTIONS BEFORE FILLING OUT! INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 (INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION
Item 1. Security and Issuer
This statement constitutes Amendment No. 2 to the Schedule 13D ("Schedule 13D") of Mr. Mark D. Kalimian and relates to the common stock, par value $.001 per share ("Common Stock") of The Village Green Bookstore, Inc., a New York corporation (the "Company"). The Company's principal executive offices are located at 1357 Monroe Avenue, Rochester, New York 14618. This Amendment No. 2 amends the initial statement on Schedule 13D dated September 21, 1994 and Amendment No. 1 thereto dated January 13, 1995 (collectively, the "Initial Statement"). This Amendment No. 2 is being filed to report the disposition by Mr. Kalimian of certain shares of Common Stock of the Company. The Initial Statement was filed with the Commission in paper format. This Amendment No. 2 is the first electronic amendment thereto, and in accordance with Rule 13d-2(c) promulgated by the Commission, contains certain information previously disclosed on the Initial Statement. The information set forth in the Initial Statement is amended and restated as set forth herein.
Item 2. Identity and Background
This statement is filed on behalf of Mr. Mark D. Kalimian. The business address of Mr. Kalimian is 950 Third Avenue, New York, New York 10022. The occupation of Mr. Kalimian is real estate manager of Abington Holding ("Abington"), 950 Third Avenue, New York, New York 10022. Abington is an owner and manager of real property. Mr. Kalimian has not been convicted in any criminal proceeding during the past five years.
During the past five years, Mr. Kalimian has not been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction the result of which proceeding was a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.
Mr. Kalimian is a citizen of the United States.
Item 3. Source and Amount of Funds or Other Consideration
On September 12, 1994, Mr. Kalimian acquired 100,000 shares of Common Stock (the "Shares") and a Common Stock Purchase Warrant (the "Warrant") exercisable into an additional 100,000 shares of Common Stock (the "Warrant Shares") for an aggregate purchase price of $300,000. As of January 12, 1995, the Warrant Shares were deemed beneficially owned by Mr. Kalimian for purposes of Regulation 13d-3(d)(1) promulgated by the Commission. Mr. Kalimian paid for all of such securities with personal funds.
Item 4. Purpose of Transaction
The purpose of the acquisition of the Shares and the Warrant and the disposition of the Shares by Mr. Kalimian is for investment. Mr. Kalimian may, from time to time, make additional sales or purchases of shares of Common Stock. Mr. Kalimian has no plans or proposals which relate to, or could result in, any of the matters referred to in paragraphs (a) through (j) of Item 4 of Schedule 13D.
Item 5. Interest in Securities of the Issuer
According to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended October 29, 1995, the Company had 3,741,255 shares of Common Stock outstanding as of October 29, 1995. On January 12, 1996, Mr. Kalimian sold 100,000 Shares at $1.75 per share in an open market transaction. As of the date hereof, Mr. Kalimian is the beneficial owner of 129,000 shares of Common Stock or approximately 3.4% of the outstanding Common Stock.
Mr. Kalimian has sole voting and dispositive power with respect to all shares of Common Stock to which this statement relates. Other than as indicated above, Mr. Kalimian has not effected any transactions in shares of Common Stock in the past sixty days. No person other than the undersigned has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the shares of Common Stock. On January 12, 1996, the undersigned ceased to be a beneficial owner of more than five percent of the Company's Common Stock.
Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer
The Company issued the Warrant to Mr. Kalimian simultaneously with the acquisition of the Shares by the undersigned. The Warrant is exercisable for a period of five years commencing March 12, 1995 at an exercise price originally established at $4.00 per share. Pursuant to a Letter Agreement dated July 20, 1995 between the Company and the undersigned, the Company reduced the exercise price of the Warrant from $4.00 to $2.25.
In connection with the acquisition of the Shares and the Warrant, and pursuant to the Registration Rights Agreement dated September 12, 1994 between the Company and the undersigned (the "Registration Rights Agreement"), Mr. Kalimian received certain "demand" and "piggy-back" registration rights under the Securities Act of 1933, as amended. Mr. Kalimian's registration rights were effectuated by the Company pursuant to the Company's registration statement on Form S-3, declared effective by the Commission on
March 15, 1995, covering the resale of the Shares and the Warrant Shares.
The Registration Rights Agreement was modified by an Agreement dated January 10, 1995 between the Company and the undersigned pursuant to which the Company agreed to reserve a portion of the net proceeds of its public offering ("Public Offering") pursuant to a registration statement on Form SB-2, declared effective by the Commission on March 15, 1995, in order to reimburse Mr. Kalimian any amount by which the net proceeds of the entire 100,000 shares of Common Stock that are actually sold by Mr. Kalimian are less than $300,000.
In connection with the Company's Public Offering, the undersigned entered into a Lock-up Agreement ("Lock-up Agreement") with H.J. Meyers & Co., Inc. (f/k/a Thomas James Associates, Inc.) pursuant to which the undersigned had agreed not to sell any of his shares of Common Stock during the periods specified therein. The Lock-up Agreement expired on December 15, 1995.
Item 7. Material to Be Filed as Exhibits
Exhibit 1 Registration Rights Agreement dated September 12, 1994 between the Company and the undersigned [Previously Filed].
Exhibit 2 Agreement dated as of January 10, 1995 between the Company and the undersigned [Previously Filed].
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.
January 15, 1996 /s/ Mark D. Kalimian | SC 13D/A | SC 13D/A | 1996-01-16T00:00:00 | 1996-01-16T15:43:33 |
0000950128-96-000009 | 0000950128-96-000009_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
For the transition period from ________________ to ________________
(Exact name of registrant as specified in the charter.)
(State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)
(Address of principal executive offices)
(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 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 at least the past 90 days.
As of January 2, 1996, 6,239,913 shares of Common Stock, without par value, of the registrant were outstanding.
Condensed Consolidated Balance Sheets at November 30, 1995 and August 31, 1995 3
Income - Three months ended November 30, 1995 and November 30, 1994 4
Cash Flows - Three months ended November 30, 1995 and November 30, 1994 5
Notes to Condensed Consolidated Financial
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Item 6. Exhibits and Reports on Form 8-K 10
Note: The consolidated balance sheet at August 31, 1995 has been taken from the audited financial statements and condensed.
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet at November 30, 1995 and the consolidated statements of income and consolidated statements of cash flows for the periods ended November 30, 1995 and November 30, 1994 have been prepared by the Company, without audit. In the opinion of Management, all adjustments necessary to present fairly the financial position, results of operations and changes in cash flows at November 30, 1995 and for the periods presented have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 1995 Annual Report to Shareholders and incorporated by reference in the Company's annual report on Form 10-K for the fiscal year ended August 31, 1995.
The results of operations for the period ended November 30, 1995 are not necessarily indicative of the operating results to be expected for the full year.
Inventories are summarized as follows:
Two lawsuits are pending against the Company involving claims of sexual discrimi-nation and harassment in which compensatory and punitive damages are sought. The Company is vigorously contesting these lawsuits and believes that, consistent with a policy in place for many years, it promptly, reasonably and effectively responded to all incidents alleged. Other employment related claims are pending before Federal and State agencies.
The Company is also involved in legal and administrative proceedings, including one with respect to a Superfund site, which may result in the Company becoming liable for a portion of certain environmental cleanup costs. With respect to these matters, the Company believes that its share of the costs should not be significant. The Company has accrued for its estimated share of the costs resulting from the environmental claims.
In the opinion of Management, the disposition of the employment and environmental claims should not have a material adverse effect on the Company's financial position.
Certain amounts in the Consolidated Statements of Cash Flows for the three months ended November 30, 1994 have been reclassified to be consistent with the presentation for the three months ended November 30, 1995.
On December 1, 1995, the Company exchanged 51,177 shares of its Common Stock and a small amount of cash having an aggregate value of $1,275,000 for all the outstanding capital stock of Alpine Packaging, Inc., a designer and manufacturer of specialty corrugated packaging, custom assembled wood pallets and technical/military specifica-tion packaging in Colorado Springs, Colorado. The Company will issue additional shares of its Common Stock to the Alpine shareholders based on the operating results of the business acquired, accounted for as a separate entity, for each of the years 1995 through 1998. The Company will continue the business acquired at the same location under a long-term lease. The acquisition will be accounted for as a purchase transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FIRST QUARTER FISCAL 1996 COMPARED TO FIRST QUARTER FISCAL 1995
Net sales for the quarter ended November 30, 1995 totaled $47.3 million, an increase of 21.5% from net sales of $38.9 million for the same quarter of fiscal 1995. Approximately 62% of the increase in net sales was attributable to continued growth in most of the markets and geographic regions which the Company serves. The balance of the increase in net sales is a result of the acquisition of M. Y. Trondex Ltd., a similar business in Northampton, England and Glasgow, Scotland in February 1995. Based on current customer order placement rates and anticipated continued economic strength, sales gains are expected to be favorable for the balance of fiscal 1996.
Gross profit for the quarter ended November 30, 1995 was $12.0 million, a 22.3% increase from $9.8 million in the first quarter of fiscal 1995. The gross profit margin increased to 25.3% from 25.1% primarily due to the increased sales level which resulted in improvements in manufacturing efficiency in both the Company's custom molding and integrated materials operations and to a lesser extent, lower EPS raw material costs per pound throughout the quarter. This improvement in the gross profit margin was achieved despite below-average profit margins at the UK operations.
Selling and administrative expenses increased $1.0 million or 20.1% for the quarter ended November 30, 1995, but decreased as a percentage of net sales to 12.9% compared to 13.1% for the same period in fiscal 1995. The dollar increase was primarily due to the expenses added as a result of the acquisition in February 1995.
Interest expense for the quarter ended November 30, 1995 was $708,000 compared to $462,000 in the first quarter of fiscal 1995. The increase of $246,000 or 53.2% was due to an increase in long-term debt incurred in fiscal 1995 and to higher interest rates throughout the quarter than in the first quarter of fiscal 1995.
Income before income taxes for the quarter ended November 30, 1995 increased to $5.1 million from $4.1 million for the same period of fiscal 1995, an increase of $1.0 million or 25.5%. The provision for income taxes for the quarter ended November 30, 1995 increased due to the increased income before income taxes.
Net income for the quarter ended November 30, 1995 was $3.2 million, an increase of 26.1% from $2.5 million for the same period of fiscal 1995. The increase was due primarily to the increases in net sales and gross profit.
The net sales and net income for the three months ended November 30, 1995 were Company records for a first fiscal quarter.
Net cash provided by operating activities for the three months ended November 30, 1995 amounted to $3.0 million compared to $929,000 for the same period in fiscal 1995. Depreciation and amortization for the same three-month periods amounted to $2.8 million and $2.4 million, respectively. Because a substantial portion of cash flow provided from operations results from depreciation and amortization, the Company believes that its liquidity would not be adversely affected should a period of reduced earnings occur.
During the three months ended November 30, 1995, the Company's inventories and accounts payable decreased despite the higher manufacturing activity, primarily due to the Company maintaining minimum raw material inventory levels as raw material prices trended lower during the period. The Company's accounts receivable increased slightly as a result of the higher manufacturing activity.
Capital expenditures during the three months ended November 30, 1995 amounted to $3.3 million, including capital expenditures for environmental equipment of $183,000. Approximately two thirds of the capital expenditures during the quarter was for machinery and equipment and approximately one third of the capital expenditures during the quarter was for land, buildings and improvements. Subsequent to the end of the quarter, the Company exchanged 51,177 shares of its Common Stock and a small amount of cash having an aggregate value of $1.3 million for all the outstanding capital stock of Alpine Packaging, Inc. (see Note 5 to the Condensed Consolidated Financial Statements). The Company has also announced that it will establish custom molding manufacturing facilities in Spennymoor in northeast England and in Storm Lake, Iowa.
Total debt of the Company amounted to $40.2 million at November 30, 1995, of which $35.3 million was borrowed under a credit agreement with the Company's principal bank, including $5.5 million out of an available $14.0 million under a revolving credit agreement. Total debt amounted to $41.3 million at August 31, 1995. No borrowings were made during the three months ended November 30, 1995.
On December 14, 1995, the Company declared its regular semiannual cash dividend of $.13 per share payable on January 5, 1996 to shareholders of record on December 26, 1995. A cash dividend of $.11 per share was paid in January 1995.
Cash provided by operating activities as supplemented by the amount available under the bank credit agreement should be sufficient to enable the Company to continue to fund its operating requirements, capital expenditures and cash dividends, as well as any payments required to satisfy any claims and contingencies referred to under Note 3 to the Condensed Consolidated Financial Statements. The Company will continue to look for the acquisition of similar or related businesses.
The impact of inflation on the Company's financial position and results of operations has not been significant during the periods discussed.
Item. 6. EXHIBITS AND REPORTS ON FORM 8-K
11 Computation of Net Income Per Share.
(b) Reports on Form 8-K
A Form 8-K, dated August 21, 1995, containing a description of the registrant's Common Stock, without par value, was filed on August 22, 1995. The filing of the description was reported under Item 5 and the actual description filed as Exhibit 99 to the Form 8-K. The description, which contains the information required by Item 202 of Regulation S-K, replaces the description of the registrant's Common Stock contained in a Form 8-K dated August 26, 1991 and filed September 4, 1991.
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 , 1996 By /s/ JOHN P. O'LEARY, JR.
Date: January , 1996 By /s/ BRIAN C. MULLINS
FORM 10-Q FOR QUARTER ENDED NOVEMBER 30, 1995
The following exhibits are filed as a part of this quarterly report on Form 10-Q.
11 Computation of Net Income Per Share. | 10-Q | 10-Q | 1996-01-16T00:00:00 | 1996-01-16T15:54:47 |
0000072633-96-000002 | 0000072633-96-000002_0000.txt | PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
NORTH EUROPEAN OIL ROYALTY TRUST
(Exact name of Registrant as specified in its charter)
(State of organization) (IRS Employer I.D. No.)
Suite 19A, 43 West Front Street, Red Bank, N.J. 07701 (Address of principal executive offices)
(Registrant's telephone number including area code)
This report (including exhibits) consists of 13 pages.
The Exhibit Index is located on page 4.
Item 5. Other Materially Important Event.
On January 11, 1996, the registrant Trust mailed to
certificate holders of units of beneficial interest in the Trust
an advisory letter, dated January 8, 1996, concerning the
appropriate percentage for cost depletion computations to be made
by such holders under the provisions of the Internal Revenue
Code. A copy of the letter is attached to this report as Exhibit
The information included in the advisory letter to
certificate holders was based upon computations furnished to the
Trust by Ralph E. Davis Associates, Inc., 3555 Timmons Lane,
Suite 1105, Houston, Texas, 77027 in a letter report dated
December 21, 1995. A copy of this letter report is attached as
Exhibit 99.2. These computations were also partially based upon
the reserve report furnished to the Trustees and to be included
as Exhibit 99 to the Annual Report on Form 10-K for the fiscal
year ended October 31, 1995. Reference is made to Item 2 of that
Form 10-K for a description of the limited nature of certain of
Item 7. Financial Statements and Exhibits.
Exhibit 99.1. Letter to certificate holders dated January 8, 1996.
Exhibit 99.2. Letter report from Ralph E. Davis Associates, Inc. dated 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 hereunto duly authorized.
NORTH EUROPEAN OIL ROYALTY TRUST
By: /S/ John R. Van Kirk
Exhibit 99.1. Letter to certificate 5 holders dated January 8, 1996.
Exhibit 99.2. Letter report from 8 Ralph E. Davis Associates, Inc., dated December 21, 1995. | 8-K | 8-K | 1996-01-16T00:00:00 | 1996-01-12T17:41:40 |
0000950168-96-000053 | 0000950168-96-000053_0000.txt | Reference is made to the Company's Schedule 14D-9 previously mailed to you on December 12, 1995 in response to the Tender Offer by Kuhlman Corporation initiated on November 29, 1995. Your Board of Directors has concluded that Kuhlman's current Offer of $12.00 is not in the best interests of the Company and its stockholders, because the Company received an offer to purchase the Company at $13.00 per share, culminating in a letter of intent to merge, signed on January 15, 1996. Subsequently, today, Kuhlman has indicated in writing that it will increase its tender offer to $13.062. The Board will consider its recommendation with respect to Kuhlman's new offer once it has been received. CCI currently is in discussions with Pentair and Kuhlman. CCI shareholder tender and withdrawal rights were subject to a deadline established by Kuhlman as January 22, 1996, but Kuhlman has announced it intends to extend the deadline to January 31, 1996. Shareholders are urged to review the tender and withdrawal procedures and deadline set forth in the Kuhlman tender offer previously delivered to shareholders and to monitor further corporate announcements. Enclosed are a copy of the Company's Amendment No. 1 previously filed and a copy of Amendment No. 2 to its Schedule 14D-9, as filed with the Securities and Exchange Commission, describing the Board's decision and containing other important information relating to this decision. We urge you to consider this information carefully. By Order of the Board of Directors.
PURSUANT TO SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMUNICATION CABLE, INC. Communication Cable, Inc. (Name of Person(s) Filing Statement) Common Stock Par Value $1.00 Per Share (Title of Class of Securities) (CUSIP Number of Class of Securities) President and Chief Executive Officer Communication Cable, Inc. (Name, address and telephone number of person authorized to receive notice and communications on behalf of the person(s) filing statement.) With a Copy to:
Communication Cable, Inc. hereby amends its Schedule 14D-9 (the "Statement"), originally filed on December 12, 1995, with respect to the tender offer by Kuhlman Corporation initiated on November 29, 1995. Capitalized terms not defined herein have the meaning assigned to them in the Statement. Item 2. Tender Offer of the Bidder. An additional paragraph is added to Item 2, as follows: The Company was notified in writing on January 16, 1996 that Kuhlman was in the process of increasing its tender offer from $12.00 to $13.062 per share. The Company currently is in discussions with Pentair and Kuhlman. Upon receipt of the increased tender offer by Kuhlman, the Company's Board will consider its response. Company shareholder tender and withdrawal rights were subject to a deadline established by Kuhlman as January 22, 1996, but Kuhlman has announced it intends to extend the deadline to January 31, 1996. Item 4. The Solicitation or Recommendation. Item 4 is hereby revised and restated in full as follows: At a meeting held on January 14, 1996, the Board of Directors of the Company (the "Board"), by a unanimous vote of all members present (including by a unanimous vote of the non-management directors of the Company), recommended, at this time, the rejection of the $12.00 Offer as not in the best interests of the Company and its stockholders in light of a $13.00 per share cash merger offer from Pentair, Inc. Mr. James R. Fore, President of the Company, abstained from the voting (see Item 6(b), below.) CCI shareholder tender and withdrawal rights were subject to a deadline established by Kuhlman as January 22, 1996, but Kuhlman has announced it intends to extend the deadline to January 31, 1996. Shareholders are urged to review the tender and withdrawal procedures and deadline set forth in the Kuhlman tender offer previously delivered to shareholders and to monitor further corporate announcements. Today, Kuhlman has indicated in writing that it will increase its tender offer to $13.062. The Board will consider its recommendation with respect to Kuhlman's new offer once it has received it. A press release with respect to this matter is attached as Exhibit 3 hereto and incorporated herein by reference. The form of press release announcing the recommendation with respect to the $12.00 Kuhlman offer and the resulting letter of intent dated January 15, 1996 to merge with Pentair for $13.00 per share in cash are being filed with the Commission as Exhibits 1 and 2, respectively, hereto and are incorporated herein by reference. This decision was made because of the Board's consideration of the following factors during the course of essentially the past year up to the date of such action: 1. The previously received, in connection with the Kuhlman Tender Offer, the fairness opinion from Interstate/Johnson Lane indicating that a price of 12.00 per share was fair to the shareholders from a financial point of view; 2. The receipt of the offer to merge from Pentair, Inc., a publicly held Minnesota corporation, at a price of $13.00 per share for each share of the Company's common stock. See Item 6(d) below, and Exhibits 1 and 2 hereto for details of the Pentair offer; 3. The consideration of prices discussed in indications of interest received by the Company during the past year;
4. The fact that the current market price of the Company's Shares for every trading day since the Kuhlman Offer was announced has been at or above the per-share price of the Offer; and that as of January 12, 1996, the last bid price of the shares was $12.00 per share; 5. The nature of the Offer; 6. An assessment by directors of the strengths and weaknesses of the Company's current business, business plans, prospects, financial condition, 7. A review of the trading history and current market value of the 8. The effect of the acquisition on the Company's customers, employees, suppliers, and business plans. Other than as set forth above, there was no basis for the Board's decision on the Tender Offer, and no relative weight was assigned to any individual factor considered in reaching its determination. Item 6. Recent Transactions and Intent With Respect to Securities. Paragraphs (b) and (d) of Item 6 are hereby revised and restated in full as follows: (b) The Company has no knowledge as to whether any of its executive officers, directors or affiliates presently intend to tender into the Offer or to sell any shares held of record or beneficially owned by them, except for the Fore option, discussed in Item 3(b), to which reference is made. The Company has been advised that Kuhlman exercised such option on January 2, 1996 and that as of January 5, 1996 Kuhlman owned 315,703 Shares (approximately 12% of the outstanding common stock of the Company). (d) On January 14, 1996, the Company received an offer to merge from Pentair, Inc., a Minnesota corporation, at a price of $13.00 per share for each share of common stock of the Company. That offer culminated in a letter of intent to merge, at that price, dated and signed on January 15, 1996. See Exhibit 2 hereto for details of the letter of intent. Today, Kuhlman has indicated in writing that it will increase its tender offer to $13.062. Kuhlman has demanded that the Company proceed to mail proxies in the near future with respect to a shareholder meeting called for the purpose of considering granting Kuhlman voting rights for shares it owns in the Company Action will be taken to call a Special Meeting of Shareholders in the near future, at a date to be announced. Item 9. Material to be Filed as Exhibits. (a) Press Release of January 15, 1996 (b) Letter of Intent of January 15, 1996 (c) Press Release January 16, 1996
After reasonable inquiry and to the best of his knowledge and belief, the undersigned certifies that the information set forth in this statement is true, complete, and correct. Date: January 16, 1996 COMMUNICATION CABLE, INC. By: (a) Press Release of January 15, 1996 FOR IMMEDIATE RELEASE PRESS RELEASE -- JANUARY 15, 1996 Communication Cable, Inc. (NASDAQ Symbol -- "CABL"), a specialty electronic wire and cable manufacturer, announced today that it has signed a non-binding letter of intent to merge with a subsidiary of Pentair, Inc., a publicly held holding company located in Minneapolis, Minnesota, at a cash price of $13.00 per share for each share of outstanding Company common stock. That letter of intent is generally not binding and is subject to a number of conditions. It has a termination fee of $750,000, plus expenses, payable by CCI if Pentair is out bid, or in certain other circumstances. The letter of intent calls for a definitive agreement to be signed by January 16, or immediately thereafter. Because of the Pentair offer, among other reasons, the Board changed its recommendation of the Kuhlman tender offer of $12.00 per share from no position to a recommendation that the Company's shareholders reject the Kuhlman offer. This decision will be reflected on the Company's Amendment No. 2 to its Schedule 14D-9, to be filed with the Securities and Exchange Commission. Shareholder withdrawal rights with respect to the Kuhlman tender offer currently are scheduled to expire on January 22, 1996. As noted in the Company's previous press releases, Kuhlman had an option agreement dated November 20, 1995 with Mr. James R. Fore by which Kuhlman could acquire all of Mr. Fore's stock at $12.00 per share, entering into an employment agreement on the same date providing for Mr. Fore's employment with Kuhlman for up to three years following Kuhlman's acquisition of the Company. The Company has been advised that Kuhlman exercised such option on January 2, 1996 and that as of January 5, 1996 Kuhlman owned 315,703 shares (approximately 12% of the outstanding common stock of the Company).
(b) Letter of Intent of January 15, 1996 Communication Cable, Inc. Re: Acquisition Proposal for Communication Cable, Inc. Gentlemen: This letter of intent will confirm Pentair's firm offer to require Communication Cable, Inc. (the "Company") through a merger of a Pentair subsidiary into the Company, by which shareholders of the Company will receive cash for the value of their shares (the "Merger"). This offer will expire on the close of business on January 16, 1996, unless before that time the Board of Directors of the Company has executed this letter of intent, approved the terms of the proposed transaction and executed and delivered to Pentair a definitive agreement to undertake the Merger. This letter is not a binding agreement, except for the provisions of paragraphs 6 through 9, with respect to the Merger, which is subject (among other things) to (a) the negotiation and execution of a definitive agreement and related agreements and documents (collectively, the "Definitive Agreement"): (b) the approval of the Merger by the holders of not less than 80% of the shares of common stock of the Company, and (c) the receipt of any necessary regulatory approvals and the expiration or termination of any applicable waiting periods. There is no financing or due diligence contingency in connection with this offer. The fundamental terms of the proposed acquisition are as follows: 1. THE MERGER. Subject to the terms and conditions of the Definintive Agreement, Pentair will form an acquisition subsidiary which shall merge with and into the Company. The issued and outstanding shares of the Company shall be converted into the right to receive cash in the amount of $13.00 per share. Pentair will become the sole shareholder of the surviving corporation, which shall be the Company. 2. BOARD APPROVAL. The Board of Directors of the Company will approve the Merger, execute and deliver to Pentair the Definitive Agreement and recommend to the shareholders of the Company that they approve the Merger. 3. DEFINITIVE AGREEMENT. As promptly as is practicable after the execution of this letter of intent, the parties will negotiate and complete the Definitive Agreement, which will include representations, covenants and conditions customary in a transaction like the Merger. 4. ONGOING COOPERATION. Following execution of the Definitive Agreement, Pentair and its counsel, accountants and advisors will conduct a continuing review of the financial condition, business, assets and contractual commitments of the Company,
which will cause it agents, employees, counsel, accountants and advisors to cooperate with Pentair in connection with such review and supply to Pentair and its counsel, accountants and advisors such materials and documents and such access to its operations as shall be reasonably requested in connection therewith. 5. CONFIDENTIALITY AGREEMENT. The Confidentiality Agreement dated December 13, 1995 executed by Pentair shall continue in full force and effect and is hereby ratified and confirmed. 6. NO SOLICITATION. Following the execution of this letter of intent, neither the Company nor its directors, officers, employees, financial advisors, legal counsel, accountants and other agents and representatives shall (a) encourage, initiate or solicit, directly or indirectly, any inquires or the making of any proposals by, or engage in discussions or negotiations with, any third party (other than Pentair) concerning any merger, consolidation, sale of assets, tender offer, sale of shares or similar transaction involving the Company or any significant assets of the Company, other than the Merger (each an "Acquisition Proposal"), or (b) disclose directly or indirectly to any person preparing to make an Acquisition Proposal any confidential information regarding the Company, or (c) enter into any understanding, agreement or commitment with any third party providing for an acquisitive transaction, equity investment or sale of any significant assets of the Company. Notwithstanding the foregoing, the Board of Directors of the Company or any committee thereof appointed for purposes of any of the foregoing (a "Committee"), officers, employees, representatives and agents of the Company may (i) take action upon receipt of the advice of special legal counsel that such action is advisable in order to fulfill the fiduciary duties of the Board or the Committee, and (ii) provide confidential information regarding the Company to a potential purchaser upon the prior written request of such purchaser whom the Board or Committee reasonably believes (A) is qualified and creditworthy, (B) will not use such information to the competitive disadvantage of the Company, and (C) intends to make a serious offer which may result in a transaction more favorable to the shareholders of the Company than the consideration payable in connection with the Merger, provided that such disclosure is made subject to an appropriate confidentiality agreement, and the request does not arise as a result of any solicitation for expression of interest by the Company or any of its directors, officers, employees, financial advisors, legal counsel, accountants or other agents and representatives. The Company will notify Pentair immediately if any Acquisition Proposal or any request for confidential information is received, shall inform Pentair if the Company's Board or Committee has been advised by special legal counsel to consider such Acquisition Proposal in order to fulfill the fudiciary duties of the Board of Directors and shall provide to Pentair such information regarding any Acquisition Proposal or request for informaiton as Pentair may reasonably request. 7. EXPENSES. Except as set forth in Paragraphs 9 and 10 below, the parties will each bear their own expenses incurred in connection with the negotiation of the transaction contemplated hereby, whether or not such transaction is consummated. 8. PUBLICITY. Until such time as either the Company or Pentair shall advise the other in writing that negotiations over the transaction contemplated herein are terminated, neither the Company nor Pentair shall, without the prior written consent of
(which consent shall not be unreasonably withheld), issue any statement or communication to the public generally or to any third party relating to this offer, any negotiations with respect thereto or the interest of Pentair in the acquisition of the Company, except as required by applicable securities law, as done on advice of that party's legal counsel, a copy of which proposed statement or communication shall be given to the other party prior to the release of the statement or communication to the public generally or to any third party. The parties agree that this letter shall be the subject of a press release upon execution. 9. TERMINATION FEES EXPENSES. In order to induce the submission by Pentair to the Board of Directors of the Company of terms for the acquisition of the Company more favorable to its shareholders than those previously offered by Kuhlman Corporation in its tender offer, if (1) this letter of intent or the Definitive Agreement is terminated by Pentair as a result of (i) any breach by the Company of any binding agreement contained in this letter or (ii) any knowing breach of any representation, warranty, or covenant contained in the Definitive Agreement; or (2) the Company enters into an Acquisition Proposal (other than this letter and the Definitive Agreement), or any Acquisition Proposal (other than the Merger) is consummated, within one (1) year from the date hereof, unless Pentair has breached, terminated, or abandoned this letter or the Definitive Agreement for any reason other than a breach by the Company of its obligations under this letter or the Definitive Agreement; or (3) any third party makes an Acquisition Proposal or acquires common stock of the Company and thereafter holds 20% or more of the then current issued and outstanding shares of the Company, and thereafter (A) the Board of Directors of the Company does not reject the Acquisition Proposal of such third party, or (B) the Definitive Agreement or this letter is terminated or abandoned as a result of the shareholders' failure to approve the Merger and the price per share of such Acquisition Proposal is higher than $13.00 at the time of the shareholder vote. then the Company shall pay to Pentair, immediately upon the occurrence of the first event to occur set forth above in this paragraph 9, a termination fee equal to $750,000, plus an amount necessary to reimburse Pentair for its costs and expenses incurred to that date in connection with the Merger, not to exceed $250,000. 10. EXPENSES OF THE COMPANY. If Pentair violates its obligations under this letter or the Definitive Agreement, Pentair will reimburse the Company for its costs and expenses incurred to that date in connection with the Merger, not to exceed $250,000. 11. NO BINDING OBLIGATION. Except for the provisions of paragraphs 6 through 10 hereof, inclusive, which constitute binding agreements of the parties, this letter is only an expression of the intent of the parties and does not constitute a binding agreement of any party to consummate the transactions contemplated hereby in respect of the business.
12. TERMINATION. This letter of intent will terminate, except with respect to the binding portions hereof as set forth above, if the Definitive Agreement has not been executed and delivered by January 16, 1996, or such later date as the parties shall mutually agree. If this letter correctly states our mutual intentions please indicate your approval and agreement by signing and returning the duplicate copy of this letter enclosed herewith. PENTAIR, INC. Approved and agreed: COMMUNICATION CABLE, INC. (c) Press Release January 16, 1996 FOR IMMEDIATE RELEASE -- JANUARY 16, 1996 Communication Cable, Inc. (NASDAQ Symbol -- "CABL"), a specialty electronic wire and cable manufacturer, announced today that it has been notified by Kuhlman Corporation that Kuhlman is in the process of increasing its tender offer from $12.00 to $13.062 per share. Yesterday, CCI announced that it had signed a non-binding letter of intent to merge with a subsidiary of Pentair, Inc. at a cash price of $13.00 per share for each share of outstanding CCI common stock. CCI currently is in discussions with Pentair and Kuhlman. Upon receipt of the increased tender offer by Kuhlman, the CCI board will consider its response. CCI shareholder tender and withdrawal rights are subject to a deadline currently established by Kuhlman as January 22, 1996. Shareholders are urged to review the tender and withdrawal procedures and deadline set forth in the Kuhlman tender offer previously delivered to shareholders and to monitor further corporate announcements. | SC 14D9/A | SC 14D9/A | 1996-01-16T00:00:00 | 1996-01-16T17:26:05 |
0000912057-96-000536 | 0000912057-96-000536_0000.txt | (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994
( ) 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.)
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (808) 835-3700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock American Stock Exchange ($0.01 par value) Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
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. (X) Yes ( ) No
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 other information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. (X) Yes ( ) No
As of April 30, 1995, no shares of common stock of the Registrant were outstanding (see Note 1 of Notes to Financial Statements). Accordingly, the aggregate market value of voting stock held by non-affiliates of the Registrant is $0.00.
On April 17, 1995, Hawaiian Airlines, Inc. (the "Company") filed its 1994 Form 10-K (the "1994 Form 10-K") with the Securities and Exchange Commission (the "Commission") pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In connection with review of the Company's proxy statement for a Special Meeting of Shareholders to be held on January 30, 1996, the Staff of the Commission requested that the Company clarify the nature of fourth quarter adjustments which cause restatement of previously reported quarterly amounts reported in its Supplemental Financial Information -- Unaudited Quarterly Financial Information on page F-39 of the 1994 Form 10-K. This Amendment No. 3 on Form 10-K/A is being filed solely to clarify the nature of such adjustments on page F-39 of the 1994 Form 10-K. Although the Securities and Exchange Commission rules require the Company to refile the Company's financial statements with this Form 10-K/A, only page F-39 has been changed to provide the disclosure requested by the Staff of the Commission.
Pursuant to the requirements of Rule 12b-15 under 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.
January 15, 1996 By /s/ C.J. DAVID DAVIES
[KPMG Peat Marwick LLP Letterhead]
We have audited the accompanying balance sheets of Hawaiian Airlines, Inc. as of December 31, 1994 and 1993, and the related statements of operations, shareholders' equity (deficit) and cash flows for the period September 12, 1994 through December 31, 1994, the period January 1, 1994 through September 11, 1994, and for each of the years in the two-year period ended December 31, 1993. 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 Hawaiian Airlines, Inc. as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the period September 12, 1994 through December 31, 1994, the period January 1, 1994 through September 11, 1994, and for each of the years in the two-year period ended December 31, 1993 in conformity with generally accepted accounting principles.
As discussed in notes 1 and 2 to the financial statements, on September 12, 1994, Hawaiian Airlines, Inc. emerged from bankruptcy. The financial statements of the Reorganized Company reflect the impact of adjustments to reflect the fair value of assets and liabilities under fresh start reporting. As a result, the financial statements of the Reorganized Company are presented on a different basis than those of the Predecessor Company and, therefore, are not comparable in all respects. Furthermore, as discussed in note 4 to the financial statements, the Company changed its method of accounting for income taxes in 1992.
The accompanying financial statements have been prepared assuming that Hawaiian Airlines, Inc. will continue as a going concern. As discussed in note 14 to the financial statements, the Company's recurring losses from operations, deficit working capital and its limited sources of additional liquidity raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 14. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
DECEMBER 31, 1994 (REORGANIZED COMPANY) AND 1993 (PREDECESSOR)
BALANCE SHEETS, CONTINUED (IN THOUSANDS) DECEMBER 31, 1994 (REORGANIZED COMPANY)
See accompanying Notes to Financial Statements.
STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE PERIOD FROM SEPTEMBER 12, 1994 TO DECEMBER 31, 1994 (REORGANIZED COMPANY), THE PERIOD FROM JANUARY 1, 1994 TO SEPTEMBER 11, 1994 (PREDECESSOR), YEARS ENDED DECEMBER 31, 1993 (PREDECESSOR) AND 1992 (PREDECESSOR)
* Not Meaningful - Per share data is not meaningful as the Predecessor has been recapitalized and has adopted fresh start reporting as of September 12, 1994 ** Proforma per share data has been calculated assuming that the Reorganized Company will issue approximately 9.4 million shares of common stock
See accompanying Notes to Financial Statements.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS) FOR THE PERIOD FROM SEPTEMBER 12, 1994 TO DECEMBER 31, 1994 (REORGANIZED COMPANY), THE PERIOD FROM JANUARY 1, 1994 TO SEPTEMBER 11, 1994 (PREDECESSOR), YEARS ENDED DECEMBER 31, 1993 (PREDECESSOR) AND 1992 (PREDECESSOR)
See accompanying Notes to Financial Statements.
See accompanying Notes to Financial Statements
On September 21, 1993 (the "Petition Date"), Hawaiian Airlines together with HAL, INC., Hawaiian Airlines' parent company, and West Maui Airport, Inc., another wholly owned subsidiary of HAL, INC., (collectively the "Debtors" or "Predecessor") commenced reorganization cases by filing voluntary petitions for relief under Chapter 11, Title 11 ("Chapter 11") of the United States (the "U.S.") Code in the U.S. Bankruptcy Court for the District of Hawaii (the "Bankruptcy Court"). Concurrently therewith, the Debtors filed a Consolidated Plan of Reorganization dated September 21, 1993 (as amended on March 5, 1994, May 6, 1994, August 29, 1994, November 2, 1994 and February 16, 1995, the "Plan"). By order dated May 10, 1994, the Debtors received Bankruptcy Court approval of their disclosure statement for soliciting acceptances of the Plan, and commenced solicitation on May 13, 1994. In the balloting completed on June 13, 1994 the class of creditors holding general unsecured claims and the class comprised of holders of Class B Preference Stock interests both failed to approve the Plan. On August 30, 1994, the Bankruptcy Court entered an order confirming the Plan and with the satisfaction of certain conditions, the Plan became effective on September 12, 1994 (the "Effective Date"). Due to the aforementioned voting results on the Plan, on the Effective Date, all of the outstanding equity securities of the Debtors were cancelled, including without limitation, all outstanding common, preferred and preference stock of HAL, INC.
Pursuant to the Plan, on the Effective Date, first West Maui Airport, Inc. and then HAL, INC. were merged with and into Hawaiian Airlines with Hawaiian Airlines (the "Reorganized Company" or the "Company") being the sole surviving corporation. All unsecured creditors with allowed claims (except with respect to certain immaterial claims and claims relating to assumed executory contracts) will receive Reorganized Company common stock in consideration for their allowed claims. Generally, secured creditors amended the terms of their existing indebtedness, but retained a security interest in the collateral that, at the Effective Date, secured their claims.
The Plan contemplated that the Reorganized Company would issue approximately 9,400,000 shares of common stock, $0.01 par value per share, and warrants and options to purchase an additional 1,589,011 shares of such common stock. A portion of the shares to be distributed to general unsecured creditors (currently estimated at 3,212,927 shares) will be held pending resolution of disputed claims. As disputed claims are finally resolved, the creditor holding such claim will receive a distribution of stock. Any shares reserved in excess of the amount distributed to such creditor will be held until all disputed claims have been resolved. Upon resolution of all disputed claims, there will be a final distribution of shares to all general unsecured creditors on a pro rata basis.
Under the Plan, the shares of new common stock were to be distributed by December 12, 1994. By order entered December 15, 1994, the Reorganized Company received approval from the Bankruptcy Court to postpone distribution of the Reorganized Company's new common stock as originally contemplated under the Plan. By order entered March 14, 1995, the Reorganized Company received a second extension from the Bankruptcy Court to postpone the distribution of the Reorganized Company's new common stock. The Reorganized Company now anticipates that its shares of new common stock will be distributed during the second quarter of 1995.
The Reorganized Company postponed the distribution for two reasons. First, the Company had received very few completed Letters of Distribution Request (which all claimants are required to return to the Distribution Agent under the Plan in order to receive their distributions of new common stock) from holders of allowed claims so that very few distributions could be made. Second, the Reorganized Company was concerned that it could have been required to make distributions to claimants who are not citizens of the U.S. that could have resulted in Hawaiian Airlines failing to be a citizen of the U.S. as defined in Section 40102 of the Transportation Act (49 U.S.C. Section 40102).
In order to hold a Section 401 Certificate which is necessary for Hawaiian Airlines to carry on its business as a provider of interstate and foreign scheduled air transportation, Hawaiian Airlines must be a citizen of the U.S. In order for Hawaiian Airlines to be deemed a citizen of the U.S. for these purposes, the president and at least two-thirds of the board of directors and other managing officers must be citizens of the U.S., and at least 75.0% of the voting interest must be owned and controlled by persons that are citizens of the U.S.
Accordingly, the Reorganized Company has filed with the Bankruptcy Court a motion seeking approval of an amendment to the Plan which the Reorganized Company believes will enable it to satisfy the citizenship test of the Transportation Act and still make all contemplated distributions under the Plan. The amendment would accomplish this by bifurcating the new common stock into two classes, one with limited voting rights ("Class B Common Stock") and the other with full voting rights ("Class A Common Stock"). The Company has asked the holders of the two largest general unsecured claims entitled to receive stock to accept Class B Common Stock for the distribution due them under the Plan. If they agree, then all other claimants entitled to receive distributions in stock under the Plan would receive shares of Class A Common Stock. If they do not agree, then non-U.S. citizens holding general unsecured claims would receive a portion of their distribution in shares of Class A Common Stock and a portion in shares of Class B Common Stock. The number of shares of Class A Common Stock to be distributed to them would be determined to assure that after giving effect to the distributions, non-U.S. citizens would not hold more than 24.0% of the outstanding shares of Class A Common Stock. The balance of their distribution would be made in shares of Class B Common Stock. All distributions to other claimants entitled to receive distributions in stock under the Plan would be made in shares of Class A Common Stock. The Company believes that the issuance of shares of Class B Common Stock in either of the foregoing manners will enable the Reorganized Company to meet the citizenship test described above.
Because implementation of the proposed amendment requires several Bankruptcy Court hearings and determinations, as well as either an agreement with the holders of the two claims who would agree to receive shares of Class B Common Stock, or, failing such agreement, a solicitation of approval of the claimants classified as non-U.S. citizens, it is impossible to determine when or whether the Reorganized Company will succeed in such implementation. If the Reorganized Company is unsuccessful in implementing the amendment, it may seek Bankruptcy Court approval to make distributions to U.S. citizens and withhold distributions to non-U.S. citizens or it may seek to implement alternative strategies to enable distributions under the Plan. However, if the Reorganized Company is unsuccessful in implementing any of the alternatives, distributions of stock to all claimants may be delayed indefinitely.
The Reorganized Company's new common stock has been approved for listing on the American Stock Exchange and Pacific Stock Exchange. The actual commencement of trading, however, may be delayed depending on the timing of the distribution of unsecured creditors. Because a significant amount (up to 42.5% of the stock to be distributed to general unsecured creditors) may not be distributed until most disputed claims have been resolved, and because significant amounts of stock may be held in employee stock ownership plans, the trading volume may be limited. By first distribution, the Reorganized Company anticipates that approximately 28.9% of the disputed claims should be resolved.
In connection with the satisfaction of legal requirements for confirmation of the Plan, certain financial projections were furnished to the Bankruptcy Court. The Reorganized Company will not update or comment further on such projections, which were not intended to be, and should not be, relied upon by post- reorganization investors in the Reorganized Company's common stock. As a matter of policy, the Reorganized Company does not intend to publish projections of future financial performance.
The fresh start reporting common equity value of approximately $40.0 million was determined by the Reorganized Company's management and was calculated by employing a methodology based on a multiple of earnings before interest and taxes. Analyses of publicly available information of other companies believed to be comparable to the Reorganized Company were used in determining a multiple which was then applied to financial projections of the Reorganized Company. Management's estimate of common equity value considered a number of factors including relevant industry and economic conditions, expected future performance, and the amount of available cash and current market conditions, and may not necessarily be indicative of the value at which the Reorganized Company's common shares may trade. Under fresh start reporting, the reorganization value of the entity has been allocated to the Reorganized Company's assets and liabilities on a basis substantially consistent with the purchase method of accounting. The portion of reorganization value not attributable to specific tangible or identifiable intangible assets of the Reorganized Company has been reflected as "Reorganization value in excess of amounts allocable to identifiable assets" in the accompanying balance sheets.
The effects of the Plan and fresh start reporting in accordance with the provisions of the American Institute of Certified Public Accountants Statement of Position (the "SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" on the Reorganized Company's balance sheet as of the Effective Date are as follows, in thousands:
(a) To record the discharge or reclassification of obligations pursuant to the Plan. Substantially all of these obligations are only entitled to receive such distributions of cash and common stock as provided under the Plan. Portions of these obligations were restructured and will continue, as restructured, to be liabilities of the Reorganized Company.
(b) To record adjustments to reflect assets and liabilities at estimated fair value (including the establishment of Reorganization value in excess of amounts allocable to identifiable assets), the establishment of the Reorganized Company's equity value of $40.0 million and the cancellation of the Predecessor's equity.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements included herein have been prepared in accordance with SOP 90-7 which was adopted by the Company effective September 22, 1993.
For periods during the Chapter 11 proceeding, prepetition liabilities which were unsecured or estimated to be unsecured are classified as "Liabilities Subject to Compromise." The accrual of interest on such liabilities was discontinued for the period from September 22, 1993 to the Effective Date of the Plan.
For accounting purposes, the Effective Date of the Plan and inception date for the Reorganized Company is deemed to be September 12, 1994. Under fresh start reporting, the reorganization value of the entity has been allocated to the Reorganized Company's assets and liabilities on a basis substantially consistent with the purchase method of accounting. The portion of reorganization value not attributable to specific tangible or identifiable intangible assets of the Company has been reflected as "Reorganization value in excess of amounts allocable to identifiable assets" in the accompanying balance sheets.
Because of the application of fresh start reporting, the financial statements for periods after reorganization are not comparable to the financial statements for periods prior to the reorganization.
The Company considers all investments purchased with an original maturity of three months or less to be cash equivalents. Short-term cash investments at December 31, 1994 and 1993 were valued at cost and amounted to $2.6 and $3.0 million, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value because of the short maturity of those instruments. The fair value of short- and long-term debt is based on rates negotiated with prepetition creditors and approximates carrying value. Letters of credit had a fair value of approximately $2.1 million. The fair values of the letters of credit were based on the face value of the underlying instruments. See Note 7.
Inventories consisting of flight equipment expendable parts and supplies are stated at average cost, less an allowance for obsolescence.
Assets held for sale consisting of expendable inventory parts and rotable flight equipment are stated at the lower of average cost or net realizable value. As of December 31, 1994 and 1993, the Company had approximately $13.4 million and $1.6 million, respectively, of expendable inventory parts and rotable flight equipment held for sale internally or on a consignment basis with a third party. In 1993, Assets held for sale were presented as a part of Inventories and Nonoperating assets.
Owned property and equipment are stated at cost. Costs of major improvements are capitalized. Depreciation and amortization are provided on a straight-line basis over the following estimated useful lives:
Maintenance and repairs are charged to operations as incurred, except that 1) costs of overhauling engines are charged to operations in the year the engines are removed for overhaul and 2) scheduled heavy airframe overhauls on DC-9-50 aircraft are recorded under the deferral method whereby the cost of overhaul is capitalized and amortized over the shorter of the period benefitted or the lease term. Additionally, provision is made for the estimated cost of scheduled heavy airframe overhauls required to be performed on leased DC-9-50 aircraft prior to their return to lessors.
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
Reorganization value in excess of amounts allocable to identifiable assets is amortized on a straight-line basis over 20.0 years. Accumulated amortization at December 31, 1994 totalled approximately $1.1 million. The Company will continue to assess and evaluate whether the remaining useful life of the asset requires revision or, through the use of estimated future undiscounted cash flows over the remaining life of the asset, whether the remaining balance of the asset may not be recoverable.
Material preoperating costs associated with the introduction of new flight equipment are amortized on a straight-line basis over the shorter of the lease period or five years.
Accrued vacation in excess of the amount expected to be taken by employees during the following year are classified as a noncurrent liability.
A liability for frequent flyer awards is recognized on the incremental cost basis in the period during which passengers have accumulated sufficient mileage for award redemption. Incremental costs primarily include fuel and catering.
Passenger fares are recorded as operating revenues when the transportation is provided. The value of unused passenger tickets is included as air traffic liability.
Income (loss) per share is based on the weighted average number of common stock shares and common stock equivalents outstanding during each year.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long- Lived Assets and Long-Lived Assets to Be Disposed Of." This Statement is effective for years beginning after December 15, 1995 and applies to long-lived assets and certain identifiable intangible assets whether held and used or to be disposed of, and goodwill.
The Statement requires that a review be made of long-lived assets and certain identifiable intangible assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the future cash flows expected to result from use of the asset (undiscounted and without interest charges) are less than the carrying amount of the asset, an impairment loss is recognized. Such impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. In instances where goodwill is identified with assets that are subject to an impairment loss, such goodwill should be allocated to the assets tested for recoverability on a pro rata basis using the relative fair values of the assets acquired in the transaction generating the goodwill.
The Statement also requires that long-lived assets and certain identifiable intangible assets to be disposed of be reported at the lower of the asset carrying amount or fair value, less cost to sell.
The Company plans to adopt the Statement in 1996. Restatement of previously issued financial statements is not permitted. The Company has not estimated the impact that adoption of the Statement is expected to have on its financial statements.
4. CHANGE IN ACCOUNTING METHODS
Effective January 1, 1992, the Predecessor elected early adoption of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The deferred tax liability recognized at January 1, 1992, as calculated under SFAS No. 96, reflected the alternative minimum tax created by the limitation on the Predecessor's net operating loss carryforwards. The provisions of SFAS No. 109 minimized the effect of alternative minimum tax on the measurement of the gross deferred tax liability. Accordingly, the implementation of SFAS No. 109 eliminated the Predecessor's deferred tax liability existing as of January 1, 1992.
The effect of the change in method of accounting for income taxes on net income before cumulative effect of change in accounting principle for the year ended December 31, 1992 was insignificant. The cumulative effect of the change in method of accounting for income taxes on prior years was approximately $2.2 million.
All of the Company's aircraft are leased except for one DC-9-50. The composition of the Company's aircraft fleet is as follows:
During 1994, the Reorganized Company completed its transition from L-1011 aircraft to DC-10-10 aircraft and ceased its DHC-7 operations in April 1994.
Six DC-10-10 aircraft are leased under operating leases which expire in year 2001. A seventh DC-10-10 is leased under a short term operating lease which expires in 1995. Seven and five DC-9-50 aircraft and related flight equipment are leased under operating and capital leases, respectively, for various periods ranging through the year 2004.
Most of the aircraft under operating leases include renewal options and fair market value purchase options at the end of the lease period.
The Company leases office space for its headquarters, airport facilities, ticket offices and certain ground equipment in varying terms to 2008.
Rent expense for aircraft, office space, real property and other equipment during 1994, 1993 and 1992 was $33.6, $36.6 million and $105.3 million (including $47.6 million in 1992 related to the Northwest wet lease agreement, see Note 17), respectively, net of sublease rental income from operating leases of $368,000, $48,000 and $276,000, respectively.
Scheduled future minimum lease commitments under operating and capital leases for the Reorganized Company as of December 31, 1994, in thousands, are as follows:
In addition to scheduled future minimum lease payments, the Company is required to prepay for monthly DC-10-10 maintenance services in accordance with the American Airlines, Inc.-Registered- ("American") Long-Term Agreements, as hereafter defined. The payments are based on estimated flight hours for the month. For the period from September 12, 1994 to December 31, 1994, the Company incurred $8.9 million in maintenance expenses under the Long-Term Agreements.
As discussed in Notes 12, 13 and 14, prior to April 1995, the Company failed to make certain payments due American under its lease arrangements. An amendment to the long-term Aircraft Lease Agreement providing for the deferral of payment of any remaining delinquent amounts owed by the Company over scheduled dates throughout 1995 became effective April 13, 1995.
The net book value of property held under capital leases as of December 31, 1994 totalled $17.3 million.
At December 31, 1994, the Company's long-term debt, including obligations under capital leases, consists of the following, in thousands:
Secured obligations due 1996-1999 are as follows:
* A note payable executed in 1994 in settlement of $6.0 million of administrative claims related to unpaid prepetition L-1011 and DC-9-50 aircraft rents. The note is due in 1999, bears interest at 8.0% per annum and is payable in monthly installments of principal and interest of $121,658. At December 31, 1994, $5.8 million is outstanding;
* A secured note payable executed in 1992 pursuant to a settlement agreement with the Government of Canada related to two DHC-7 aircraft and related flight equipment. The note is due in 1996 and is payable in installments of $50,000 per month. As the note bears no interest, interest has been imputed as of the Effective Date at 10.0% per annum. As of December 31, 1994 and 1993, $1.0 million and $1.8 million were outstanding,
* A secured note executed in 1993 for the purchase of a DC-9-50 aircraft from a lessor. The mortgage note is due in 1999 and is payable in monthly installments of principal and interest of $59,876. Interest accrues at 10.315% per annum. At December 31, 1994 and 1993, $2.6 million and $3.0
* On the Effective Date, credit facility borrowings were made by the Reorganized Company under a financing arrangement with CIT Group/Credit Finance, Inc. ("CIT"). The financing arrangement was approved by the Bankruptcy Court on July 27, 1994 and consists of a credit facility of up to $8.15 million consisting of a secured revolving credit facility including up to $3.0 million of letters of credit (the "Financing"). On
Effective Date of the Plan, $2.0 million of the revolving credit facility and $3.0 million of letters of credit were funded to the Reorganized Company. Borrowings under the revolving credit facility have been recorded net of discount representing the estimated fair value of issued warrants as discussed in Note 11. The Financing has a term of two years and bears interest at the rate of prime plus 2.5% (11.0% at December 31, 1994). Available credit is subject to reduction determined by recalculation of the borrowing base and repayments arising from disposition of collateral. At December 31, 1994, $4.1 million and $2.1 million of borrowings and letters of credit, respectively, were outstanding. The Financing contains certain restrictive covenants one of which requires a minimum net worth. Effective April 13, 1995, the minimum required net worth covenant was reduced from $28.0 million to $20.0 million. See Note 14.
Estimated tax obligations due 1995-2000 represent allowed priority tax claims for various taxing jurisdictions, which in accordance with the provisions of the Plan, bear interest at 7.0% per annum and are payable in twenty-four quarterly installments commencing on the first through sixth anniversaries of the Effective Date.
Unsecured notes payable due 1996-1997 are as follows:
* A note executed in 1994 in settlement of $4.7 million of administrative claims related to unpaid postpetition L-1011 aircraft rents. The note is due in 1996, bears interest at prime plus 3.0% (11.5% at December 31, 1994) and is payable in monthly installments of principal and interest of $194,010. At December 31, 1994, $3.9 million was outstanding;
* A note executed in 1994 in settlement of $2.8 million of administrative claims related to unpaid prepetition airport use and occupancy fees to the State of Hawaii. The note is due in 1997 and is payable in monthly installments of $100,000. The note bears no interest; however, interest has been imputed at 10.0% per annum. As of December 31, 1994, $2.2
* A note executed in 1994 in settlement of $276,000 of administrative claims related to unpaid L-1011 aircraft rents. The note is due in 1996 and is payable in monthly principal installments of $11,518. At December 31, 1994, $254,000 remained outstanding. Interest accrues at prime plus 3.0% per annum (11.5% at December 31, 1994).
Obligations under capital leases represent the present value of aggregate future minimum lease payments discounted using interest rates ranging from 8.5% to 9.0%.
The following table represents a summary of the Reorganized Company's assets as of December 31, 1994 which are pledged as security for the indicated obligations as of December 31, 1994:
8. REORGANIZATION AND NONRECURRING OPERATING ITEMS
The following reorganization and other items associated with the bankruptcy proceeding were incurred by the Predecessor during the period from January 1, 1994 to September 11, 1994, in thousands:
During 1993, the Predecessor returned or terminated the respective leases under five of its DC-9-50 aircraft. As a result, the Company provided for $14.0 million in anticipated aircraft rental and return costs. In accordance with SOP 90-7, following the Petition Date, the Predecessor classified reorganization and other costs associated with the bankruptcy proceeding as nonoperating reorganization expenses. The balance for the period from September 22, 1993 through December 31, 1993 includes the following, in thousands:
Charter revenues in 1993 include $3.9 million received from the Military Airlift Command in May 1993 following a settlement with the Debtors on its claim for additional compensation for charter operations during Operations Desert Shield and Desert Storm in 1991 and 1990.
As part of the Predecessor's restructuring of its operations in the last quarter of 1992, the Predecessor provided for approximately $23.0 million in anticipated aircraft rental and return costs for its six DC-8 aircraft, $5.6 million for the write-down to net realizable value of DC-8 aircraft improvements and deferred charges and approximately $650,000 in severance cost related to scheduled personnel reductions. In addition, approximately $7.5 million of favorable operating leases were completely written down to reflect the changes in the economic value of the restructured lease terms.
In 1992, the Financial Accounting Standards Board issued SFAS No. 109. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Predecessor adopted SFAS No. 109 as of January 1, 1992. The cumulative effect of this change in accounting for income taxes of $2.2 million was determined as of January 1, 1992 and is reported separately in the statement of operations for the year ended December 31, 1992.
As a result of net operating losses in the current year and net operating losses carried forward from prior years, the Company and the Predecessor were not required to provide for federal and state income taxes for 1994 and 1993.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1994 and 1993 are presented below, in thousands:
The valuation allowance for deferred tax assets as of December 31, 1993 was $66.4 million. The net change in the total valuation allowance for the year ended December 31, 1994 was a decrease of $19.3 million.
As a result of the November 1992 debt restructuring and recapitalization transaction, an ownership change of the Company occurred which resulted in a limitation on the use of its net operating loss (and tax credit) carryforwards pursuant to Sections 382 and 383 of the Internal Revenue Code. Consequently, the Company's ability to utilize net operating loss and tax credit carryforwards that arose prior to that ownership change is limited to $2.8 million annually ("Section 382 limitation"). Any part of the Section 382 limitation that is not utilized in a given year may be carried forward to the next year and combined with that year's originating Section 382 limitation of $2.8 million. Net operating loss carryforwards generated after the ownership change resulting from the November 1992 restructuring, are not subject to the Section 382 limitation, but were affected by the Company's Chapter 11 reorganization, as discussed below. After taking into account the reductions in net operating loss carryforwards resulting from the November 1992 debt restructuring and recapitalization transaction, as of December 31, 1994 the Company has approximately $44.8 million of net operating loss (and equivalent tax credit) carryforwards attributable to the period prior to the November 1992 restructuring ("pre-November 1992 NOLs") that are subject to the Section 382 limitation.
The financial reorganization of the Company in 1994 resulted in the cancellation of substantial debts of the Company. Such cancellation of indebtedness can result in taxable income under the Internal Revenue Code equal to the excess of the amount of debt canceled over the cash and fair market value of property (including new stock of the Company) paid to the creditors. However, the Internal Revenue Code provides that the cancellation of indebtedness does not give rise to taxable income if the cancellation was pursuant to a plan approved by the court in a bankruptcy case. Moreover, under the judicial "stock-for-debt exception," as modified by Section 108 of the Internal Revenue Code, the Company will not be required to reduce its net operating loss and tax credit carryforwards as a result of the issuance of the Company's new stock to creditors in connection with the Company's reorganization, except as discussed below.
The Chapter 11 reorganization of the Company resulted in another "ownership change" of the Company under Section 382 of the Internal Revenue Code. Ordinarily, an ownership change would result in a significant limitation on the Company's ability to utilize its net operating loss carryforwards following the ownership change. However, pursuant to the so-called "Section 382(l)(5) bankruptcy exception," provided the Company's reorganization resulted in the ownership of 50.0% or more of the Company's stock by "qualifying creditors" and pre-change stockholders, the general limitations imposed by Section 382 will not apply, but the Company's net operating loss carryforwards will be reduced by (i) certain interest paid or accrued on indebtedness converted into stock pursuant to the Plan and (ii) 50.0% of the excess of the amount of debt canceled (other than debt incurred for interest described in (i)) over the value of the Company's stock issued in exchange for the canceled debt.
If the Section 382(l)(5) bankruptcy exception applies and the Company undergoes another ownership change within two years after the ownership change resulting from its Chapter 11 reorganization, the Company would not be entitled to use any net operating loss and tax credit carryforwards that accrued prior to such subsequent ownership change to offset taxable income earned following such ownership change. In addition, the Section 382(l)(5) bankruptcy exception will not affect the limitations imposed on the Company's pre-November 1992 NOLs, and therefore such pre-November 1992 NOLs will remain subject to the $2.8 million Section 382 limitation.
If the Company determines that the net operating loss reduction rules mandated by the Section 382(l)(5) bankruptcy exception would seriously reduce the amount of the Company's net operating loss carryforwards, or if there is a significant possibility that the Company will undergo another ownership change within the two-year period following the ownership change resulting from its Chapter 11 reorganization, the Company may elect to be subject to the annual limitation rules under Section 382(l)(6) of the Internal Revenue Code (the "Section 382(l)(6) election"). Under this provision, the Company's ability to utilize net operating loss and equivalent tax credit carryforwards in the future will generally will be subject to an annual limitation (the "Section 382(l)(6) limitation") determined by multiplying the applicable long term tax- exempt rate of 6.05% as of September 1994, by the lower of (1) the value of the Company's assets immediately before the ownership change, determined without regard to liabilities; or (2) the aggregate new stock value immediately after the ownership change. If the Section 382(l)(6) election is made, the Company's net operating loss and credit carryforwards will not be subject to the reductions mandated by the Section 382(l)(5) bankruptcy exception, nor will there be a complete prohibition on the use of net operating loss and credit carryforwards if the Company undergoes another ownership change within the two-year period described above. Moreover, if the Section 382(l)(6) election is made and the Section 382(l)(6) limitation is greater than the $2.8 million Section 382 limitation discussed above, the $2.8 million Section 382 limitation will continue to apply to the pre-November 1992 NOLs.
After giving consideration to the provisions of Section 382(l)(5), the Company has post-November 1992 net operating loss and equivalent investment tax credit carryforwards of $49.1 million. Such amounts are in addition to the pre- November 1992 NOLs, and if the Company decides not to make the Section 382(l)(6) election, such amounts would not be subject to limitation under Section 382 until the occurrence of another ownership change. The Company's net operating loss and credit carryforwards will expire in 2006 at the earliest.
While it is anticipated that the Section 382(l)(5) bankruptcy exception would be most advantageous, the Company has until September 15, 1995 to decide on whether or not to make the Section 382(l)(6) election.
If the Company, in future tax periods, were to recognize tax benefits attributable to tax attributes of the Predecessor (such as net operating loss and other carryforwards), any such benefit would first be applied to reduce the balance of Reorganization value in excess of amounts allocable to identifiable assets.
The Company has several pension plans covering substantially all of its employees hired prior to September 1, 1992. Pilots and ground personnel are covered under three defined benefit plans which provide benefits based primarily on years of service and employee compensation near retirement. The International Association of Machinists ("IAM") defined benefit pension plan was frozen effective October 1, 1993 upon ratification of the new IAM collective bargaining unit agreement. The salaried employee defined benefit pension plan was also frozen effective October 1, 1993. Funding for the ground personnel plans is based on minimum Employee Retirement Income Security Act requirements. Pension cost for the Air Line Pilots Association ("ALPA") plan is funded on a current basis based on the amortization of prior service cost over 20 years. Plan assets consist primarily of common stocks, government securities, insurance contract deposits and cash management funds.
The following table summarizes the funded status of the defined benefit plans as of December 31, 1994 and 1993, in thousands:
The projected benefit obligation was determined using an assumed weighted- average discount rate of 8.25% and 7.25% for 1994 and 1993, respectively. At December 31, 1994, the assumed weighted-average rate of compensation increase was 4.50% for pilots and 0.00% for ground personnel. The assumed weighted- average rate of compensation increase was 4.25% in 1993. The assumed weighted- average expected long-term rate of return on plan assets was 9.0% for 1994 and 1993.
In the third quarter of 1994, ALPA further ratified certain funding assumption changes to their defined benefit pension plan which resulted in decreased required cash contributions to the plan. The changes were ratified by ALPA in exchange for 1) an additional allowed general unsecured claim under the Predecessor's Chapter 11 process; 2) payment by the Reorganized Company of the pilots' pension plan investment and advisory fees and administrative expenses in 1994 and 1995, with payments being limited to $100,000 in 1994; 3) if applicable, future payment directly by the Reorganized Company for retirement benefits accrued in excess of statutory compensation limits; and 4) forgiveness of certain immaterial fees due from ALPA.
Subsequent to December 31, 1994, in the first quarter of 1995, an early out retirement program has been offered by the Company to qualified participants of the IAM and salaried defined benefit plans. As of the date of this report, the Company is not able to determine the dollar adjustment required to its defined benefit and postretirement obligations as a result of this program.
The net periodic pension cost for defined benefit plans in 1994 included the following components, in thousands:
The net periodic pension cost in 1994 was determined using an assumed weighted- average discount rate of 8.25% and 7.25% for the period from September 12, 1994 to December 31, 1994 and the period from January 1, 1994 to September 11, 1994, respectively.
Fresh start adjustment of $8.3 million represents the net effect of fresh start accounting, as applied by the Company in accordance with SOP 90-7, on the pension benefit obligation as of September 12, 1994.
Net pension cost for defined benefit plans in 1993 and 1992 included the following components, in thousands:
The net periodic pension cost in 1993 and 1992 was determined using an assumed weighted-average discount rate of 7.25% and 8.0%, respectively.
Curtailment gain of $12.1 million representing the actuarial equivalent of the reduction in the net accrued pension benefit obligation as of September 30, 1993 is reflected in the accompanying financial statements as an extraordinary item. The gain results from the cessation of future pay and credited service increases due to the aforementioned freezing of the IAM and salaried employee defined benefit pension plans as of October 1, 1993.
In addition to providing pension benefits, the Company sponsors two defined benefit postretirement plans. Employees in the Company's non-pilot group are eligible for certain medical benefits under one plan if they meet certain age and service requirements at the time of retirement. Employees in the Company's pilot group are eligible for certain medical and life insurance benefits under another plan if they become disabled or reach normal retirement age while working for the Company. The Company continues to fund the cost of medical and life insurance benefits in the year incurred.
The postretirement benefit plans' combined benefit obligations as of December 31, 1994 and 1993 are as follows, in thousands:
The accumulated postretirement benefit obligation was determined using an assumed weighted-average discount rate of 8.25% and 7.25% for 1994 and 1993, respectively.
Net periodic postretirement benefit cost in 1994 included the following components, in thousands:
A weighted average discount rate of 8.25% and 7.25% was used for the period from September 12, 1994 to December 31, 1994 and the period from January 1, 1994 to September 11, 1994, respectively.
For measurement purposes, a graded rate ranging from an initial rate of 15.0% to a termination rate of 6.0% was used in the per capita cost of covered medical benefits for the period from September 12, 1994 to December 31, 1994. A graded rate ranging from an initial rate of 14.0% to a termination rate of 5.0% was used in the per capita cost of covered medical benefits for the period from January 1, 1994 to September 11, 1994. The medical cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed medical cost trend rates by 1.0% in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994, 1993 and 1992 by $3.7 million, $3.5 million and $2.9 million, respectively, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the years then ended by $584,000, $593,000 and $495,000, respectively.
Net periodic postretirement benefit cost in 1993 and 1992 included the following components, in thousands:
A weighted average discount rate of 7.25% and 8.0% was used as of December 31, 1993 and 1992, respectively.
A graded rate ranging from an initial rate of 14.0% to a termination rate of 5.0% was used in the per capita cost of covered medical benefits as of December 31, 1993. A graded rate ranging from an initial rate of 15.0% to a termination rate of 6.0% was used in the per capita cost of covered medical benefits as of December 31, 1992.
During September 1990, the Predecessor agreed to establish Employee Stock Option Plans (the "ESOPs") as a part of the renegotiation of labor contracts covering the pilots, flight attendants and other union represented employees. In exchange for work rule changes and 10.0% wage rate reductions for the two- year period commencing September 1, 1990, the Predecessor contributed 20.0% of its common stock on a fully diluted basis to the tax- qualified ESOPs. The final increment of 220,931 shares was contributed on January 2, 1992 and recorded as a $1.3 million charge to compensation expense in 1992.
In 1992, the Predecessor agreed to contribute 425,000 shares of common stock to the pilots 401(k) plan in exchange for revisions to work rules, shared health care costs and a change in the interest rate assumption used for funding the pilot's retirement plan. The Predecessor accrued an obligation of approximately $3.5 million in 1992 based on the market price of the Predecessor's common stock at the date of commitment. On August 12, 1993, 348,038 of such shares were issued.
In 1993 the Company entered into new collective bargaining agreements with the IAM, ALPA, Association of Flight Attendants ("AFA") and Transport Workers Union ("TWU") and made certain changes to the compensation and benefits of salaried employees. The new agreements and the changes for the salaried employees are for a duration of three-and-a-half years. These new agreements contemplated that the employees would have claims relating to these concessions which would be satisfied through the issuance of the new common stock of the Reorganized Company. See Note 1.
The Company also has separate deferred compensation plans (401(k)) for its pilots, flight attendants and ground and salaried personnel. Participating employer cash contributions are not required under the terms of the pilots' plan. However, the Company made contributions of 5.0% in 1994, 7.0% in 1993 and 6.25% in 1992, of defined compensation pursuant to the terms of the flight attendants' plan. Effective January 1, 1994, the Company is required to contribute an additional 2.0% to participants in the flight attendants' plan. Contributions to the flight attendants' plan are funded currently and totalled approximately $889,000, $868,000 and $832,000 in 1994, 1993 and 1992, respectively. Effective September 1, 1993, in conjunction with the modifications to IAM and salaried employees benefits, the Company was required to contribute 2.0% of eligible earnings to the 401(k) plan for IAM and salaried personnel. Effective September 1, 1994, the Company is required to contribute 4.0% of eligible earnings to the IAM and salaried personnel plan. Contributions from the Company are required only for those employees who were participants in the plan as of September 1, 1993. Contributions to the IAM and salaried 401(k) plan totalled $1.1 million and $288,000 in 1994 and 1993, respectively.
11. COMMON STOCK WARRANTS, RIGHTS AND OPTIONS
In conjunction with obtaining the Financing, $2.0 million of letters of credit were provided by certain third parties as additional security for performance of the Reorganized Company's obligations under the Financing. One such letter of credit in the amount of $1.0 million is guaranteed by a Director of the Reorganized Company. The persons providing the letters of credit received a subordinated security interest in the assets securing the Financing and received warrants to purchase 989,011 shares of the Reorganized Company's common stock. The warrants have a five-year term, expiring September 12, 1999, and are exercisable at a price equal to $2.73 per common share, subject to adjustment pursuant to anti-dilution provisions.
On December 1, 1994 the Board of Directors of the Company authorized adoption of a shareholder rights plan pursuant to which there will be attached to each share of common stock of the Reorganized Company one preferred stock purchase right (a "Right"). The rights plan provides that in the event any person becomes the beneficial owner of 10.0% or more of the outstanding common shares, each Right (other than a Right held by the 10.0% shareholder) will be exercisable, on and after the close of business on the tenth business day following such event, to purchase Hawaiian Airlines preferred stock having a market value equal to two times the then current exercise price (initially $8.00). The rights plan further provides that if, on or after the occurrence of such event, the Company is merged into any other corporation or 50.0% or more of the Company's assets or earning power are sold, each right (other than a Right held by the 10.0% shareholder) will be exercisable to purchase common shares of the acquiring corporation having a market value equal to $16.00. The Rights expire on December 1, 2004 (unless previously triggered) and are subject to redemption by the Company at $0.01 per Right at any time prior to the first date upon which they become exercisable.
Pursuant to the terms of the Plan, 600,000 shares of the Reorganized Company's new common stock have been reserved for issuance under a 1994 Stock Option Plan. The 1994 Stock Option Plan provides for issuance of options to officers and key employees of the Reorganized Company, with the terms of such options and the recipients of such options to be determined by a committee. In February 1995, the Compensation Committee of the Board of Directors approved a form of nonqualified stock option agreement and granted options under such agreements covering substantially all of the 600,000 reserved shares. The grant of such options is subject to approval of the 1994 Stock Option Plan by shareholders of the Reorganized Company.
12. TRANSACTIONS WITH AMERICAN AND CERTAIN OF ITS AFFILIATES
On November 8, 1993, the Predecessor entered into a letter of intent as amended from time to time with AMR Training & Consulting Group, Inc. ("AMRCG"), an affiliate of American. As contemplated by the Letter, Hawaiian Airlines, Inc. entered into a variety of agreements with AMRCG's affiliates (collectively, the "Interim Agreements") for certain services, including data processing, licensing of reservations system, leasing of DC-10-10 aircraft, maintenance services on such DC-10-10 aircraft and participation in the AAdvantage- Registered Trademark- frequent flyer program. Pursuant to its participation in the program, members who are redeeming mileage to fly to Hawaii or among the islands may fly on Hawaiian Airlines (subject to space limitations) with American paying Hawaiian Airlines an agreed fee for transporting such passengers. In addition, passengers flying on Hawaiian Airlines can earn AAdvantage-Registered Trademark- miles.
On September 12, 1994, long-term agreements with American and certain of its affiliates (the "Long-Term Agreements") were entered into pursuant to the confirmation of the Plan, and superseded the Interim Agreements. Services provided under the Long-Term Agreements are substantially identical to those services specified in the Interim Agreements and include the lease of six DC-10- 10 aircraft from American. In November 1994, an additional DC-10-10 aircraft was leased by American to the Company on a a short-term basis, which lease has been extended until April 30, 1995. At December 31, 1994, the obligations of the Company under the Long-Term Agreements were secured by a $2.0 million letter of credit issued under the Company's working capital line of credit. See Note 7.
On October 31, 1994, the Company failed to timely make certain payments due to American pursuant to the long-term Aircraft Lease Agreement entered into on the Effective Date. American sent the Company notice of the failure to make rent and prepaid maintenance payments, but did not declare the Aircraft Lease Agreement in default or exercise any of the remedies, which include, but are not limited to, termination of the lease, repossession of aircraft and engines, recovery of damages and drawings under the letters of credit, available to it. The Company subsequently made the rent and prepaid maintenance payments due American on November 4 and November 15, 1994, respectively. In December 1994
January, February and March 1995 the Company again failed to timely make certain full payments due pursuant to the long-term Aircraft Lease Agreement. Again, while American sent the Company notice of the failure to make such full rent and prepaid maintenance payments, American did not declare the Aircraft Lease Agreement in default or exercise any of the remedies available to it.
Certain additional payments were subsequently made by the Company to American and effective April 13, 1995, the Company and American executed an amendment to the long-term Aircraft Lease Agreement providing for the deferral of payment of approximately $11.1 million of delinquent lease rents and maintenance payments. The amendment provides that the Company is to remit periodic payments (generally on a weekly basis) to American commencing March 31, 1995 and ending December 22, 1995, in amounts ranging from approximately $25,000 to $950,000, including interest at 10.0% per annum, plus payments for the basic rent of aircraft. Maintenance payments will also be payable weekly, but in the same aggregate amounts as set forth in the original terms of the long-term Aircraft Lease Agreement. Thereafter, commencing January 5, 1996, the Company is required to pay, weekly in advance, the basic rent payments owed for the aircraft and maintenance payments in respect of the aircraft.
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Reorganized Company is a party to a number of legal proceedings, substantially all of which were filed prior to the Petition Date. The Chapter 11 filing resulted in the imposition of an automatic stay against the commencement or continuation of any judicial, administrative or other action or proceeding against the Reorganized Company that was or could have been commenced before the Petition Date. The outcomes of these proceedings cannot be predicted with certainty. However, adverse outcomes in any of the legal proceedings filed prior to the Chapter 11 filing and any resultant allowed claim will share pro rata with other unsecured creditors in common stock of the Reorganized Company.
Claims have been, or may be, asserted against the Reorganized Company for alleged administrative claims on or before the Effective Date of the Plan. Management believes that the Reorganized Company has established adequate reserves for these claims.
The Reorganized Company is a party to various other claims and legal actions which are incidental to the conduct of its business. In the opinion of management, after consultation with legal counsel, the Reorganized Company believes that the ultimate disposition of these matters will not have a material adverse effect on the Reorganized Company's operations or financial condition.
In the first quarter of 1995, the Company reached agreement with one of its creditors for settlement of approximately $2.0 million in liabilities owed. The creditor will receive 1) $300,000 of the Reorganized Company's new common stock shares and 2) $1.7 million to be paid in specified installments over 20.0 months. The $2.0 million in liabilities are included in air traffic liability as of December 31, 1994.
Maintenance on the Company's DC-10-10 aircraft fleet is being performed by American in accordance with FAA regulations and Hawaiian Airlines' approved maintenance program. The Company is required to prepay for such maintenance services on a monthly basis in accordance with the Long-Term Agreements. Prior to April 1995, the Company was delinquent in making certain payments due American under its lease arrangements. See Notes 6, 12 and 14.
Hawaiian Airlines anticipates that in the period 1995 through 1999, eight of its thirteen DC-9-50 aircraft will require a heavy airframe overhaul check (the "D Check"). The D Check for a DC-9-50 requires more than 10,000 man-hours of maintenance work and includes stripping the airframe, extensively testing the airframe structure and a large number of parts and components, and reassembling the overhauled airframe with new or rebuilt components. The Company anticipates each D Check to cost approximately $900,000.
As a result of certain incidents in 1989 and 1988 involving structural damage to aircraft in flight operated by carriers other than the Company, the Federal Aviation Administration (the "FAA") is requiring or is expected to require structural modifications and the replacement of certain parts, as well as the implementation of additional maintenance programs or changes to current programs, with respect to various types of aircraft over a certain age. These requirements vary, depending on the type of aircraft covered. Based on information currently available, the Company estimates that the total cost of complying with the aging aircraft requirements over the 1995 through 1999 period will approximate $300,000 per DC-9-50 aircraft.
In addition, the Company expects to incur approximately $100,000 per DC-9-50 aircraft per year, for maintenance required under a corrosion prevention and control program. This program is anticipated to continue indefinitely in the future.
During the period from 1995 through 1999, the Company anticipates implementing its supplemental inspection document program for certain of its DC-9-50 aircraft which is estimated to range up to $50,000 per aircraft.
The estimated future cost of complying with FAA regulations as discussed in the preceding paragraphs will be in addition to the costs of the Company's current DC-9-50 fleet maintenance programs.
LOS ANGELES AIRPORT OPERATING TERMINAL
On December 1, 1985, the Company entered into an Interline Agreement with other airlines for, among other things, the sharing of costs, expenses and certain liabilities related to the acquisition, construction and renovation of certain passenger terminal facilities at the Los Angeles International Airport ("Facilities"). Current tenants and participating members of LAX Two Corporation (the "Corporation"), a mutual benefit corporation, are jointly and severally obligated to pay their share of debt service payments related to Facilities Sublease Revenue Bonds issued to finance the acquisition, construction and renovation of the Facilities which totalled $111.9 million at completion. The Corporation leases the Facilities from the Regional Airports Improvement Corporation under a lease agreement. In addition, the Corporation is also obligated to make annual payments to the city of Los Angeles for charges related to its terminal ground rental. All leases of the Corporation are accounted for as operating leases with related future commitments as of December 31, 1994 amounting to approximately $208.1 million. Rent expense relating to these operating leases totalled $4.4 million, $3.6 million and $4.2 million in 1994, 1993 and 1992, respectively.
Member airlines pay the expenses associated with the Facilities on a prorata share basis calculated primarily upon their respective numbers of passengers utilizing the Facilities. The Company accounts for its obligation under this agreement as an operating lease and incurred $737,000, $672,000 and $557,000 of rent in 1994, 1993 and 1992, respectively.
The Company's Gold Plus frequent flyer program offers a variety of awards based on accumulated mileage. The Company recognizes a liability in the period in which members have accumulated sufficient mileage points to allow for award redemption. The incremental cost method is used, computed primarily on the basis of fuel and catering costs, exclusive of any overhead or profit margin. Non-travel awards are valued at the incremental cost of tickets exchanged for such awards.
As of December 31, 1994 and 1993, Gold Plus members had accumulated approximately 3.0 and 3.1 billion miles, respectively, representing liabilities totalling approximately $489,000 and $450,000 at the end of each year, respectively. The Company's accruals assume full redemption of mileage points. During the years ended December 31, 1994, 1993 and 1992, 636.0 million, 493.0 million and 264.0 million award miles were redeemed, respectively.
The Company believes that the usage of free travel awards will not result in the displacement of revenue customers and, therefore, such usage will not materially affect the Company's liquidity or operating results. The use of free travel awards is subject to effective capacity control/yield management programs maintained by the Company to limit the possibility of displacing revenue passengers. Usage of Gold Plus travel redemption accounted for approximately 2.7%, 2.1% and 1.2% of Interisland traffic and an insignificant percentage of Transpacific and South Pacific traffic in 1994, 1993 and 1992, respectively.
14. FINANCIAL CONDITION AND LIQUIDITY
On the Effective Date, the Company recognized an extraordinary gain of $190.1 million representing the relief of approximately $204.7 million in prepetition liabilities net of offsets and certain prepetition liabilities which survived. However, as of December 31, 1994, the Reorganized Company had a net working capital deficit of $45.8 million. The net working capital deficit as of December 31, 1994 represents a $4.6 million increase from the net working capital deficit of $41.2 million at December 31, 1993. The deterioration in the Company's working capital position at December 31, 1994 from that at December 31, 1993 is due to a combination of the following:
* In relation to current assets, increases in accounts receivable, assets held for sale, and prepaid expenses of $2.0 million, $1.6 million and $2.2 million, respectively, being offset by decreases in cash and cash equivalents of $800,000 and inventories of$5.3 million;
* In relation to current liabilities, increases in current portion of long- term debt, current portion of capital lease obligations, air traffic liability and accrued liabilities of $4.2 million, $2.9 million, $10.3 million and $1.0 million, respectively, reduced by decreases in accounts payable of $14.1 million.
As discussed in Note 7, on the Effective Date, credit facility borrowings were made by the Reorganized Company under the Financing. As of the date of this report, the amount of the facility had been effectively reduced to approximately $5.5 million, which amount was approximately fully drawn in the form of $3.4 million in borrowings and $2.1 million in letters of credit.
In order to increase liquidity, the Company has also engaged in a series of promotional ticket sales activities. As of the date of this report, another such promotional activity is in progress. Such promotional activities increase liquidity, but also increase air traffic liability which could affect revenues and liquidity in future periods. Liquidity was further enhanced when 1) in December 1994, $3.0 million of letters of credit issued under the CIT Financing and held by the Airline Reporting Corporation were supplanted with a letter of credit of $100,000, effectively increasing the availability of the revolving credit facility under the Financing and 2) in March 1995, $3.6 million in fuel facility notes receivable held by the Company were collected with $1.5 million of the proceeds reducing borrowings under the Financing and $2.1 million reverting back to the Company.
Notwithstanding the above, since the Effective Date, the Company has continued to experience liquidity shortfalls. As discussed in Notes 6, 12 and 13, prior to April 1995, the Company failed to timely make certain payments due American under the long-term Aircraft Lease Agreement with the Company and American executing an amendment to the long-term Aircraft Lease Agreement, effective April 13, 1995, providing for the deferral of payment of the delinquent lease rents and maintenance payments.
The Company currently does not have access to other unutilized credit facilities and, since there are no remaining unencumbered assets, its access to additional sources of liquidity remains limited. The Company is seeking other possible sources of external financing, but unless it is successful there may continue to be liquidity shortfalls in the future.
The financial statements at December 31, 1994, have been prepared on a going concern basis which assumes continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. As discussed herein, the Company has continued to experience net and operating losses post Effective Date. Furthermore, there can be no assurance that the Company will succeed in solving its liquidity problems or that the Company will have sufficient cash resources to support its continued operations. Because of the Company's liquidity shortfall, an adverse change in events and circumstances outside the control of management could result in the Company being unable to meet its financial obligations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or the amounts and classification of liabilities that might be necessary as a result of the outcome of the uncertainties discussed herein. Management recognizes that the continuation of the Company as a going concern is dependent upon a return to profitable, positive cash flow operations and the generation of adequate funds to meet its ongoing obligations.
15. CONCENTRATION OF BUSINESS RISK
The Company's scheduled service operations are primarily focused on providing air transportation service to, from, or throughout the Hawaiian Islands. Therefore, the Company's operations, including its ability to collect its outstanding receivables, are significantly affected by economic conditions in the State of Hawaii and by other factors affecting the level of tourism in Hawaii.
The Company's Interisland, Transpacific and South Pacific scheduled service is marketed through a number of wholesalers and tour operators. No wholesaler or tour operator accounted for more than 10.0% of total passenger revenues in 1994 or 1992. In 1993, one wholesaler accounted for approximately 11.0% of total passenger revenues. The wholesaler primarily purchased tickets in the Interisland and Transpacific markets with total purchases in 1993 aggregating approximately $31.0 million.
NWA, INC. ("NWA") AND NORTHWEST AIRLINES, INC. ("NORTHWEST")
The Predecessor incurred certain operating revenues and expenses in 1992 in relation to certain operating and marketing agreements with NWA and Northwest. Both NWA and Northwest ceased being related parties in 1992. Refer to Note 17.
JAPAN AIRLINES CO., LTD. ("JAL")
Pursuant to a Space Block Agreement, the Predecessor provided JAL with blocks of seats on certain of its flights from Honolulu to Kahului, Maui and certain ground handling services. The Predecessor earned $970,000 and $4.5 million in revenue under this arrangement during 1993 and 1992, respectively. Ground handling charges related to those segments under the Space Block Agreement totalled an additional $267,000 during 1992. The Space Block Agreement was terminated in 1993.
The Company incurred $276,000, $583,000 and $1.5 million in legal fees from one of its outside legal counsel in 1994, 1993 and 1992, respectively. One of the directors of the Company, Mr. Martin Anderson, is a partner in this law firm. As of December 31, 1994, $7,500 of fees were outstanding.
17. 1992 FINANCIAL RESTRUCTURING AND RECAPITALIZATION PLAN
The Predecessor implemented a complex and comprehensive financial and operating restructuring in November 1992 (the "1992 Restructuring"). Most of the components of the restructuring were consummated at the same time, and contingent upon each other. The principal components of this restructuring were as follows:
TRANSACTIONS WITH THE BANK OF AMERICA, NATIONAL TRUST AND SAVINGS (THE "BANK")
An extraordinary gain of $106.6 million was recognized in 1992 when pursuant to an agreement with the Debtors in November 1992, the Bank cancelled indebtedness of approximately $80.0 million and surrendered for cancellation its warrant to purchase approximately 8.0% of the Predecessor's common stock on a fully diluted basis and all of the outstanding shares of the Predecessor's Class C Senior Preferred Stock ("Class C Stock"), which had a liquidation preference of approximately $55.0 million and certain rights to mandatory redemption.
The Debtors transferred to the Bank 1) approximately $18.6 million of cash proceeds received from the condemnation of the West Maui Airport; 2) approximately $200,000 in payment for the Bank's attorneys' fees and for accrued and future letter of credit fees related to $3.0 million in letters of credit issued for the Debtors' benefit; 3) a warrant to purchase 1,075,268 shares of the common stock of the Predecessor representing approximately 13.1% of the common stock of the Predecessor following closing, exercisable at a price of $0.01 per share at any time through November 9, 2002; and 4) an payable in the principal amount of approximately $3.4 million. The $3.0 million in letters of credit were secured by most of the mortgages and security interests that had previously secured the Debtors' indebtedness to the Bank. The outstanding letters of credit and mortgages and security interests securing such were cancelled on the Effective Date.
In 1992, the Predecessor completed a series of transactions with Northwest and its parent NWA involving the sale of its Honolulu, Hawaii-Fukuoka Route (the "Fukuoka Route") in exchange for 1) the forgiveness of $7.5 million in loans plus related accrued interest and $34.2 million in outstanding net wet lease obligations resulting in a nonoperating gain of approximately $41.7 million, 2) the return and cancellation of its shares of common and Class D Junior Convertible Preference Stock ("Class D Stock"), and NWA's option to purchase up to 49.0% of the Predecessor's common stock on a fully diluted basis; 3) the extension through 1995 of certain marketing and operational agreements relating to fuel purchase, engine overhaul and repair and flight simulator training and ground handling and 4) new ten-year agreements for code sharing and proration of fares designed to save Northwest up to $500,000 per year off of the Debtors' standard prorated fares on Interisland flights, assuming Northwest provided certain volumes of feeder traffic. The Debtors' performance obligations under these ten-year agreements were secured by 100,000 Interisland ticket coupons and were to be used by Northwest had the Debtors materially defaulted under the agreements. The ten-year agreements were rejected on the Effective Date and the 100,000 Interisland ticket coupons subsequently returned to the Reorganized Company.
The Predecessor incurred approximately $63.3 million and $135.7 million in operating revenues and expenses, respectively, in 1992 related to the operation of the Fukuoka Route and the marketing and operational agreements with Northwest and NWA.
CANCELLATION OF CERTAIN SHARES OF STOCK
In addition to the shares of common, Class C and Class D Stock surrendered for cancellation by NWA and the Bank, J. Thomas Talbot and Peter V. Ueberroth, two former directors of the Predecessor, surrendered a total of 479,758 common stock shares for cancellation. Messrs. Talbot's and Ueberroth's voting rights with respect to an additional 1,006,994 shares of the Predecessor's common stock were also terminated. Prior to the restructuring, Messrs. Talbot and Ueberroth held voting control of approximately 36.2% of the outstanding voting securities of the Predecessor.
Pan Pacific Hoteliers, Inc. ("PPH"), a subsidiary of JAL, converted its 487,992 shares of Class A Convertible Preferred Stock ("Class A stock") into 487,992 shares of common stock, thereby relieving the Predecessor from a mandatory redemption obligation commencing in December 1998 that would have aggregated approximately $19.5 million. PPH was also granted the right to "put" its 487,992 shares of common stock to the Company for $10.0 million if a "Control Change" (sale of the Predecessor to certain U.S. air carriers) occurred on or prior to the first anniversary of the restructuring or for $5.0 million if the Control Change occurred after the first anniversary and on or before the fifth anniversary of the 1992 Restructuring. PPH's Common Stock interests in the Predecessor along with any remaining Class A Stock were cancelled on the Effective Date.
As part of the 1992 Restructuring, the Debtors also closed a private placement of 2,816,659 shares of HAL, Inc. common stock at a purchase price of $3.72 per share for total proceeds of approximately $10.5 million.
In 1992, the Predecessor received ratification agreements with three of its unions to assist in lowering expenses and increasing productivity. Included in these agreements were (1) revised work rules; (2) sharing of health care costs; and (3) a change in the interest rate assumption used for funding the pilots' retirement plan in exchange for 425,000 shares of the Predecessor's common stock.
SALE OF WEST MAUI AIRPORT
In October 1992, the State of Hawaii filed an action to condemn the West Maui Airport (the "Airport") pursuant to a prior agreement with the Debtors. The Airport was owned by the Debtors and located on land leased from a third party. By an agreement between the State of Hawaii, the Debtors and the third party, the State agreed to pay $18.6 million to the Debtors and $6.4 million to the third party. The net proceeds were utilized to repurchase the Debtors's indebtedness to the Bank as part of the 1992 Restructuring. The Debtors discontinued operations to the Airport on April 18, 1994 with title of the Airport transferring to the State of Hawaii on the Effective Date.
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The results for the fourth quarter of 1993 include $52.6 million of expenses related to the reorganization processes of the Company, including $51.8 million for the early termination of the Company's L-1011 aircraft leases.
The results of operations for the first three quarters of 1994 and 1993 were adjusted for the impact of certain significant fourth quarter adjustments which related to the prior quarters. These adjustments were corrections of errors which resulted from mathematical mistakes, mistakes in the application of accounting principles, or oversight or misuse of facts that existed at the time the financial statements were prepared.
(a) Period from July 1, 1994 to September 11, 1994 (b) Period from September 12, 1994 to September 30, 1994
* Not Meaningful - Per share data is not meaningful as the Predecessor has been recapitalized and has adopted fresh start reporting as of ** Proforma loss per share data has been calculated assuming that the Reorganized Company will issue approximately 9.4 million shares of
SELECTED FINANCIAL AND STATISTICAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
* Not Meaningful - Per share data is not meaningful as the Predecessor has been recapitalized and has adopted fresh start reporting as of
** Proforma per share data has been calculated assuming that the Reorganized Company will issue approximately 9.4 million shares of
See Notes to Financial Statements (continued)
SELECTED FINANCIAL AND STATISTICAL DATA, CONTINUED (IN THOUSANDS, EXCEPT PER SHARE DATA)
See Notes to Financial Statements
SELECTED FINANCIAL AND STATISTICAL DATA, CONTINUED
Effective July 1, 1993, the Predecessor began to treat passengers flying on promotional or frequent flyer awards as revenue passengers. This change decreased passenger revenue per passenger mile by 0.1 CENTS in 1993 and increased the number of revenue passengers, revenue passenger miles and passenger load factor by 4.0%, 2.0%, and 1.5%, respectively, in 1993 over the amounts that would have been reported without the change.
STOCK TRADING RANGE (PER SHARE)
Stock trading range (per share) is not meaningful as the Predecessor has been recapitalized and has adopted fresh start reporting as of September 11, 1994. Further, the new Common Stock shares of the Reorganized Company have not been distributed as of the date of this report. | 10-K405/A | 10-K | 1996-01-16T00:00:00 | 1996-01-16T16:58:38 |
0000912057-96-000542 | 0000912057-96-000542_0012.txt | P.O. BOX 127 RED LION, PENNSYLVANIA 17356
Nuclear Metals Inc. Flinchbaugh Operations 2229 Main St. 200 East High St Concord Ma 01742 Red Lion PA 17356
Confirmation of contract entered into between Ed Shue > Letter to Don King on 5/22/95
ITEM NUMBER 001, **** pcs, part number 12944264 penetrator for **** projectile in accordance with requirements of drawing 12944264, rev B, purchase specification A34124, rev none and QAP 12944264, rev D. Total price ****.
ITEM NUMBER 002, 1 piece, U/M-lot, part number/description-subcontract data items (see note #4). Total price- n/c.
1665 pcs - 01/02/96 (includes 15 pcs ballistics) -2 penetrators from the FAS lot and 13 from the balance of lots.
1560 pcs - 04f/30/96 (includes 10 pcs ballistics)
2. ORDER QUANTITY OPTIONS: This purchase order award includes an option for PY3 of approximately **** each; an option for PY4 of approximately **** each; an option for PY5 of approximately **** each; for PY3, PY4, PY5 of **** each, all at a firm price of $**** each. The foregoing quantities will be adjusted to be equal to **** of the actual quantities in the **** government prime contract award.
3. Ship via: call olin/flinchbaugh traffic coordinator (717-246-8255) prior to shipment for carrier designation.
4. Subcontract data requirements (sdrl): subcontractor shall provide, with unlimited rights under this subcontract, all data set FORTH IN SDRL FOR M829A2 PENETRATOR, REV B, DTD 05 JULY 1995, ITEMS A008, A010, A013, A015, A018, A019, A022, A030, B001, B003, C005 AND CO14.
5. GOVERNMENT FURNISHED MATERIAL: THE GOVERNMENT WILL FURNISH **** POUNDS OF UNALLOYED DEPLETED URANIUM ARMOR SCRAP PER PENETRATOR ORDERED (TOTAL APPROX. 197,160 LBS) FOB SUBCONTRACTORS S PLACE OF PERFORMANCE. THIS MATERIAL MUST BE USED ON EACH PRODUCTION LOT UNDER THIS SUBCONTRACT, WITHOUT CHANGE IN BLEND OF MATERIALS. NO OTHER MATERIALS ARE AUTHORIZED FOR USE IN PRODUCTION UNDER THIS SUBCONTRACT. DELIVERY OF ARMOR SCRAP TO NMI TO BE: 24,000 LBS EACH ON 07/17/95, 07/31/95, 08/15/95, 08/31/95, ;09/15/95, 10/02/95, 10/19/95, 11/15/95, AND 5,160 LBS ON 12/13/95.
6. FIRST ARTICLE SAMPLE (FAS): A FIRST ARTICLE PER QAP 12944264 WILL BE REQUIRED DUE TO THE NEW PROCESS THAT UTILIZES 100% RECYCLED MATERIAL. THE FAS WILL CONSIST OF 47 PENETRATORS. THE FAS LESS THE TWO (2) HISTORICAL SAMPLES SHALL BE INCLUDED AS PART OF THE FIRST LOT. A BALLISTIC SAMPLE FOR THE FIRST LOT AND THE FAS WILL BE SELECTED ACROSS BOTH THE FAS PIECES AS WELL AS 100% OF THE FIRST LOT. GOVERNMENT SOURCE INSPECTION (GSI) WILL BE REQUIRED FOR FAS.
7. SOURCE INSPECTION: OLIN/FLINCHBAUGH AND GOVERNMENT SOURCE INSPECTION WILL BE REQUIRED PRIOR TO EACH SHIPMENT FROM YOUR PLANT. UPON RECEIPT OF THIS ORDER, PROMPTLY NOTIFY THE GOVERNMENT REPRESENTATIVE WHO NORMALLY SERVICES YOUR PLANT AND SCHEDULE ACCORDINGLY.
8. TECHNICAL DATA PACKAGE LIST (TDPL): THE APPLICABLE TDPL IS #12944257, REV R02, DTD 05 JULY 1995, PROJECTILE, 120MM, APFSDS-T, M829A2.
9. SECURITY CLASSIFICATION: THE APPLICABLE DOCUMENT IS THE SECURITY CLASSIFICATION GUIDE, CARTRIDGE, 120MM, APFSDS-T, M829A2, 30 MAY 1995.
10. SCHEDULING CONTROLS: NMI WILL NOT PERFORM WORK IN ADVANCE OF THAT REQUIRED TO MEET THE DELIVERY SCHEDULE, UNLESS SPECIFICALLY REQUESTED BY OLIN/FLINCHBAUGH IN WRITING TO DO SO. MATERIALS WILL NOT BE ASSIGNED TO THE SUBCONTRACT IN ADVANCE OF ACTUAL NEED IN PRODUCTION BASED ON A NORMAL PRODUCTION SCHEDULE. ACCELERATED OR PARTIAL DELIVERIES WILL NOT BE ACCEPTED, UNLESS REQUESTED BY OLIN/FLINCHBAUGH IN WRITING. ACCELERATED DELIVERIES ARE ANY DELIVERIES MORE THAN 15 DAYS PRIOR TO THE SUBCONTRACT DELIVERY REQUIREMENT. SOURCE INSPECTION WILL NOT BE PERFORMED EARLIER THAN NEEDED TO MEET THE REQUIRED DELIVERY SCHEDULE.
11. REPORTING: NMI WILL PROVIDE A "LINE OF BALANCE" CHART PRIOR TO INITIATION OF PRODUCTION AND UPDATE IT MONTHLY TO SHOW PLANNED PRODUCTION AND MATERIAL ACQUISITION AS IT RELATES TO THE REQUIRED DELIVERY SCHEDULE.
12. PROGRESS BILLINGS: PROGRESS BILLINGS ARE ACCEPTABLE, BUT MUST BE CONSISTENT WITH THE ACTUAL PERFORMANCE. PROGRESS BILLINGS WILL BE AT THE RATE OF 80%. NMI WILL UNDERTAKE ANY REASONABLE STEPS TO PROVIDE OLIN/FLINCHBAUGH ASSURANCES THAT WORK IS PROGRESSING APPROPRIATELY AND THAT FUNDING IS BEING REQUESTED ONLY FOR COMPLETED WORK OR FOR WORK IN PROCESS ACCORDING TO SCHEDULE.
13. DEMILITARIZATION: DEMILITARIZATION MUST RESULT IN COMPLETE DESTRUCTION OF THE ITEM. DISPOSITION WILL BE VIA SCRAP ONLY.
14. GOVERNMENT FURNISHED PROPERTY: THE FOLLOWING ITEMS OF PROPERTY ARE ACCOUNTABLE TO NUCLEAR METALS UNDER THIS PURCHASE ORDER AND PRIME CONTRACT IN ACCORDANCE WITH THE TERMS OF FAR 52.245-2 (ALT 1) AND OLIN OSP - 801/132.
DESCRIPTION SERIAL NO. QTY UNIT PRICE YR MFR
PROBE HOLDER 6672 1 $228.00 1989 SET MASTER 6483 1 $210.00 1990 SET MASTER 6484 1 $210.00 1990 SET MASTER 6485 1 $210.00 1990 SET MASTER 6486 1 $210.00 1990 ULTRASONIC STD SDU1005 1 $2300.00 1990
THE ABOVE PRICE IS A FIRM FIXED PRICE FOR THE DURATION OF THIS PURCHASE ORDER AND IT CONFIRMS NMI QUOTATION 10/14/94, BEST & FINAL OFFER LETTER 01/10/95 AND LETTER SUBCONTRACT DATED 05/22/95.
SUPPLIER QUALITY REQUIREMENTS LIST (SQRL): THE FOLLOWING PARAGRAPHS FROM SQRL REV A DTD 07/13/95 SHALL APPLY:
(1 - 17, 19, 21 - 28)
TERMS AND CONDITIONS: THE ATTACHED "SPECIAL TERMS AND CONDITIONS APPLICABLE TO GOVERNMENT CONTRACTS", FORM FP-03 SHALL APPLY TO THIS PURCHASE ORDER.
FAR CLAUSES: IN ADDITION TO THOSE REGULATIONS SHOWN ON FP-03, THE FEDERAL ACQUISITION REGULATIONS (FAR) SHOWN ON FLYSHEET FAR 13 SHALL APPLY TO THIS PURCHASE ORDER.
SMALL BUSINESS AND SMALL DISADVANTAGED BUSINESS CONCERNS: THE ATTACHED CLAUSE ENTITLED "UTILIZATION OF SMALL BUSINESS AND SMALL DISADVANTAGED BUSINESS CONCERNS" APPLIES TO THIS PURCHASE ORDER.
PALLET SIZES: ITEMS SHIPPED ON PALLETS SHALL HAVE A MAXIMUM DIMENSION OF 42" WIDE X 42" HIGH. (DIMENSION INCLUDES SKID)
TRUCKLOAD SHIPMENTS: FULL TRUCKLOAD SHIPMENTS MUST BE SCHEDULED FOR UNLOADING BY CALLING 717-246-8256 AT LEAST FOUR HOURS PRIOR TO ANTICIPATED DELIVERY.
PURCHASE SPECIFICATION A34124, REV NONE SDRL FOR M829A2 PENETRATOR, REV B DTD 05 JULY 1995 TDPL 12944257, R02, 05 JULY 1995 UTILIZATION OF SMALL BUSINESS AND SMALL DISADVANTAGED BUSINESS SUPPLIER QUALITY REQUIREMENTS LIST (SQRL) REV. A DTD. 07/13/95
IN ADDITION TO THE TERMS AND CONDITIONS OF PURCHASE PRINTED ON THE REVERSE OF THIS PURCHASE ORDER, THE STANDARD NOTES APPLICABLE TO FLINCHBAUGH PURCHASE ORDERS FOUND ON FLYSHEET #790-9 DATED
JANUARY 24, 1995, (ATTACHED) ARE HEREBY INCORPORATED INTO THIS PURCHASE ORDER. | 10-K | EX-10.(P) | 1996-01-16T00:00:00 | 1996-01-16T17:13:10 |
0000912057-96-000502 | 0000912057-96-000502_0000.txt | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995
(Exact name of registrant as specified in its charter)
(State of incorporation) (IRS employer identification number)
SUITE 600, FIRST INTERSTATE BANK BUILDING 1 EAST FIRST STREET, RENO, NEVADA 89501 (702) 786-5527 (Address of principal executive offices) (Zip Code) (Telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
4-5/8% Notes Due 1996 New York Stock Exchange 7.20% Notes Due 1997 New York Stock Exchange 9-5/8% Subordinated Notes Due 1998 New York Stock Exchange 8-5/8% Subordinated Debentures Due 2019 New York Stock Exchange
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 filing requirements for the past 90 days. Yes /X/ No / /
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
At January 1, 1996, 2,500 shares of common stock, without par value, of the registrant were outstanding, all of which were owned by John Deere Credit Company.
The registrant meets the conditions set forth in General Instruction J(1)(a) and (b) of Form 10-K and is therefore filing this Form with certain reduced disclosures as permitted by Instruction J(2).
Page 1 of 53 pages. Index to Exhibits is on pages 47 and 48.
John Deere Capital Corporation (Capital Corporation) and its subsidiaries: Deere Credit, Inc., Farm Plan Corporation, Deere Credit Services, Inc. and John Deere Receivables, Inc., are collectively called the Company. John Deere Credit Company, a wholly-owned finance holding subsidiary of Deere & Company, is the parent of the Capital Corporation.
The principal business of the Company is providing and administering financing for retail purchases of new and used John Deere agricultural, industrial and lawn and grounds care equipment. The Company purchases retail installment sales and loan contracts (retail notes) from Deere & Company and its wholly-owned subsidiaries (collectively called John Deere). These retail notes are acquired by John Deere through John Deere retail dealers in the United States. The Company also purchases and finances retail notes unrelated to John Deere, representing primarily recreational vehicle and recreational marine product notes acquired from independent dealers of those products and from marine product mortgage service companies (recreational product retail notes). The Company also leases equipment to retail customers, finances and services unsecured revolving charge accounts acquired from and offered through merchants in the agricultural, lawn and grounds care and marine retail markets (revolving charge accounts), and provides wholesale financing for wholesale inventories of recreational vehicles, manufactured housing units, yachts, John Deere engines, and John Deere industrial equipment owned by dealers of those products (wholesale notes). Retail notes, revolving charge accounts, financing leases and wholesale notes receivable are collectively called "Receivables." Receivables and operating leases are collectively called "Receivables and Leases."
The Capital Corporation was incorporated under the laws of Delaware and commenced operations in 1958. At January 1, 1996, the Company had 865 full- and part-time employees.
John Deere's operations are categorized into six business segments:
John Deere's worldwide AGRICULTURAL EQUIPMENT segment manufactures and distributes a full range of equipment used in commercial farming -- including tractors; tillage, soil preparation, planting and harvesting machinery; sprayers; crop handling equipment and precision farming devices.
John Deere's worldwide INDUSTRIAL EQUIPMENT segment manufactures and distributes a broad range of machines used in construction, earthmoving and forestry -- including backhoe loaders; crawler dozers and loaders; four- wheel-drive loaders; scrapers; motor graders; excavators; and log skidders.
includes the manufacture and distribution of engines and drivetrain components for the original equipment manufacturer (OEM) market.
John Deere's worldwide LAWN AND GROUNDS CARE EQUIPMENT segment manufactures and distributes equipment for commercial and residential uses - including small tractors for lawn, garden and utility purposes; riding and walk behind mowers; golf course equipment; utility transport vehicles; snowblowers; hand-held products such as chain saws, string trimmers and leaf blowers; and other outdoor power products.
The products produced by the equipment segments are marketed primarily through independent retail dealer networks and other retail outlets. John Deere's agricultural, industrial, and lawn and grounds care operations and subsidiaries are sometimes referred to as the "Equipment Operations."
The CREDIT segment includes the operations of the Company (described herein), John Deere Credit Company and John Deere Finance Limited, which primarily purchases and finances retail notes from John Deere's equipment sales branches in Canada, as well as recreational vehicle and marine product notes from independent dealers. John Deere Finance Limited, through its subsidiary, Canadian Equipment Finance Corporation (CEFC), also purchases and finances non-Deere construction and transportation equipment notes from independent dealers.
The INSURANCE segment issues policies in the United States and Canada primarily for: general and specialized lines of property and casualty insurance to the general public; group accident and health insurance for employees of participating John Deere dealers and disability insurance for employees of John Deere.
The HEALTH CARE segment provides health management programs and related administrative services in the United States to corporate customers as well as employees of John Deere.
John Deere's total annual net sales and revenues exceeded $10 billion for the first time in John Deere's history, due to continued growth in demand for John Deere products and services in fiscal 1995. Worldwide net sales and revenues increased 15 percent to $10.3 billion in 1995 compared with $9.0 billion in 1994. Net sales of John Deere's Equipment Operations increased 15 percent in 1995 to $8.8 billion from $7.7 billion last year. The physical volume of sales increased by 11 percent compared with a year ago.
John Deere achieved record worldwide net income for 1995, totaling $706 million compared with last year's income of $604 million. John Deere's strong results for 1995 were due to higher production and sales levels, coupled with significantly improved overseas and industrial equipment division results. Additionally, John Deere's exports from the United States set a new record, totaling $1.3 billion. John Deere's results also continued to benefit from the strong performance of its Financial Services subsidiaries.
Market demand for John Deere products remains very strong. Increased overseas and domestic demand for agricultural commodities, coupled with lower harvest yields, have resulted in substantial increases in commodity prices. Additionally, the United States Department of Agriculture (USDA) is currently forecasting world grain stocks to be at the lowest levels, relative to use, since it began keeping systematic records. The low commodity inventories, expected increases in worldwide grain demand and the anticipated resulting strong worldwide commodity price levels should bolster farmers' confidence and result in continued strong demand for new and used agricultural equipment. Additionally, government acreage set-asides should be lower in 1996 in response to the reduction in world grain stocks which should further promote agricultural demand. Therefore, John Deere expects agricultural equipment industry retail sales to increase again in 1996, despite some uncertainty surrounding the new farm bill.
Nonresidential and public construction expenditures in 1996 are anticipated to show moderate growth. Housing starts are projected to increase slightly over 1995 levels in response to lower mortgage rates now forecasted for 1996. Consumer spending is expected to remain at relatively strong levels throughout most of 1996. Additionally, John Deere's lawn and grounds care equipment demand should also increase as the result of the introduction of a new product line, "Sabre by John Deere", which includes entry-level lawn tractors and walk-behind mowers. As a result of the many factors cited, industry retail sales for industrial and lawn and grounds care products are expected to increase in 1996 compared with 1995. Financial Services revenues should reflect continued strong demand for John Deere products.
Based on its initial production schedules, John Deere's worldwide physical volume of sales to dealers in 1996 is expected to increase by four percent compared with 1995, with first quarter volumes anticipated to be approximately 12 percent higher than the first quarter of 1995. Additionally, expenditures targeted at establishing markets for new and existing products in both domestic and overseas regions are expected to increase substantially in 1996. However, the expected volume increases will more than offset the short-term costs associated with John Deere's planned growth initiatives. Therefore, 1996 is expected to be another strong year.
RELATIONSHIPS OF THE COMPANY WITH JOHN DEERE
The operations and results of the Company are affected by its relationships with John Deere, including among other things, the terms on which the Company acquires Receivables and Leases and borrows funds from John Deere, the reimbursement for waiver and low-rate finance programs from John Deere and the payment to John Deere for various expenses applicable to the Company's operations. In addition, John Deere has joint access to all of the Company's bank lines of credit.
The Company's acquisition of Receivables and Leases is largely dependent upon the level of retail sales and leases of John Deere products. The level of John Deere retail sales and leases is responsive to a variety of economic, financial, climatic and other factors which influence demand for its products. Since 1986, the Company has also been providing retail sales financing through dealers of certain unrelated manufacturers of recreational vehicles and recreational marine products. The net balance of recreational product retail notes outstanding under these arrangements at October 31,1995 totaled $865 million.
The Company bears all of the credit risk (net of recovery from withholdings from certain John Deere dealers and Farm Plan merchants) associated with its holding of Receivables and Leases, and performs all servicing and collection functions. The Company compensates John Deere for originating retail notes and leases on John Deere products or through John Deere dealers. John Deere is also reimbursed for staff and other administrative services at estimated cost, and for credit lines provided to the Company based on utilization of those lines.
The terms of retail notes and the basis on which the Company acquires retail notes from John Deere are governed by agreements with John Deere, terminable by either John Deere or the Company on 30 days notice. As provided in these agreements, the Company sets its terms and conditions for purchasing the retail notes from John Deere. Under these agreements, John Deere is not obligated to sell retail notes to the Company, and the Company is obligated to purchase retail notes from John Deere only if the notes comply with the terms and conditions set by the Company.
The terms of retail notes and the basis on which John Deere acquires retail notes from the dealers are governed by agreements with the independent John Deere dealers, terminable at will by either the dealers or John Deere. In acquiring the retail notes from dealers, the terms and conditions, as set forth in agreements with the dealers, conform with the terms and conditions adopted by the Company in determining the acceptability of retail notes to be purchased from John Deere. The dealers are not obligated to send retail notes to John Deere, and John Deere is not obligated to accept retail notes from the dealers. In practice, retail notes are acquired from dealers only if the terms of the retail notes and the creditworthiness of the customers are acceptable to the Company for purchase of the retail notes from John Deere. The Company acts on behalf of both itself and John Deere in determining the acceptability of the notes and acquiring acceptable notes from dealers.
The terms of leases, and the basis on which the Company enters into such leases with retail customers through John Deere dealers, are governed by agreements between dealers and the Company. Leases are accepted based on the lessees' creditworthiness, the anticipated residual values of the equipment and the intended uses of the equipment.
Deere & Company has expressed an intention of conducting its business with the Company on such terms that the Company's consolidated ratio of earnings to fixed charges will not be less than 1.05 to 1 for any fiscal quarter. For 1995, the Company's ratio was 1.73 to 1 and for 1994, it was 1.96 to 1. This arrangement is not intended to make Deere & Company responsible for the payment of obligations of the Company.
DESCRIPTION OF RECEIVABLES AND LEASES
Receivables and Leases arise mainly from the retail sale or lease (including the sale to John Deere dealers for rental to users) of John Deere products, used equipment accepted in trade for them, and equipment of unrelated manufacturers, and also include revolving charge accounts receivable and wholesale notes receivable. The great majority derive from retail sales and leases of agricultural equipment, industrial equipment and lawn and grounds care equipment sold by John Deere dealers. The Company also offers financing to recreational product customers through the secured financing of recreational vehicles and recreational marine products. The Company also offers Farm Plan revolving charge accounts, which are used primarily by agri-businesses to finance purchases which would otherwise be carried by the merchant as accounts receivable, as well as credit cards, which are used primarily by retail customers to finance purchases of John Deere lawn and grounds care equipment and marine equipment. Retail notes provide for retention by John Deere or the Company of security interests under certain statutes, including the Uniform Commercial Code, certain Federal statutes, and state motor vehicle laws. Filings are also made for leases, but for operating leases these filings are for informational purposes only. See notes 1 and 2 to the consolidated financial statements.
Recreational product retail notes conform to industry standards different from those for John Deere retail notes and often have smaller down payments and longer repayment terms. In addition, the volumes, margins and collectibility of recreational product retail notes are affected by different economic, marketing and competitive factors and cycles, such as fluctuations in fuel prices and recreational spending patterns, from those affecting retail notes arising from the sale of John Deere equipment. Recreational product retail notes are acquired from more than 550 active recreational vehicle dealers and from approximately 500 active marine product dealers.
Receivables and Leases are eligible for acceptance if they conform to prescribed finance and lease plan terms. Guidelines relating to down-payments and contract terms on retail notes and leases are described in note 2 to the consolidated financial statements.
The John Deere Credit Revolving Plan is used primarily by retail customers of John Deere dealers to finance purchases of John Deere lawn and grounds care equipment. John Deere Credit Revolving Plan is also used by some of the Company's recreational product customers to finance the purchase of such products. Additionally, through its Farm Plan product, the Company finances revolving charge accounts offered by approximately 3,100 participating agri- businesses to their retail customers for the purchase of goods and services. Farm Plan account holders consist mainly of farmers purchasing equipment parts and service at implement dealerships. Farm Plan revolving charge accounts are also used by customers patronizing other agri-businesses, including farm supply, feed and seed, parts supply, bulk fuel, building supply merchants and veterinarians. See notes 1 and 2 to the consolidated financial statements under "Revolving Charge Accounts Receivable."
The Company finances wholesale inventories owned by approximately 400 dealers of recreational vehicles, manufactured housing units, yachts, John Deere engines, and John Deere industrial equipment. A portion of the wholesale financing provided by the Company is with dealers from whom it also purchases recreational product and yacht retail notes. See notes 1 and 2 to the consolidated financial statements under "Wholesale Receivables."
The Company requires that theft and physical damage insurance be carried on all goods leased or securing retail notes. In most cases, the customer may, at his expense, have the Company or the seller of the goods purchase this insurance or obtain it from other sources. Theft and physical damage insurance is also required on wholesale notes. Insurance is not required for revolving charge accounts.
In some circumstances, Receivables and Leases may be accepted and acquired even though they do not conform in all respects to the established guidelines. Acceptability and servicing of retail notes, wholesale notes and leases, according to the finance plans and retail terms, including any waiver of conformity with such plans and terms, is determined by Company personnel. Officers of the Company are responsible for reviewing the performance of the Company in accepting and collecting retail notes, wholesale notes and leases. The Company normally makes all routine collections, compromises, settlements and repossessions on Receivables and Leases.
FINANCE RATES ON RETAIL NOTES
As of October 31, 1995, approximately 52 percent of net dollar value of the retail notes held by the Company bore a variable finance rate. Recreational product retail notes are primarily fixed finance rate notes.
A portion of the finance income earned by the Company arises from financing the retail sales of John Deere equipment sold in advance of the season of use or in other sales promotions by John Deere on which finance charges are waived by John Deere for a period from the date of sale to a specified subsequent date. Some low-rate financing programs are also offered by John Deere. The Company generally receives compensation from John Deere equal to a competitive interest rate for periods during which finance charges have been waived or reduced. The portion of the Company's finance income earned that was received from John Deere on retail notes containing waiver of finance charges or reduced rates was 19 percent in 1995 and 14 percent in 1994.
RECEIVABLES AND LEASES ACQUIRED AND HELD
Receivable and Lease acquisitions during the fiscal years ended and amounts held at October 31, 1995 and 1994 were as follows in millions of dollars:
(1) "Amount" as used here means the approximate principal value financed. (2) "Amount" as used here represents the cost of equipment financed on both financing and operating leases.
John Deere equipment note acquisitions increased by approximately $349 million in 1995 compared with the same period last year, primarily due to an increase in the acquisition of agricultural equipment retail notes. Acquisitions of recreational product retail notes were ten percent higher in the current year due to more competitive financing programs offered by the Company in both the recreational vehicle and recreational marine product markets.
The Company's business is somewhat seasonal, with overall acquisitions of Receivables and Leases traditionally higher in the second half of the fiscal year than in the first half, and overall collections of credit receivables traditionally somewhat higher in the first six months than in the last half of the fiscal year.
From time to time, the Capital Corporation sells retail notes to other financial institutions and in the public market. The Capital Corporation received proceeds from sales of John Deere retail notes of $726 million in 1995 and $560 million in 1994. The unpaid balance of all retail notes previously sold was $1.162 billion at October 31, 1995 and $1.175 billion at October 31, 1994. For additional information on the terms, conditions, recourse and accounting for such sales, see note 2 to the consolidated financial statements.
AVERAGE ORIGINAL TERM AND AVERAGE LIFE OF RETAIL NOTES AND LEASES
The following table shows the estimated average original term in months (based on dollar amounts) for retail notes and leases acquired by the Company during 1995 and 1994:
The average original term for recreational products is longer than John Deere equipment notes because of competitive pressures. Because of prepayments (often from trade-ins), the average actual life of retail notes is considerably shorter than the average original term. The following table shows the estimated average life in months (based on dollar amounts) for retail notes and leases liquidated in 1995 and 1994:
(1) Includes new and used equipment. (2) Estimate based on industry averages due to limited experience with the recreational product portfolio.
DEPOSITS WITHHELD ON RECEIVABLES AND LEASES
Generally, the Company has limited recourse against John Deere agricultural and lawn and grounds care dealers on retail notes and leases and against certain Farm Plan merchants on revolving charge account balances acquired from or through those dealers and merchants. For these John Deere dealers and Farm Plan merchants, separate withholding accounts are maintained by the Company. The total amount of deposits withheld from John Deere dealers and Farm Plan merchants totaled $126.6 million and $111.4 million at October 31, 1995 and 1994, respectively. Of this amount, deposits withheld from Farm Plan merchants totaled $1.0 million at October 31, 1995 and $.5 million at October 31, 1994. Credit losses are charged against deposits withheld from the originating dealer or merchant. To the extent that a loss cannot be absorbed by the deposit withheld from the dealer or merchant from which the retail note, lease or Farm Plan account was acquired, it is charged against the Company's allowance for credit losses. See note 1 to the consolidated financial statements.
The Company does not withhold deposits on recreational product retail notes, John Deere Credit Revolving Plan receivables, industrial notes or wholesale notes acquired. However, an allowance for credit losses has been established by the Company in an amount considered to be appropriate in relation to the total Receivables and Leases outstanding. In addition, for wholesale notes relating to recreational vehicles, manufactured housing units and yachts, there are agreements with the manufacturers for the repurchase of new inventories held by dealers. For additional information on credit losses and deposits withheld on Receivables and Leases, see note 3 to the consolidated financial statements.
RETAIL NOTES. The following table shows unpaid installments 60 days or more past due on retail notes held by the Company and the balance (principal plus earned interest) of retail notes outstanding with any such delinquencies, on the basis of retail note terms in effect at the indicated dates, in millions of dollars and as a percentage of the ending retail note portfolio financed by the Company at such dates:
The following table shows losses on retail notes in millions of dollars (after charges to withheld dealer deposits) and as a percentage of the average retail note portfolio financed:
Retail note write-offs declined three percent in 1995 compared to 1994. Write-offs on equipment retail notes financed totaled $3.1 million, an increase of 49 percent, compared with write-offs of $2.1 million in 1994, primarily due to higher industrial equipment write-offs. Write-offs of recreational product retail notes totaled $11.5 million in 1995 compared with $12.9 million in 1994, an 11 percent decrease.
REVOLVING CHARGE ACCOUNTS. The following table shows revolving charge account payments 60 days or more past due in millions of dollars and as a percentage of total revolving charge accounts receivable:
The following table shows losses on revolving charge accounts in millions of dollars and as a percentage of the average revolving charge amounts financed:
Losses increased in 1995 for both Farm Plan and the John Deere Credit Revolving Plan. The higher losses in 1995 related to both the growth in the revolving charge portfolio and exceptionally low write-offs in 1994 and 1993.
LEASES. The following table shows the total balance of financing and operating lease payments 60 days or more past due in millions of dollars and as a percent of the investment in financing and operating leases at those respective dates.
The following table shows losses absorbed by the Company, in millions of dollars and as a percent of the average investment in financing and operating leases, on terminated financing and operating leases (after charges to withheld dealer deposits).
The increase in 1995 losses resulted primarily from increased industrial lease write-offs.
WHOLESALE NOTES. The total balance of wholesale notes receivable 60 days or more past due totaled $.1 million at October 31, 1995 and October 31, 1993, which represented 0.02 percent and 0.11 percent, respectively, of the wholesale notes receivable held on those dates. The total balance of wholesale notes receivable 60 days or more past due was negligible at October 31, 1994.
The following table shows wholesale note losses in millions of dollars and as a percentage of the average wholesale notes receivable:
The average wholesale note portfolio increased 86 percent in 1995, primarily as a result of increases in wholesale financing of John Deere industrial dealers and dealers of manufactured housing and yachts. The losses in 1993 resulted primarily from a relatively large loss incurred with one recreational vehicle dealer.
The businesses in which the Company is engaged are highly competitive. The Company competes for customers based upon its customer service and finance rates (or time-price differentials) charged. The proportion of John Deere equipment retail sales and leases financed by the Company is influenced by conditions prevailing in the agricultural equipment, industrial equipment and lawn and grounds care equipment industries, in the financial markets, and in business generally. A significant portion of such retail sales during 1995 was financed by the Company. A substantial part of the retail sales and leases eligible for financing by the Company is financed by others, including banks and other finance and leasing companies.
The Company emphasizes convenient service to retail customers and offers terms desired in its specialized markets such as seasonal schedules of repayment and rentals. The Company's installment sales and loan finance rates or time- price differentials and lease rental rates are believed to be in the range of those of sales finance and leasing companies generally, although not as low as those of some banks and other lenders and lessors.
In a number of states, the maximum finance rate or time-price differential on retail notes is limited by state law. The present state limitations have not, thus far, significantly limited the Company's variable-rate finance charges nor the fixed-rate finance charges established by the Company. However, if interest rate levels should increase significantly, maximum state rates or time-price differentials could affect the Company by preventing the variable rates on outstanding variable-rate retail notes from increasing above the maximum state rate or time-price differential, and by limiting the fixed rates or time-price differentials on new notes. In some states, the Company may be able to qualify new retail notes for a higher maximum limit by using retail installment sales contracts (rather than loan contracts) or by using fixed-rate rather than variable-rate contracts.
In addition to rate regulation, various state and federal laws and regulations apply to some Receivables and Leases, principally retail notes for family or household use and Farm Plan and John Deere Credit Revolving Plan accounts receivable for such goods. To date, such laws and regulations have not had a significant adverse effect on the Company.
The Company's properties principally consist of office equipment and leased office space in Reno, Nevada; West Des Moines, Iowa; Moline, Illinois; Madison, Wisconsin; and Ft. Lauderdale, Florida.
The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to state and federal regulations concerning retail credit. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes that these unresolved legal actions will not have a material effect on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to instruction J(2).
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the Capital Corporation's common stock is owned by John Deere Credit Company, a finance holding company that is wholly-owned by Deere & Company.
The Capital Corporation paid cash dividends to John Deere Credit Company of $55 million in 1995 and $210 million in 1994. In each case, John Deere Credit Company paid a comparable dividend to Deere & Company. During the first quarter of 1996, the Capital Corporation declared and paid a dividend of $20 million to John Deere Credit Company which, in turn, declared and paid a dividend of $20 million to Deere & Company.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to instruction J(2).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Acquisitions of Receivables and Leases by the Company during 1995, totaled $4.667 billion, an increase of 18 percent, compared with acquisitions of $3.942 billion during 1994. The higher acquisitions this year resulted mainly from an increased volume of John Deere agricultural and John Deere lawn and grounds care equipment retail notes, recreational vehicle retail notes, revolving charge accounts and wholesale receivables. Receivables and Leases held by the Company at October 31, 1995 totaled $4.922 billion compared with $4.112 billion one year ago. Receivables and Leases administered, which include retail notes and leases previously sold but still administered, amounted to $6.105 billion at the end of 1995 compared with $5.326 billion at October 31, 1994.
During 1995, retail notes (principal value financed) acquired by the Company increased 15 percent compared with 1994. Retail note acquisitions totaled $2.864 billion during 1995 compared with 1994 acquisitions of $2.488 billion. The increase was primarily due to increased retail sales of John Deere equipment and an improvement in the Company's market share for the financing of John Deere agricultural equipment. Acquisitions of recreational product retail notes accounted for ten percent of total retail note acquisitions in 1995 and 11 percent in 1994.
Retail note acquisitions from John Deere increased by $349 million in 1995, a 16 percent increase over last year. Acquisitions of agricultural equipment retail notes increased 20 percent over last year. Lawn and grounds care equipment retail note activity increased 12 percent over the prior year. Acquisitions of industrial equipment notes decreased by $4 million, or one percent, compared to 1994. However, 1995 results do not include industrial dealer wholesale notes, which are now classified as part of the wholesale receivables. Retail note acquisitions in 1995 from John Deere continued to represent a significant proportion of the total United States retail sales of John Deere equipment.
Acquisitions of recreational product retail notes, representing primarily recreational vehicle and recreational marine product notes acquired from independent dealers of several unrelated manufacturers, were $289 million in 1995 compared with $262 million in 1994. This increase resulted primarily from more competitive financing programs in both the recreational vehicle and recreational marine product markets.
At October 31, 1995, the amount of retail notes held by the Company was $3.825 billion compared to $3.289 billion last year. Included in these amounts were recreational product retail notes of $865 million in 1995 and $800 million in 1994. The balance of equipment retail notes held increased from $2.489 billion at October 31, 1994 to $2.960 billion at the end of 1995. This increase resulted from equipment retail note acquisitions exceeding collections during 1995. However, the Company also securitized and sold retail notes, receiving proceeds of $726 million during 1995 compared to $560 million during 1994. Additional information is presented in note 1 to the consolidated financial statements. The balance of retail notes administered by the Company, which includes retail notes previously sold, amounted to $4.987 billion at October 31, 1995, compared with $4.464 billion at October 31, 1994. The balance of retail notes previously sold was $1.162 billion at October 31, 1995 compared with $1.175 billion at October 31, 1994. Additional sales of retail notes are expected to be made in the future. The Company's maximum exposure under all retail note recourse provisions at October 31, 1995 and 1994 was $180 and $140 million, respectively.
Retail notes bearing variable finance rates totaled 52 percent of net dollar value of the retail note portfolio at October 31, 1995 compared with 56 percent one year earlier. The Company actively manages interest rate risk through the issuance of fixed-rate and variable-rate borrowings and the use of financial instruments such as interest rate swaps and interest rate caps. See "Capital Resources and Liquidity" and note 13 "Financial Instruments" to the consolidated financial statements.
Revolving charge accounts receivable totaled $510 million at October 31, 1995, an increase of 17 percent compared with $437 million at October 31, 1994. The balance at October 31, 1995 included $232 million of John Deere Credit Revolving Plan receivables and $278 million of Farm Plan receivables compared with $210 million and $227 million, respectively, at October 31, 1994. Revolving charge account acquisitions increased 11 percent in 1995 compared with 1994, reflecting the increased volume of Farm Plan receivable acquisitions.
The portfolio of financing leases totaled $149 million at October 31, 1995 and $118 million at October 31, 1994. The investment in operating leases was $140 million and $125 million at the end of 1995 and 1994, respectively. The Company also administers municipal leases owned by Deere & Company, which totaled $21 million at October 31, 1995 compared with $39 million at October 31, 1994. The Company sold $20 million of municipal leases to Deere & Company in 1994. During 1995, the Company did not sell municipal leases to Deere & Company.
Wholesale notes receivable on recreational vehicle, manufactured housing, yachts, John Deere engine inventories and John Deere industrial dealer wholesale notes totaled $298 million at October 31, 1995 compared with $142 million at October 31, 1994. Wholesale note acquisitions, including the industrial dealer wholesale note acquisitions, increased 67 percent during the year and were favorably impacted by the Company's growth in both the manufactured housing and yacht markets.
Total Receivable and Lease amounts 60 days or more past due were $14.1 million at October 31, 1995 compared with $11.7 million at October 31, 1994. These past-due amounts represented 0.29 percent and 0.28 percent of the total Receivables and Leases held at those respective dates. The balance (principal plus earned interest) of retail notes outstanding with any installments 60 days or more past due was $33.0 million at October 31, 1995 compared with $23.9 million one year earlier. The amount of retail note installments 60 days or more past due was $6.1 million at October 31, 1995 and $5.5 million at October 31, 1994. These past-due installments represented 0.16 percent of the unpaid balance of retail notes at October 31, 1995 and 0.17 percent at October 31, 1994.
The total balance of revolving charge accounts receivable 60 days or more past due was $7.1 million at October 31, 1995 compared with $5.6 million at October 31, 1994. These past-due amounts represented 1.40 percent and 1.28 percent of the revolving charge accounts receivable held at each of those respective dates.
The total balance of financing and operating lease payments 60 days or more past due was $.8 million at October 31, 1995 compared with $.6 million at October 31, 1994. These past-due installments represented 0.28 percent and 0.24 percent of the investment in financing and operating leases at those respective dates.
At October 31, 1995, the Company's allowance for credit losses on all Receivables and Leases financed, totaled $84 million and represented 1.7 percent of the total Receivables and Leases financed compared with $80 million and 1.9 percent, respectively, one year earlier. Deposits withheld from dealers and merchants, representing mainly the aggregate retail note and lease withholding accounts from individual John Deere dealers to which losses from retail notes and leases originating from the respective dealers can be charged, amounted to $127 million at October 31, 1995 compared to $111 million at October 31, 1994.
The Capital Corporation's consolidated net income for the fiscal year ended October 31, 1995 was $114.1 million compared with net income of $104.9 million in 1994. The higher income resulted from higher earnings on a larger portfolio, partially offset by lower financing margins. The ratio of earnings to fixed charges was 1.73 to 1 for 1995 compared with 1.96 to 1 in 1994.
Total revenues of $551 million in 1995 were up 19 percent from $463 million in 1994. Revenues were affected by the higher average portfolio owned and the higher overall yield on the portfolio held. Higher average borrowing rates on increased borrowings this year resulted in higher interest expense, which totaled $238 million in 1995 compared with $167 million in 1994. Average borrowings were $3.726 billion in 1995 compared with $3.235 billion in 1994. The weighted average annual interest rate incurred on all interest-bearing borrowings during this year increased to 6.3 percent from 4.9 percent in 1994.
Finance income earned on retail notes was $333 million this year compared with $293 million in 1994, an increase of 14 percent. The average balance of the retail note portfolio financed during 1995 was seven percent higher than the comparable 1994 average balance.
Revenues earned on revolving charge accounts amounted to $84 million in 1995, a 26 percent increase over revenues of $67 million earned during 1994. This increase was primarily due to a 23 percent increase in the average balance of Farm Plan receivables financed and a 28 percent increase in the average balance of John Deere Credit Revolving Plan receivables financed in 1995 compared with 1994.
The average net investment in financing and operating leases increased by 20 percent in 1995 compared with 1994. Correspondingly, total lease revenues increased to $48.0 million in 1995 compared with $43.6 million in 1994.
The net gain on retail notes sold totaled $11.4 million during 1995 compared with $10.3 million for 1994. The Company received proceeds from the sale of retail notes in the amount of $726 million during 1995 and $560 billion in 1994. Securitization and servicing fee income totaled $35.5 million in 1995 compared with $28.6 million during 1994. Securitization and servicing fee income relates to retail notes sold to limited-purpose business trusts and primarily includes the amortization of present value receivable amounts from the trusts established at the time of sale, adjustments related to those sales and reimbursed administrative expenses received from the trusts. Additional sales of retail notes are expected to be made in the future.
Administrative and operating expenses decreased three percent from $79.7 million in 1994 to $77.6 million in 1995. The decline was primarily related to reduced legal expenses during the year compared to 1994.
The provision for credit losses was $32.3 million in 1995 and $27.8 million in 1994. Total write-offs of Receivables and Leases financed were $23.7 million during 1995 compared with $20.8 million in 1994. The increase in write-offs from 1994 primarily related to an increase in the amount of revolving charge and industrial equipment receivable write-offs. The increase in the provision was partially offset by a favorable adjustment of $6.7 million in 1995 related to current and expected losses on both revolving charge and industrial equipment retail notes.
Acquisitions of Receivables and Leases by the Company increased 18 percent during 1994 compared with acquisitions in 1993. The higher acquisitions in 1994 resulted mainly from an increased volume of John Deere agricultural and industrial equipment retail notes, revolving charge accounts and wholesale receivables. Receivables and Leases held by the Company at October 31, 1994 totaled $4.112 billion compared with $3.437 billion in 1993. Receivables and Leases administered, which include retail notes previously sold but still administered, amounted to $5.326 billion at the end of 1994 compared with $4.873 billion at October 31, 1993.
During 1994, retail notes (principal value financed) acquired by the Company increased 16 percent compared with 1993. Retail note acquisitions totaled $2.488 billion during 1994 compared with 1993 acquisitions of $2.136 billion. The increase was primarily due to increased retail sales of John Deere equipment. Acquisitions of recreational product retail notes accounted for 11 percent of total retail note acquisitions in 1994 and nine percent in 1993.
Retail note acquisitions from John Deere increased by $291 million in 1994, a 15 percent increase over 1993. Acquisitions of agricultural equipment retail notes increased 14 percent over 1993. Industrial equipment retail note activity was significantly higher, increasing 24 percent over 1993. Acquisitions of lawn and grounds care equipment notes were flat compared to 1993; however, corresponding financings under the John Deere Credit Revolving Plan, under which lawn and grounds care equipment is also financed, increased significantly. Retail note acquisitions in 1994 from John Deere continued to represent a significant proportion of the total United States retail sales of John Deere equipment.
Acquisitions of recreational product retail notes, representing primarily recreational vehicle and recreational marine product notes acquired from independent dealers of several unrelated manufacturers, were $262 million in 1994 compared with $202 million in 1993. This increase resulted primarily from more competitive financing programs in both the recreational vehicle and recreational marine product markets.
At October 31, 1994, the amount of retail notes held by the Company was $3.289 billion compared to $2.792 billion in 1993. Included in these amounts were recreational product retail notes of $800 million in 1994 and $804 million in 1993. The balance of John Deere retail notes held increased from $1.988 billion at October 31, 1993 to $2.489 billion at the end of 1994. This increase resulted from John Deere retail note acquisitions exceeding collections during 1994. However, the Company also securitized and sold retail notes, receiving proceeds of $560 million during 1994 compared to $1.143 billion during 1993. Additional information is presented in note 1 to the consolidated financial statements. The balance of retail notes administered by the Company, which includes retail notes previously sold, amounted to $4.464 billion at October 31, 1994, compared with $4.185 billion at October 31, 1993. The balance of retail notes previously sold was $1.175 billion at October 31, 1994 compared with $1.394 billion at October 31, 1993. The Company's maximum exposure under all retail note recourse provisions at October 31, 1994 and 1993 was $140 and $175 million, respectively.
Retail notes bearing variable finance rates totaled 56 percent of the total retail note portfolio at October 31, 1994 compared with 57 percent in 1993. The Company actively manages interest rate risk through the issuance of fixed-rate and variable-rate borrowings and the use of financial instruments such as interest rate swaps and interest rate caps.
At the end of fiscal 1994, revolving charge accounts receivable totaled $437 million, an increase of 32 percent compared with $331 million at October 31, 1993. The balance at October 31, 1994 included $210 million of John Deere Credit Revolving Plan receivables (including a small balance of marine finance receivables) and $227 million of Farm Plan receivables compared with $147 million and $184 million, respectively, at October 31, 1993. Revolving charge account acquisitions increased 24 percent in 1994 compared with 1993, reflecting the increased retail sales of John Deere lawn and grounds care equipment, as well as an increased volume of Farm Plan receivable acquisitions.
The portfolio of financing leases totaled $118 million at October 31, 1994 and $85 million at October 31, 1993. The investment in operating leases was $125 million and $119 million at the end of 1994 and 1993, respectively. Overall, 1994 lease acquisitions were flat compared to 1993. The Company also administers municipal leases owned by Deere & Company, which totaled $39 million at October 31, 1994 compared with $43 million at October 31, 1993. During 1994, $20 million of municipal leases were sold to Deere & Company compared with $19 million sold in 1993.
Wholesale notes receivable totaled $142 million at October 31, 1994 compared with $110 million at October 31, 1993. Wholesale note acquisitions increased 23 percent during the year primarily due to acquisitions related to recreational vehicle inventories. Wholesale activity was also favorably impacted by the financing of $24 million in inventory held by dealers of manufactured housing units, a new business for the Company in 1994.
Total Receivable and Lease amounts 60 days or more past due were $11.7 million at October 31, 1994 compared with $12.7 million at October 31, 1993. These past-due amounts represent 0.28 percent and 0.37 percent of the total Receivables and Leases held at those respective dates. The balance (principal plus earned interest) of retail notes outstanding with any installments 60 days or more past due was $23.9 million at October 31, 1994 compared with $33.0 million in 1993. The amount of retail note installments 60 days or more past due was $5.5 million at October 31, 1994 and $6.8 million at October 31, 1993. These past-due installments represented 0.17 percent of the unpaid balance of retail notes at October 31, 1994 and 0.24 percent at October 31, 1993.
The total balance of revolving charge accounts receivable 60 days or more past due was $5.6 million at October 31, 1994 compared with $5.3 million at October 31, 1993. These past-due amounts represented 1.28 percent and 1.61 percent of the revolving charge accounts receivable held at each of those respective dates.
The total balance of financing and operating lease payments 60 days or more past due was $.6 million at October 31, 1994 compared with $.5 million at October 31, 1993. These past-due installments represented 0.24 percent and 0.25 percent of the investment in financing and operating leases at those respective dates.
At October 31, 1994, the Company's allowance for credit losses on all Receivables and Leases financed totaled $80 million and represented 1.9 percent of the total Receivables and Leases financed compared with $77 million and 2.3 percent, respectively, at October 31, 1993. Deposits withheld from dealers and merchants, representing mainly the aggregate retail note and lease withholding accounts from individual John Deere dealers to which losses from retail notes and leases originating from the respective dealers can be charged, amounted to $111 million at October 31, 1994 compared to $105 million at October 31, 1993.
Consolidated net income for the fiscal year ended October 31, 1994 was $104.9 million compared with income before the cumulative effect of accounting changes of $111.0 million in 1993 ($107.2 million after the accounting changes). The decrease reflects the impact of increased borrowings resulting from higher dividend payouts during 1994, lower gains from the sale of retail notes and higher operating expenses, partially offset by securitization and servicing fee income from retail notes previously sold but still administered. The ratio of earnings to fixed charges was 1.96 to 1 for 1994 compared with 1.99 to 1 (excluding the effects of accounting changes) in 1993.
Total revenues of $463 million in 1994 were down slightly from $466 million in 1993. Revenues were affected by lower gains from the sale of retail notes and lower average interest rates resulting in lower finance charges earned in 1994. These decreases in revenues were partially offset by the previously mentioned increase in securitization and servicing income. Lower average borrowing rates in 1994 resulted in a slight decrease in interest expense, which totaled $167 million in 1994 compared with $168 million in 1993. Average borrowings were $3.235 billion in 1994 compared with $3.127 billion in 1993. The weighted average annual interest rate incurred on all interest-bearing borrowings in 1994 declined to 4.9 percent from 5.1 percent in 1993.
Finance income earned on retail notes was $293 million in 1994 compared with $314 million in 1993, a decrease of seven percent. The average balance of the retail note portfolio financed during 1994 was three percent lower than the comparable 1993 average balance.
Revenues earned on revolving charge accounts amounted to $67 million in 1994, a 24 percent increase over revenues of $54 million earned during 1993. This increase was primarily due to a 24 percent increase in the average balance of Farm Plan receivables financed and a 32 percent increase in the average balance of John Deere Credit Revolving Plan receivables financed in 1994 compared with 1993.
The average net investment in financing and operating leases increased by 19 percent in 1994 compared with 1993. Correspondingly, total lease revenues increased to $43.6 million in 1994 compared with $39.6 million in 1993.
The net gain on retail notes sold totaled $10.3 million during 1994 compared with $15.6 million for 1993. The Company received proceeds from the sale of retail notes in the amount of $560 million during 1994 and $1.143 billion in 1993. Securitization and servicing fee income totaled $28.6 million in 1994 compared with $22.3 million during 1993. Securitization and servicing fee income relates to retail notes sold to limited-purpose business trusts and primarily includes the amortization of present value receivable amounts from the trusts established at the time of sale, adjustments related to those sales and reimbursed administrative expenses received from the trusts.
Administrative and operating expenses increased seven percent to $80 million in 1994 compared with $75 million in 1993. These expenses increased primarily due to the costs of employee reductions.
The provision for credit losses was $28 million in both 1994 and 1993. Total write-offs of Receivables and Leases financed were $20.8 million during 1994 compared with $26.1 million in 1993. The decline in write-offs from 1993 related to a decrease in the amount of recreational product write-offs. The provision amount in 1994 exceeded the cost of write-offs due primarily to the overall growth of Receivables and Leases financed.
The Company relies on its ability to raise substantial amounts of funds to finance its Receivable and Lease portfolios. The Company's primary sources of funds for this purpose are a combination of borrowings and equity capital. Additionally, the Company periodically sells substantial amounts of retail notes in the public market. The Company's ability to obtain funds is affected by its debt ratings, which are closely related to the outlook for and the financial condition of Deere & Company, and the nature and availability of support facilities, such as its lines of credit. For information regarding Deere & Company and its business, see Exhibit 99.
The Company's ability to meet its debt obligations is supported in a number of ways. All commercial paper issued is backed by bank credit lines. The assets of the Company are self-liquidating in nature. A strong equity position is available to absorb unusual losses on these assets. Liquidity is also provided by the Company's ability to sell or "securitize" these assets. Asset-liability risk is actively managed to minimize exposure to interest rate fluctuations.
The Company's business is somewhat seasonal, with overall acquisitions of Receivables and Leases traditionally higher in the second half of the fiscal year than in the first half, and overall collections of Receivables and Leases traditionally somewhat higher in the first six months than in the last half of the fiscal year.
Cash provided by operating activities was $161 million in 1995. Financing activities provided $858 million in 1995, resulting from a $913 million increase in total borrowings, which were partially offset by dividend payments totaling $55 million. Cash provided from the Company's operating and financing activities was used primarily to increase credit receivables and a $121 million increase in cash and cash equivalents. Cash used for investing activities totaled $898 million in 1995, primarily due to acquisitions of Receivables and Leases exceeding collections by $1.629 billion, which was partially offset by the $726 million of proceeds from the sale of receivables. Other cash flows from investing activities decreased in 1995 mainly due to the collection activity on receivables previously sold that were being held for payment to the trusts. See "Statement of Consolidated Cash Flows" on page 29.
Over the past three years, operating activities have provided $479 million in cash, the sale of receivables $2.468 billion and total borrowings $1.007 billion. These amounts were used mainly to fund Receivable and Lease acquisitions which exceeded collections by $3.612 billion and payments of $347 million in dividends.
The Company is naturally exposed to various interest rate and foreign currency risks. As a result, the Company enters into derivative transactions to hedge these exposures that arise in the normal course of business, and not for the purpose of creating speculative positions or trading. In common with other large credit companies, the Company actively manages the relationship of the types and amounts of its funding sources to its Receivable and Lease portfolios in an effort to diminish risk due to interest rate fluctuations, while responding to favorable financing opportunities. Accordingly, from time to time, the Company enters into interest rate swap and interest rate cap agreements to hedge its interest rate exposure in amounts corresponding to a portion of its borrowings. The Company also has a foreign exchange swap related to a long term borrowing. The credit and market risks under these interest rate and foreign currency agreements are not considered to be significant. See note 13 to the consolidated financial statements for further details.
Total interest-bearing indebtedness amounted to $4.264 billion at October 31, 1995 compared with $3.350 billion at October 31, 1994, generally corresponding with the level of Receivables and Leases financed and the level of cash and cash equivalents. Total short-term indebtedness amounted to $2.791 billion at October 31, 1995 compared with $2.316 billion at October 31, 1994. Total long-term indebtedness amounted to $1.473 billion at October 31, 1995 and $1.034 billion at October 31, 1994. The ratio of total interest-bearing debt to stockholder's equity was 6.2 to 1 and 5.3 to 1 at October 31, 1995 and October 31, 1994, respectively.
During 1995, the Capital Corporation issued $150 million of floating rate notes due in 1998 and retired $150 million of 5% debentures, $150 million of 11-5/8% debentures and $100 million of 6% debentures all due in 1995. Also during 1995, the Company issued $625 million and retired $226 million of medium-term notes.
The Company maintained unsecured lines of credit with various banks in North America and overseas. See note 4 to the consolidated financial statements.
The Capital Corporation paid cash dividends to John Deere Credit Company of $55 million in 1995 and $210 million in 1994. In each case, John Deere Credit Company paid a comparable dividend to Deere & Company. During the first quarter of 1996, the Capital Corporation declared and paid a dividend of $20 million to John Deere Credit Company which, in turn, declared and paid a dividend of $20 million to Deere & Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See accompanying table of contents of financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to instruction J(2).
Omitted pursuant to instruction J(2).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to instruction J(2).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to instruction J(2).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
See the table of contents to financial statements and schedules immediately preceding the financial statements and schedules to consolidated financial statements.
See the index to exhibits immediately preceding the exhibits filed with this report.
(b) Reports on Form 8-K
Current Report on Form 8-K dated August 17, 1995 (Items 5 and 7).
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.
By: /s/ Hans W. Becherer
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 date indicated.
/s/ Hans W. Becherer Director, Chairman and Principal ) 15 January 1996 /s/ J. W. England Director ) /s/ B. L. Hardiek Director ) /s/ J. R. Heseman Director ) /s/ D. E. Hoffmann Director ) /s/ F. F. Korndorf Director ) /s/ J. K. Lawson Director ) /s/ Pierre E. Leroy Director, Vice President and ) --------------------- Principal Financial Officer ) /s/ M. P. Orr Director and President )
/s/ J. S. Robertson Vice President and ) 15 January 1996 --------------------- Principal Accounting Officer ) /s/ E. L. Schotanus Director ) /s/ D. H. Stowe, Jr. Director ) D. H. Stowe, Jr. ) /s/ J. D Volkert Director ) /s/ S. E. Warren Director )
[Deloitte & Touche LLP Letterhead]
We have audited the accompanying consolidated balance sheets of John Deere Capital Corporation and subsidiaries as of October 31, 1995 and 1994 and the related statements of consolidated income and retained earnings and of consolidated cash flows for each of the three years in the period ended October 31, 1995. Our audits also included the financial statement schedule listed in the Table of Contents on page 26. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule 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 John Deere Capital Corporation and subsidiaries at October 31, 1995 and 1994 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the Consolidated Financial Statements, effective November 1, 1992 the Company changed its method of accounting for postretirement benefits other than pensions.
John Deere Capital Corporation and Subsidiaries (consolidated):
Statement of Consolidated Income and Retained Earnings for the Years Ended October 31, 1995, 1994 and 1993. . . . . . . . . 27
Consolidated Balance Sheet, October 31, 1995 and 1994 . . . . . . . . . 28
Statement of Consolidated Cash Flows for the Years Ended October 31, 1995, 1994 and 1993. . . . . . . . . . . . . . . . . . . 29
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . 30
Schedule II - Valuation and Qualifying Accounts for the Years Ended October 31, 1995, 1994 and 1993. . . . . . . . . . . . . 46
The following schedules are omitted because of the absence of conditions under which they are required:
I, III, IV, and V.
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ON PAGES 30 TO 45 ARE AN INTEGRAL PART OF THIS STATEMENT. * EXCLUDES EFFECT OF ACCOUNTING CHANGES.
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ON PAGES 30 TO 45 ARE AN INTEGRAL PART OF THIS STATEMENT.
STATEMENT OF CONSOLIDATED CASH FLOWS
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ON PAGES 30 TO 45 ARE AN INTEGRAL PART OF THIS STATEMENT.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
John Deere Capital Corporation (Capital Corporation) is a wholly-owned subsidiary of John Deere Credit Company, a finance holding company which is wholly-owned by Deere & Company. The Capital Corporation and its subsidiaries, Deere Credit Services, Inc. (DCS), Farm Plan Corporation (FPC), Deere Credit, Inc. (DCI), and John Deere Receivables, Inc. (JDRI), are collectively called the Company. Deere & Company with its other wholly-owned subsidiaries are collectively called John Deere.
Retail notes, revolving charge accounts, financing leases, and wholesale notes are collectively called "Receivables." Receivables and operating leases are collectively called "Receivables and Leases."
The risk of credit losses applicable to John Deere retail notes and leases, net of recovery from withholdings from John Deere dealers, is borne by the Company. During 1995, John Deere was compensated by the Company for originating retail notes on John Deere products. John Deere is reimbursed by the Company for staff support and other administrative services at estimated cost, and for credit lines provided by Deere & Company based on utilization of the lines. John Deere is compensated for originating leases on John Deere products and is reimbursed for staff support in a manner similar to the procedures for retail notes.
The consolidated financial statements include the financial statements of the Capital Corporation and its subsidiaries, all of which are wholly-owned.
In 1995, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. Additional information is presented in note 13 to the consolidated financial statements.
In the fourth quarter of 1993, the Company adopted FASB Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, effective November 1, 1992. Prior quarters of 1993 were restated as required by this Statement. The Company elected to recognize the pretax transition obligation of $5.4 million ($3.6 million net of deferred income taxes) as a one-time charge to earnings in 1993. For years prior to 1993, postretirement benefits were generally included in costs as covered expenses were actually incurred. The adoption of FASB Statement No. 106 resulted in an incremental pretax expense of $.2 million compared with the expense determined under the previous accounting principle.
In the fourth quarter of 1993, the Company adopted FASB Statement No. 112, Employers' Accounting for Postemployment Benefits, effective November 1, 1992. The Company previously accrued certain disability related benefits when the disability occurred. Results for the first quarter of 1993 were restated for the cumulative pretax charge resulting from this change in accounting as of November 1, 1992 which totaled $.3 million ($.2 million net of deferred income taxes). The adoption of FASB Statement No. 112 had an immaterial effect on 1993 expenses.
The principal business of the Company is providing and administering financing for retail purchases of new and used John Deere agricultural, industrial and lawn and grounds care equipment. The Company purchases retail installment sales and loan contracts (retail notes) from John Deere. These retail notes are acquired by John Deere through John Deere retail dealers in the United States. The Company also purchases and finances retail notes unrelated to John Deere, representing primarily recreational vehicle and recreational marine product notes acquired from independent dealers of those products and from marine product mortgage service companies (recreational product retail notes).
Finance income included in the face amount of retail notes is amortized into income over the lives of the notes on the effective-yield basis. Unearned finance income on variable-rate notes is adjusted monthly based on fluctuations in the base rate of a specified bank.
Costs incurred in the acquisition of retail notes are deferred and amortized into income over the expected lives of the notes on the effective- yield basis.
A portion of the finance income earned by the Company arises from financing the retail sales of John Deere equipment sold in advance of the season of use or in other sales promotions by John Deere on which finance charges are waived by John Deere for a period from the date of sale to a specified subsequent date. Some low-rate financing programs are also offered by John Deere. The Company generally receives compensation from John Deere equal to a competitive interest rate for periods during which finance charges have been waived or reduced on retail notes and leases. The portions of the Company's finance income earned that were received from John Deere on retail notes containing waiver of finance charges or reduced rates were 19 percent in 1995, 14 percent in 1994 and 19 percent in 1993.
A deposit equal to one percent of the face amount of John Deere agricultural and lawn and grounds care equipment retail notes originating from each dealer is withheld from that dealer and recorded by the Company. Any subsequent retail note losses are charged against the withheld deposits. To the extent that a loss on a retail note cannot be absorbed by deposits withheld from the dealer from which the retail note was acquired, it is charged against the Company's allowance for credit losses. At the end of each calendar year, the balance of each dealer's withholding account in excess of a specified percent (currently 3 percent) of the total balance outstanding on retail notes originating with that dealer is remitted to the dealer, and any negative balance dealer withholding account is written off and absorbed by the Company's allowance for credit losses.
All John Deere industrial equipment retail notes are acquired on a non- recourse basis and there is no withholding of dealer deposits on those notes. The Company does not withhold deposits on recreational product retail notes.
The Company requires that theft and physical damage insurance be carried on all goods leased or securing retail notes. In most cases, the customer may, at his own expense, have the Company or the seller of the goods purchase this insurance or obtain it from other sources. Theft and physical damage insurance is also required on wholesale notes and can be purchased through the Company or from other sources. Insurance is not required on revolving charge accounts.
Generally, when an account becomes 120 days delinquent, accrual of finance income is suspended, the collateral is repossessed or the account is designated for litigation, and the estimated uncollectible amount, after charging the dealer's withholding account, if any, is written off to the allowance for credit losses.
Revolving charge account income is generated primarily by two revolving credit products: Farm Plan and the John Deere Credit Revolving Plan.
Farm Plan is primarily used by agri-businesses to finance purchases, such as parts and service labor, which would otherwise be carried by the merchants as accounts receivable. Farm Plan income includes a discount paid by merchants for the purchase of customer accounts and finance charges paid by customers on their outstanding revolving charge account balances. Merchant recourse and a merchant reserve are established on some receivables purchased.
The John Deere Credit Revolving Plan is used primarily by retail customers of John Deere dealers to finance lawn and grounds care equipment. Income includes a discount paid by dealers on most transactions and finance charges paid by customers on their outstanding account balances.
Accrual of revolving charge account income is suspended generally when an account becomes 120 days delinquent. Accounts are deemed to be uncollectible and written off to the allowance for credit losses when delinquency reaches 180 days for a Farm Plan account and 150 days for John Deere Credit Revolving Plan accounts.
DIRECT FINANCING LEASES AND EQUIPMENT ON OPERATING LEASES
The Company leases John Deere agricultural equipment, industrial equipment and lawn and grounds care equipment, as well as other equipment, to retail customers.
At the time of accepting a lease that qualifies as a direct financing lease under FASB Statement No. 13, the Company records the gross amount of lease payments receivable, estimated residual value of the leased equipment for non- leases and unearned lease income. The unearned lease income is equal to the excess of the gross lease receivable plus the estimated residual value over the cost of the equipment. The unearned lease income is recognized as revenue over the lease term on the effective-yield method.
Leases that do not meet the criteria for direct financing leases as outlined by FASB Statement No. 13 are accounted for as operating leases. Rental payments applicable to equipment on operating leases are recorded as income on a straight-line method over the lease terms. Operating lease assets are recorded at cost and depreciated on a straight-line method over the terms of the leases.
Lease acquisition costs are accounted for in a manner similar to the procedures for retail notes.
Deposits withheld from John Deere dealers and related losses on leases are handled in a manner similar to the procedures for retail notes. In addition, a lease payment discount program, allowing reduced payments over the term of the lease, is administered in a manner similar to finance waiver on retail notes.
Equipment returned to the Company upon termination of leases and held for subsequent sale or lease is recorded at the estimated wholesale market value of the equipment.
Generally, when an account becomes 120 days delinquent, accrual of lease revenue is suspended, the equipment is repossessed or the account is designated for litigation and the estimated uncollectible amount, after charging the dealer's withholding account, if any, is written off to the allowance for credit losses.
The Company finances wholesale inventories of recreational vehicles, manufactured housing units, yachts, John Deere engines, and John Deere industrial equipment owned by dealers of those products. Wholesale finance income is generally recognized monthly based on the daily balance of wholesale receivables outstanding and the applicable effective interest rate. Interest rates vary with a prevailing bank base rate, the type of equipment financed and the balance outstanding. Wholesale receivables are secured by equipment financed. Although amounts are not withheld from dealers to cover uncollectible receivables, there are repurchase agreements with certain manufacturers for new inventories held by dealers. Generally, when an account becomes 60 days delinquent, accrual of finance income is suspended, the collateral is repossessed and the estimated uncollectible amount is written off to the allowance for credit losses.
The Company has sold retail notes to limited-purpose business trusts, which utilized the notes as collateral for the issuance of asset backed securities to the public. At the time of the sales, "Other receivables" from the trusts were recorded at net present value. The receivables relate to deposits made pursuant and other payments to be received under the sales agreements. The receivables will be amortized to their value at maturity using the interest method. The Company is also compensated by the trusts for certain expenses incurred in the administration of these receivables. Securitization and servicing fee income includes the amortization of the above receivables, adjustments related to those sales and reimbursed administrative expenses.
Certain amounts for prior years have been reclassified to conform with the 1995 financial statement presentations.
NOTE 2. RECEIVABLES AND LEASES.
Retail notes receivable by product category at October 31 in millions of dollars follow:
Retail note installments at October 31 are scheduled as follows in millions of dollars:
Company guidelines relating to down payment requirements and maximum contract terms on retail notes are generally as follows:
During 1995, the average effective yield on retail notes held by the Company was approximately 10.0 percent compared with 9.4 percent in 1994.
Retail notes acquired by the Company during the year ended October 31, 1995 had an estimated average original term (based on dollar amounts) of 71 months. During 1994 and 1993, the estimated average original term was 70 and 67 months, respectively. Historically, because of prepayments, the average actual life of retail notes has been considerably shorter than the average original term.
During 1995, the Company received proceeds of $726 million from the sale of retail notes to limited-purpose business trusts, which utilized the notes as collateral for the issuance of asset backed securities to the public. During
Company received proceeds of $560 million and $1.143 billion from the sale of retail notes.
At October 31, 1995, 1994 and 1993, the balance of all retail notes previously sold by the Company was $1.162 billion, $1.175 billion and $1.394 billion, respectively. Additional sales of retail notes are expected to be made in the future.
The Company recognizes any gain or loss at the time of the sale of retail notes. The Company acts as agent for the buyers in collection and administration of all the notes it has sold. The Company's maximum exposure under all retail note recourse provisions at October 31, 1995 and 1994 was $180 million and $140 million, respectively. All retail notes sold are collateralized by security agreements on the related machinery sold to the customers.
Revolving charge accounts receivable at October 31, 1995 totaled $510 million compared with $437 million at October 31, 1994. Account holders may pay the account balance in full at any time, or make payments over a number of months according to a payment schedule. A minimum amount is due each month from customers selecting the revolving payment option.
Financing leases receivable by product category at October 31 are as follows in millions of dollars:
Residual values represent the amounts estimated to be recoverable at maturity from disposition of the leased equipment under non-purchase option financing leases.
Initial lease terms for financing leases range from 12 months to 72 months. Payments on financing leases receivable at October 31 are scheduled as follows in millions of dollars:
The Company administers municipal leases owned by Deere & Company which totaled $21 million at October 31, 1995 and $39 million at October 31, 1994. The Company sold $20 million and $ 43 million, respectively, of municipal leases to Deere & Company in 1994 and 1993. During 1995 the Company did not sell municipal leases to Deere & Company.
Wholesale notes receivables on recreational vehicle, manufactured housing, yachts, John Deere engine inventories and John Deere industrial equipment totaled $298 million at October 31, 1995 compared with $142 million at October 31, 1994. Generally, the maximum maturity for wholesale notes is 12 months.
The cost of equipment on operating leases by product category at October 31 follows in millions of dollars:
Initial lease terms for equipment on operating leases range from 12 months to 72 months. Rental payments for equipment on operating leases at October 31 are scheduled as follows in millions of dollars:
Receivables and Leases have significant concentrations of credit risk in the agricultural, industrial, lawn and grounds care and recreational product business sectors as shown in the previous tables. On a geographic basis, there is not a disproportionate concentration of credit risk in any area of the United States. The Company retains as collateral a security interest in the equipment associated with Receivables and Leases other than revolving charge accounts.
NOTE 3. ALLOWANCE FOR CREDIT LOSSES.
Allowances for credit losses on Receivables and Leases are maintained in amounts considered to be appropriate in relation to the Receivables and Leases outstanding based on estimated collectibility and collection experience.
An analysis of the allowance for credit losses on total Receivables and Leases follows in millions of dollars:
The allowance for credit losses represented 1.7 percent, 1.9 percent and 2.3 percent of Receivables and Leases outstanding at October 31, 1995, 1994 and 1993, respectively. In addition, the Company had $127 million, $111 million and $105 million at October 31, 1995, 1994 and 1993, respectively, of deposits withheld from John Deere dealers and Farm Plan merchants available for certain potential credit losses originating from those dealers and merchants. The provision for credit losses in 1995 reflects the growth in the total Receivables and Leases portfolios. It also reflects a favorable adjustment of $6.7 million related to current and expected losses on industrial and revolving charge loans.
On October 31, 1995, short-term borrowings were $2.791 billion, $1.987 billion of which was commercial paper. Short-term borrowings were $2.316 billion one year ago, $1.581 billion of which was commercial paper. The Capital Corporation's short-term debt also includes amounts borrowed from Deere & Company, which totaled $460 million at October 31, 1995. The Capital Corporation pays a market rate of interest to Deere & Company based on the average outstanding borrowings each month. The weighted average interest rates on all short-term borrowings, excluding current maturities of long-term borrowings, at October 31, 1995 and 1994 were 5.8 percent and 4.9 percent, respectively.
At October 31, 1995, the Capital Corporation, Deere & Company, John Deere Limited (Canada) and John Deere Finance Limited (Canada), jointly, maintained $4.008 billion of unsecured lines of credit with various banks in North America and overseas, $1.370 billion of which was unused. For the purpose of computing unused credit lines, the total short-term borrowings, excluding the current portion of long-term borrowings, of the Capital Corporation, Deere & Company, John Deere Limited (Canada) and John Deere Finance Limited (Canada) were considered to constitute utilization. Included in the total credit lines is a long-term credit agreement commitment for $3.500 billion. An annual facility fee on the credit agreement is charged to the Capital Corporation based on utilization.
At October 31, 1995, the Capital Corporation had no borrowings outstanding under the credit agreements. These agreements require the Capital Corporation to maintain its consolidated ratio of earnings to fixed charges at no less than 1.05 to 1 for each fiscal quarter. In addition, the Capital Corporation's ratio of senior debt to total stockholder's equity plus subordinated debt may not be more than 8 to 1 at the end of any fiscal quarter. For purposes of these calculations, "earnings" consist of income before income taxes to which are added fixed charges. "Fixed charges" consist of interest on indebtedness, amortization of debt discount and expense, an estimated amount of rental expense under capitalized leases which is deemed to be representative of the interest factor and rental expense under operating leases. "Senior debt" consists of the Company's total interest-bearing obligations, excluding subordinated debt, but including borrowings from Deere & Company. The Company's ratio of senior debt to total stockholder's equity plus subordinated debt was 4.0 to 1 at October 31, 1995 compared with 3.3 to 1 at October 31, 1994.
Long-term borrowings of the Capital Corporation at October 31 consisted of the following in millions of dollars:
The approximate amounts of long-term borrowings maturing and sinking fund payments required in each of the next five years, in millions of dollars, are as follows: 1996 - $344, 1997 - $489, 1998 - $393, 1999 -$248, 2000 - $290.
NOTE 6. FIXED CHARGE COVERAGE.
Deere & Company has expressed an intention of conducting its business with the Company on such terms that the Company's consolidated ratio of earnings to fixed charges will not be less than 1.05 to 1 for each fiscal quarter. Financial support was not provided in 1995, 1994 or 1993, as the ratios were 1.73 to 1, 1.96 to 1 and 1.99 to 1, respectively. This arrangement is not intended to make Deere & Company responsible for the payment of Company obligations.
All of the Company's common stock is owned by John Deere Credit Company, a wholly-owned finance holding subsidiary of Deere & Company. No shares of common stock of the Company were reserved for officers or employees or for options, warrants, conversions or other rights at October 31, 1995 or 1994. At October 31, 1995, the Company had authorized, but not issued, 10,000 shares of $1 par value preferred stock.
The Capital Corporation paid cash dividends to John Deere Credit Company of $55 million in 1995 and $210 million in 1994. In each case, John Deere Credit Company paid a comparable dividend to Deere & Company. During the first quarter of 1996, the Capital Corporation declared and paid a dividend of $20 million to John Deere Credit Company which, in turn, declared and paid a dividend of $20 million to Deere & Company.
NOTE 9. PENSION AND OTHER RETIREMENT BENEFITS.
The Company participates in the Deere & Company salaried pension plan, which is a defined benefit plan in which benefits are based primarily on years of service and employees' compensation near retirement. This plan is funded according to the 1974 Employee Retirement Income Security Act (ERISA) and income tax regulations. Plan assets consist primarily of common stocks, common trust funds, government securities and corporate debt securities. Pension expense is actuarially determined based on the Company's employees included in the plan. The Company's pension expense amounted to $1.4 million in 1995 and $1.5 million in 1994 and 1993. Further disclosure for the plan is included in the Deere & Company 1995 annual report pension note.
The Company generally provides defined benefit health care and life insurance plans for retired employees. Health care and life insurance benefits expense is actuarially determined based on the Company's employees included in the plans and amounted to $.9 million in 1995, $.7 million in 1994 and $.6 million in 1993.
TAXES ON INCOME AND INCOME TAX CREDITS
The taxable income of the Company is included in the consolidated United States income tax return of Deere & Company. Provisions for income taxes are made generally as if the Capital Corporation and each of its subsidiaries filed separate income tax returns.
Deferred income taxes arise because there are certain items that are treated differently for financial accounting than for income tax reporting purposes. An analysis of deferred income tax assets and liabilities at October 31 in millions of dollars follows:
The provision for income taxes consisted of the following in millions of dollars:
The Omnibus Budget Reconciliation Act of 1993 was signed into law during 1993. In accordance with FASB Statement No. 109, Accounting for income Taxes, deferred tax assets and liabilities as of the enactment date were revalued during 1993 using the new rate of 35 percent. This resulted in a credit of $.7 million to the provision for income taxes.
A comparison of the statutory and effective income tax provisions of the Company and reasons for related differences follow in millions of dollars:
NOTE 11. CASH FLOW INFORMATION.
For purposes of the statement of consolidated cash flows, the Company considers investments with original maturities of three months or less to be cash equivalents. Substantially all of the Company's short-term borrowings mature within three months or less.
Cash payments by the Company for interest incurred on borrowings in 1995, 1994 and 1993 were $225.2 million, $173.7 million and $134.8 million, respectively. Cash payments for income taxes during these same periods were $63.5 million, $59.7 million and $54.9 million, respectively.
The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to state and federal regulations concerning retail credit. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes these unresolved legal actions will not have a material effect on its financial position or results of operations.
The fair values of financial instruments which do not approximate the carrying values in the financial statements at October 31 in millions of dollars follow:
Fair values of the long-term receivables financed with fixed rates were based on the discounted values of their related cash flows at current market rates. The fair values of the remaining receivables financed approximated the carrying amounts. The fair values of receivables related to asset backed securities were based on the discounted values of their related cash flows.
Fair values of long-term borrowings with fixed rates were based on the discounted values of their related cash flows at current market interest rates. Fair values of the Company's long-term borrowings that have been swapped to current variable interest rates approximated their carrying amounts. However, the long-term borrowings and the related interest rate and foreign currency swaps are shown separately in the previous table. Fair values of these swaps were based on quotes from dealers.
Fair values and carrying values of the Company's other interest rate swaps and caps associated with short-term borrowings were not material.
The Company enters into derivative transactions only to hedge exposures arising in the normal course of business, and not for the purpose of creating speculative positions or trading. The following notional or contract amounts do not represent amounts exchanged by the parties and, therefore, are not representative of the Company's risk. The net amounts exchanged are calculated on the basis of the notional amounts and other terms of the derivatives such as interest rates and exchange rates, and represent only a small portion of the notional amounts. The credit and market risk under these agreements is not considered to be significant since the counterparties have high credit ratings and the fair values and carrying values are not material.
INTEREST RATE SWAPS AND CAPS
The Company has entered into interest rate swap and interest rate cap agreements related to borrowings in order to more closely match the type of interest rates of the borrowings to those of the assets being funded. The differential to be paid or received on all swap and cap agreements is accrued as interest rates change and is recognized over the lives of the agreements in interest expense. Premiums are amortized to interest expense over the lives of the agreements.
At October 31, 1995 and 1994, the total notional principal amounts of interest rate swap agreements hedging short-term borrowings were $100 million and $563 million, having rates of 6.5 percent and 4.5 to 5.9 percent, terminating in up to four months and 16 months, respectively. The total notional principal amount of interest rate cap agreements hedging short-term borrowings at October 31, 1994 was $33 million, having capped rates of 6.3 to 8.3 percent, terminating in up to nine months. There were no interest rate cap agreements at October 31, 1995.
The Company has entered into interest rate swap agreements with independent parties that change the effective rate of interest on certain long-term borrowings to a variable rate. The "Long-Term Borrowings " table on page 40 reflects the effective year-end variable interest rates relating to these swap agreements. The notional principal amounts and maturity dates of these swap agreements are the same as the principal amounts and maturities of the related borrowings. In addition, the Company has interest rate swap agreements corresponding to a portion of its fixed-rate long-term borrowings. At October 31, 1995 and 1994, the total notional principal amounts of these interest rate swap agreements were $116 million and $302 million, having variable interest rates of 6.1 to 6.5 percent and 5.3 to 5.7 percent, terminating in up to 16 months and 28 months, respectively.
The Company has interest rate swap agreements associated with medium-term notes. The "Long Term Borrowings" table on page 40 reflects the interest rates relating to these swap agreements. At October 31, 1995 and 1994, the total notional principal amounts of these swap agreements were $260 million and $40 million, terminating in up to 83 months and 45 months, respectively.
At October 31, 1995 and 1994, the Company had a foreign exchange swap agreement maturing in up to 39 and 51 months, respectively, for $97 million to hedge the currency exposure of the 5% Swiss Franc Bonds due in 1999. The foreign exchange swap gains and losses are accrued as foreign exchange rates change.
NOTE 14. QUARTERLY DATA (UNAUDITED).
Supplemental consolidated quarterly information for the Company follows in millions of dollars:
JOHN DEERE CAPITAL CORPORATION AND SUBSIDIARIES SCHEDULE II FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to Form 10-K of the registrant for the year ended October 31, 1994*).
3.2 Bylaws, as amended (Exhibit 3.2 to Form 10-K of the registrant for the year ended October 31, 1994*).
4.1 Credit agreements among registrant, Deere & Company, various financial institutions, and Chemical Bank, The Chase Manhattan Bank (National Association), Bank of America National Trust and Savings Association, Deutsche Bank AG, and The Toronto-Dominion Bank as Managing Agents, dated as of April 5, 1995 (Exhibit 4.1 to Form 10-Q of Deere & Company for the quarter ended April 30, 1995 (Securities and Exchange Commission file number 1-4121*).
4.2 Senior Indenture dated as of June 15, 1995 between the registrant and The Chase Manhattan Bank (National Association), as Trustee (Exhibit 4.1 to Form 10-Q of the registrant for the quarter ended July 31, 1995*).
4.3 Subordinated Indenture dated as of June 15, 1995 between the registrant and The First National Bank of Chicago, as Trustee (Exhibit 4.2 to Form 10-Q of the registrant for the quarter ended July 31, 1995*).
4.4 Form of certificate for common stock (Exhibit 4.3 to Form 10-Q of the registrant for the quarter ended April 30, 1993*).
Certain instruments relating to long-term debt constituting less than 10% of the registrant's total assets may not be filed as exhibits herewith pursuant to Item 604(b)(4)(iii)(A) of Regulation S-K. The registrant will file copies of such instruments upon request of the Commission.
10.1 Agreement dated May 11, 1994 between the registrant and Deere & Company concerning agricultural retail notes (Exhibit 10.1 to Form 10-Q of registrant for the quarter ended April 30, 1993*).
10.2 Amendment dated November 4, 1994 between the registrant and Deere 49 & Company concerning agricultural retail notes.
10.3 Agreement dated May 11, 1994 between registrant and Deere & Company concerning lawn and grounds care retail notes (Exhibit 10.2 to Form 10-Q of the registrant for the quarter ended April 30, 1993*).
10.4 Amendment dated November 4, 1994 between the registrant and Deere 50 & Company concerning lawn and grounds care retail notes.
10.5 Agreement dated January 26, 1983 between registrant and Deere & Company relating to agreements with United States sales branches on retail notes (Exhibit 10.4 to Form 10-Q of the registrant for the quarter ended April 30, 1993*).
10.6 Insurance policy no. CL-001 of Sierra General Life Insurance Company providing insurance on lives of purchasers of certain equipment financed with receivables (Exhibit 10.5 to Form 10-Q of the registrant for the quarter ended April 30, 1993*).
12. Statement of computation of the ratio of earnings before fixed 51 charges to fixed charges for each of the five years in the period ended October 31, 1995.
21. Omitted pursuant to instruction J(2).
23. Consent of Deloitte & Touche LLP. 52 24.Not applicable.
27. Financial Data Schedule. 53
99. Parts I and II of the Deere & Company Form 10-K for the fiscal year ended October 31, 1995 (Securities and Exchange Commission file number 1-4121*).
* Incorporated by reference. Copies of these exhibits are available from the Company upon request. | 10-K405 | 10-K | 1996-01-16T00:00:00 | 1996-01-16T12:52:21 |
0000107815-96-000002 | 0000107815-96-000002_0003.txt | <DESCRIPTION>FIRST SUPPLEMENTAL INDENTURE OF WE
(formerly First Wisconsin Trust Company)
Indenture dated as of September 1, 1992 Of Wisconsin Natural Gas Company
Assumption of Obligations under Indenture and Securities
First Supplemental Indenture Dated January 1, 1996
Debt Securities Indenture dated as of September 1, 1992 of Wisconsin Natural Gas Company
Assumption of Obligations under Indenture and Securities............... 2 Termination of Certain Covenants in Connection with Merger............. 2
Trustee not responsible for validity of First Supplemental Indenture... 2
Meanings of terms in First Supplemental Indenture..................... 3 Effective Time of Covenants, Declarations and Agreements Contained in Execution of First Supplemental Indenture in counterparts............. 3
* Note: The Table of Contents is not part of the Supplemental Indenture and should not be considered as such. It is included herein only for purposes of convenience.
SUPPLEMENTAL INDENTURE, dated January 1, 1996, between WISCONSIN ELECTRIC POWER COMPANY, a corporation organized and existing under the laws of the State of Wisconsin (hereinafter called "Wisconsin Electric"), and FIRSTAR TRUST COMPANY, formerly First Wisconsin Trust Company, a corporation organized and existing under the laws of the State of Wisconsin (hereinafter called the "Trustee"), as Trustee under the Indenture dated as of September 1, 1992;
WHEREAS, WISCONSIN NATURAL GAS COMPANY (hereinafter called "Wisconsin Natural") has heretofore executed and delivered to the Trustee its Indenture dated as of September 1, 1992, (said Indenture being hereafter sometimes referred to as the "Original Indenture" and, together with all securities resolutions thereto, being sometimes referred to herein collectively as the "Indenture"), to secure the payment of the principal of and the interest and premium, if any, on all debt securities ("Securities") at any time issued and outstanding thereunder, and to declare the terms and conditions upon which Securities are to be issued thereunder; and four securities resolutions have heretofore been adopted thereunder; and
WHEREAS, prior to the date hereof, Securities have been issued by the Wisconsin Natural under said Indenture as follows:
(1) $25,000,000 principal amount of 6-1/8% Debentures due September 1, 1997, which are described in Securities Resolution No. 1 effective as of September 1, 1992, all of which remain outstanding at the date of
(2) $25,000,000 principal amount of 8-1/4% Debentures due December 15, 2022, which are described in Securities Resolution No. 2 effective as of December 1, 1992, all of which remain outstanding at the date of
(3) $2,290,000 principal amount of 10-1/4% Debentures due January 15, 1998, which are described in Securities Resolution No. 3 effective as of March 29, 1994, all of which have been redeemed prior to the date of execution
(4) $7,000,000 principal amount of 9.47% Debentures due March 1, 2006, which are described in Securities Resolution No. 4 effective as of March 29, 1994, all of which remain outstanding at the date of execution hereof;
WHEREAS, pursuant to Articles of Merger dated December 27, 1995, Wisconsin Natural is being merged into Wisconsin Electric, effective at 12:01 a.m., Central Standard Time, on January 1, 1996, with Wisconsin Electric as
WHEREAS, it is provided in Section 5.01 of the Original Indenture that, upon any merger of Wisconsin Natural into another corporation, subject to Section 5.02 of the Original Indenture, all the obligations of Wisconsin Natural under the Indenture and the Securities shall, by supplemental indenture, be expressly assumed by the successor corporation resulting from
WHEREAS, Section 5.01 of the Original Indenture prohibits Wisconsin Natural from merging except if such merger meets certain other conditions; and
WHEREAS, when this Supplemental Indenture becomes effective, the merger of Wisconsin Natural into Wisconsin Electric will meet each of the conditions of the Original Indenture; and
WHEREAS, Section 5.02 of the Original Indenture provides that, upon the effectiveness of the merger of Wisconsin Natural into Wisconsin Electric, the covenants contained in Sections 4.07, 4.08 and 4.09 of the Original Indenture shall terminate and be of no further force and effect; and
WHEREAS, Wisconsin Electric, pursuant to appropriate resolutions of its Board of Directors, has duly resolved and determined to make, execute and deliver to the Trustee a Supplemental Indenture in the form hereof for the purpose of complying with the above-mentioned provisions of Section 5.01 of
WHEREAS, all conditions and requirements necessary to make this Supplemental Indenture a valid, binding and legal instrument have been done, performed and fulfilled and the execution and delivery hereof have been in all
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
That, in consideration of the premises and of the mutual covenants herein contained and of the sum of One Dollar duly paid by the Trustee to Wisconsin Electric at or before the time of the execution of this Supplemental Indenture, and of other valuable considerations, the receipt whereof is hereby acknowledged, Wisconsin Electric does hereby covenant, declare and agree to and with the Trustee, and its successors in trust, under the Indenture, for the benefit of those who shall hold the Securities issued or to be issued under the Indenture, as follows:
Wisconsin Electric hereby assumes, as of the effective time specified in Article III hereof, all the obligations of Wisconsin Natural under the Indenture and the Securities except for those covenants which terminate pursuant to Section 5.02 of the Indenture.
As provided in Section 5.02 of the Indenture, the covenants contained in Sections 4.07, 4.08 and 4.09 of the Indenture shall terminate and be of no further force and effect upon the effectiveness of the merger of Wisconsin Natural into Wisconsin Electric, and Wisconsin Electric shall not assume the obligations of Wisconsin Natural thereunder and shall not be bound thereby.
The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or the due execution hereof by Wisconsin Electric or for or in respect of the recitals contained herein, all of which recitals are made by Wisconsin Electric solely.
All terms contained in this Supplemental Indenture, and not herein defined, shall for all purposes thereof, have the meanings given to such terms in Article I of the Original Indenture.
Although the actual date of execution of this Supplemental Indenture by Wisconsin Electric and by the Trustee is as indicated by their respective acknowledgments hereto annexed, the covenants, declarations and agreements of Wisconsin Electric herein contained shall become effective at 12:01 a.m., Central Standard Time, on January 1, 1996, the effective time of the merger referred to herein.
This Supplemental Indenture may be simultaneously executed in any number of counterparts, each of which when so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, said Wisconsin Electric Power Company has caused this Supplemental Indenture to be executed on its behalf by its President or one of its Vice Presidents and its corporate seal to be hereto affixed and said seal and this Supplemental Indenture to be attested by its Secretary or the Assistant Secretary; said Firstar Trust Company has caused this Supplemental Indenture to be executed on its behalf by its President or one of its Assistant Vice Presidents, and its corporate seal to be hereto affixed and said seal and this Supplemental Indenture to be attested by its Secretary or one of its Assistant Secretaries; all as of the first day of January, one thousand nine hundred and ninety-six.
By /s/ C. H. Baker
Signed, sealed and delivered by COMPANY in the presence of:
By /s/ Gene E. Ploeger
Signed, sealed and delivered by in the presence of:
On this 22nd day of December, 1995, before me personally appeared C. H. BAKER and THOMAS H. FEHRING, to me personally known, who being by me severally duly sworn, did say: that C. H. BAKER is a Vice President and THOMAS H. FEHRING is an Assistant Secretary of WISCONSIN ELECTRIC POWER COMPANY, and that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors; and said C. H. BAKER and THOMAS H. FEHRING severally acknowledged said instrument to be the free act and deed of said corporation.
My Commission expires October 12, 1997
On this 22nd day of December, 1995, before me personally appeared GENE E. PLOEGER and AMY E. NOLDE, to me personally known, who being by me severally duly sworn, did say: that GENE E. PLOEGER is an Assistant Vice President and AMY E. NOLDE is an Assistant Secretary of FIRSTAR TRUST COMPANY, and that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors; and said GENE E. PLOEGER and AMY E. NOLDE severally acknowledged said instrument to be the free act and deed of said corporation.
My Commission expires February 2, 1997
This instrument was drafted by James D. Zakrajsheck and Bruce C. Davidson on behalf of Wisconsin Electric Power Company. | 8-K | EX-4.3 | 1996-01-16T00:00:00 | 1996-01-16T10:54:46 |
0000897101-96-000015 | 0000897101-96-000015_0000.txt | FORM 12B-25 U.S. SECURITIES AND EXCHANGE COMMISSION CUSIP NUMBER
X Form 10-K Form 11-K Form 20-F Form 10-Q
For Period Ended: September 30, 1995
If the notification relates to a portion of the filing checked above, identify the Item(s) to which the notification relates:
PART I - REGISTRANT INFORMATION
Address of Principal Executive Office (Street and Number)
City, State and Zip Code
PART II - RULES 12B-25 (B) AND (C)
If the subject report could not be filed without unreasonable effort or expense and the registrant seeks relief pursuant to Rule 12b-25(b), the following should be completed. (Check box if appropriate)
(a) The reasons described in reasonable detail in Part III on this form could not be eliminated without unreasonable effort or
[X] (b) The subject annual report / portion thereof will be filed on or before the fifteenth calendar day following the prescribed due date; or the subject quarterly report/portion thereof will be filed on or before the fifth calendar day following the
(c) The accountant's statement or other exhibit required by Rule 12b-25(c) has been attached if applicable.
State below in reasonable detail the reasons why the Form 10-K, 20-F or 10-Q, or portion thereof, could not be filed within the prescribed time period.
Financial information for subsidiaries has not been received in time to prepare and prove consolidated financial statements.
(Attach Extra Sheets if Needed)
PART IV - OTHER INFORMATION
(1) Name and telephone number of person to contact in regard to this
William C. Pribble, Jr. 612 593-0041 (NAME) (AREA CODE) (TELEPHONE NUMBER)
(2) Have all other periodic reports required (under Section 13 or 15(d) of the Securities Exchange Act of 1934) during the preceding 12 months (or for such shorter period X YES __ NO that the registrant was required to file such reports) been filed? If answer is no, identify report(s)
(3) Is it anticipated that any significant change in results of operations from the corresponding period for the last fiscal year will be reflected by the earnings statements to be included in the subject report or portion thereof?
If so, attach an explanation of the anticipated change, both narratively and quantitatively, and, if appropriate, state the reasons why a reasonable estimate of the results can not be made.
(NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
has caused this notification to be signed on its behalf by the undersigned thereunto duly authorized.
Date December 28, 1995 By /s/ Thomas K. Scallen
Intentional misstatements or omissions of fact constitute Federal Criminal Violations (See 18 U.S.C. 1001) | NT 10-K | NT 10-K | 1996-01-16T00:00:00 | 1996-01-16T16:31:14 |
0000873084-96-000002 | 0000873084-96-000002_0001.txt | SEARS CREDIT ACCOUNT TRUST 1991 B
Under the Pooling and Servicing Agreement dated as of May 15,1991, by and among Sears, Roebuck and Co.("Sears"), Sears Receivables Financing Group, Inc. and First Trust of Illinois, National Association, as Trustee the Trustee is required to prepare certain information each month regarding current distributions to Investor Certificateholders and the performance of the Trust during the previous month. The information which is required to be prepared with respect to the distribution of January 16, 1996 (the current Distribution Date") and with respect to the performance of the Trust during the Due Period ended December, 1995 (the "related Due Period") is set forth below. Certain of the information is presented on the basis of an original principal amount of $1,000 per Investor Certificate. Certain other information is presented based on the aggregate amount for the Trust as a whole.
A.Information Regarding the Current Monthly Distribution (Stated on the Basis of $1,000 Original Principal Amount).
1.The total amount of the distribution to Investor Certificateholders on the current Distribution Date
2.The amount of the distribution set forth in paragraph 1 above in respect of interest on the Investor Certificates, per $1,000 interest....... $0.000000000
3.The amount of the distribution set forth in paragraph 1 above in respect of principal on the Investor Certificates, per $1,000 interest........... $0.000000000
B.Information Regarding the Performance of the Trust.
(a)The aggregate amount of Collections of during the related Due Period........... $9,226,497.01
(b)The aggregate amount of Collections of Principal Receivables processed during the
(c)The aggregate amount of Collections of Finance Charge Receivables processed during the related Due Period which were allocated in respect of the Investor Certificates..... $7,982,384.51
(d)The aggregate amount of Collections of Principal Receivables processed during the related Due Period which were allocated in respect of the Investor Certificates.... $20,751,467.78
(e)The aggregate amount of Collections of Finance Charge Receivables processed during the related Due Period which were allocated in respect of the Seller Certificate..... $1,244,112.50
(f)The aggregate amount of Collections of Principal Receivables processed during the related Due Period which were allocated in respect of the Seller Certificate.............. $5,573,812.57
2.Principal Receivables in the Trust; Principal Funding Account.
(a)The aggregate amount of Principal Receivables in the Trust as of the end of the related Due Period (which reflects the Principal Receivables represented by both the Seller Certificate and the Investor Certificates)..... $591,669,707.70
(b)The amount of Principal Receivables in the Trust represented by the Investor Certificates (the "Investor Interest") as of the end of the related Due Period ................. $83,333,333.20
(c)The Investor Interest set forth in paragraph 2(b) above as a percentage of the aggregate amount of Principal Receivables set forth in
(d)The Invested Amount as of the end of the
(e)The total amount to be deposited in the Principal Funding Account in respect of Collections of Principal Receivables on such
(f)The total amount on deposit in the Principal Funding Account in respect of Collections of Principal Receivables on such Distribution Date (after giving effect to the deposit referred to
(g)The total amount of Investment Income since the last Distribution Date............................ $2,051,007.16
(h)The Deficit Accumulation Amount (after giving effect to the deposit referred to in paragraph 2(e) $0.00
(a)The total amount to be deposited in the Interest Funding Account in respect of Certificate Interest on such Distribution Date.. $3,583,333.33
(b)The total amount on deposit in the Interest Funding Account in respect of Certificate Interest on such Distribution Date (after giving effect to the deposit referred to in
(a)The aggregate amount of Receivables charge- off as uncollectible during the related Due Period allocable to the Investor Certificates (the "Investor Charged-Off Amount").............. $391,586.69
(b)The Aggregate Investor Charged-Off Amount.. $0.00
5.Investor Losses; Reimbursement of Charge-Offs.
(a)The excess of the Investor Charged-Off Amount set forth in paragraph 3(a) above over the sum of (i) payments in respect of the Available Subordinated Amount and (ii) Excess Servicing, if any (an "Investor Loss").............................. $0.00
(b)The amount of the Investor Loss set forth in paragraph 4(a) above, per $1,000 interest (which will have the effect of reducing, pro rata, the amount of each Investor Certificate-
(c)The total amount reimbursed to the Trust in the current month from the sum of the Available Subordinated Amount and Excess Servicing, if any, in respect of Investor Losses in prior
(d)The amount set forth in paragraph 4(c) above, per $1,000 interest (which will have the effect of increasing, pro rata, the amount of each
(e)The aggregate amount of Investor Losses in the Trust as of the end of the current
(f)The amount set forth in paragraph 4(e) above, per $1,000 interest (which will have the effect of reducing, pro rata, the amount of each
The aggregate amount of the Investor Monthly Servicing Fee payable by the Trust to the Servicer for the related Due Period.................... $173,611.11
(a)The amount available to be applied pursuant to Section 4.03 as of the end of the current
(b)The amount set forth in paragraph 6(a) above as a percentage of the Invested Amount....... 8.50%
Allocated Yield (2) $10,033,391.67 24.08%
Certificate Interest (3) $3,583,333.33 8.60% Servicing Fees (4) $173,611.11 0.42% Allocated Charge-Offs (5) $391,586.69 0.94%
(1) Annualized percentage of the Invested Amount at the beginning of the related Due Period. (2) Section B1(c) plus Section B2(g) above (3) See Section B3(a) above (4) See Section B6 above (5) See Section B4(a) above
Note: Payment rate (aggregate collections/beg. receivables balance) for the related Due Period: 6.05%
The aging of delinquent receivables is summarized as follows (1): Delinquencies as a % of balances 60 - 89 days past due........... 1.45% 90 - 119 days past due.......... 0.91% 120 days or more past due....... 1.51%
(1)An account is considered delinquent when it is past due a total of three or more scheduled monthly payments. Delinquencies as of the end of each month are divided by balances at the beginning of each such month.
The Pool Factor (which represents the ratio of the amount of the Invested Amount as of the end of the day on the current Distribution Date to the amount of the Investor Interest as of the Closing Date). The amount of an Investor Certificate- holder's pro rata share of the Invested Amount can be determined by multiplying the original denomination of the Holder's Investor Certificate by the Pool Factor.......................................... 1.0000000
FIRST TRUST OF ILLINOIS, NATIONAL ASSOCIATION | 8-K | EX-21 | 1996-01-16T00:00:00 | 1996-01-16T10:22:34 |
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